What is a Home Loan Foreclosure Calculator?

Home loans empower aspiring home buyers to buy their home, despite falling short on funds, to While home loans provide ease of repayment and preserve immediate liquidity, home loans come at the cost of substantial interest that needs to be paid back to the lending institution, in addition to the principal amount borrowed.

Home loan foreclosure simply means that the borrower pays back the principal amount and the accrued interest, at a date before the completion of the home loan tenor. For example, a borrower has a home loan of Rs.10 lakh that has to be paid over 10 years (that is 120 months). Of this, Equated Monthly Instalments (EMIs) have been paid for 12 months, and in the 13th month, the borrower pays back the entire remaining loan amount and the interest to date. It would then be said that the borrower has opted to foreclosure their loan and the 13th month will be called the foreclosure month.

Home Loan Foreclosure Calculator: Overview

The Home Loan Foreclosure Calculator (alternatively known as the Home Loan Pre-Closure Calculator) is a freely available online tool that helps the borrower understand the financial implications of home loan foreclosure.
The amount to be paid for a home loan foreclosure (if applicable) is usually dependent on the following factors:

  1. The principal amount of the loan affects foreclosure. Naturally bigger loans will amount to a higher foreclosure amount as compared to smaller home loans.
  2. The number of EMIs already paid also affects foreclosure. If the majority of the previously agreed EMIs have been paid, the foreclosure amount will naturally be smaller as compared to the same loan, taken on the same rate of interest, for the same tenor, for which a lesser number of EMIs have been paid.
  3. The rate of interest on which the loan has been approved affects foreclosure. If the loan is being paid back at a higher rate of interest, the foreclosure amount will likely be higher.
  4. The tenor of the home loan also affects foreclosure. More specifically, the duration of the tenor for which EMIs have been paid. If a relatively larger duration of the tenor has elapsed, with regular EMI payments being made to the lender, the foreclosure amount will be relatively smaller.
  5. The amount to be paid for foreclosure is also inclusive of foreclosure / pre-closure charges.

What Are Home Loan Pre-closure / Foreclosure Charges?

A bank or a lending financial institution makes money by charging interest on home loan that they offer. Naturally, it is in the interest of the bank or the financial institution that loan repayment is made up to the end of the home loan tenor since this maximizes the interest amount that the bank receives on the home loan. Simply put, foreclosure / pre closure is not in the financial interest of the lending institution.

However, for the borrower, foreclosure of the loan saves the amount that would prospectively be paid by the borrower to the lender as interest on the loan. To compensate for this, the lender charges a fee if the borrower intends foreclosure. This is called home loan preclosure / foreclosure charges.

The foreclosure charges range between 2% and 5% in addition to taxes that the foreclosure might entail and the payments to be made to regulatory bodies.

Features of Home Loan Foreclosure Calculator

The Home Loan Foreclosure Calculator allows the borrower to enter the principal amount, EMIs paid, the total number of EMIs, the rate of interest, foreclosure month, and the tenor of the loan. The calculator then calculates the amount that needs to be paid if the borrower chooses to foreclose the home loan.

The borrower can further see the difference in the total pay-out, by changing the foreclosure month, etc. Thus the borrower can make an informed choice before deciding if foreclosure is in his/her best interest.

It is highly inadvisable to do foreclosure calculations manually. Any errors incurred in the manual calculations will reflect in subsequent calculations related to the loan. This may further lead to financial mis-planning on the part of the borrower.

Steps for Home Loan Foreclosure

The following steps are usually involved when the borrower chooses to foreclose a home loan.

  • Locating a Branch

    Foreclosure is usually an in-person procedure. It is advisable to locate a branch of the bank or the lending financial institution before deciding on foreclosure. It is also advisable to ask customer care to give a printed and signed copy of the foreclosure procedure and the foreclosure amount. This is necessary so that the borrower does not overestimate or underestimate the due foreclosure amount based on his/her calculations.

  • Foreclosure Application

    A written application citing the loan reference number and/or any other loan identifiers should be submitted to the bank or the lending financial institution so that they can draw up the necessary paperwork for the foreclosure in advance.

  • Document Submission

    Documents, such as loan agreement, EMI payment receipts, no objection certificates, no dues statement and a filled preclosure receipt, need to be produced at the time of foreclosure. It is always advisable to ask the lending institution to make a set of copies of home loan documents which can be retained by the borrower for his/her financial records.

  • Prepayment

    The actual prepayment should be made before the mutually decided date so that the details of the foreclosure do not change and remain the same as those drawn up by the lending institution. It is advisable to make an electronic payment so that a trail of the payment is recorded.

  • Receipt of foreclosure and informing the accrediting agency

    Banks and financial institutions may provide an immediate receipt of foreclosure. However, the borrower must always collect a no dues / no legal liability closure certificate from the lender for his/her records.

    Crediting agencies are also informed by the lending institution that the loan has been paid off. Foreclosure counts towards good credit history and allows the borrower to take subsequent loans.