Which is a better option? Prepay home loan or re-investing.

A quick home loan is very easy to obtain, but when it comes to paying the loan or to invest in a more beneficial mutual fund, you will be in a position wherein you cannot decide on the opinion. An individual will take a loan on EMI which he can afford to pay. Eventually, when the income increases and he finds out that he can pay back the loan before itself than he had originally planned, he will get this confusion of what to do with the extra earnings.

Paying off debt means reducing our stress, lowering risks, and a greater capacity to endure personal difficulties. Living debt-free of charge will also make it easier to withstand an economic downturn or depression.

Investing means building a backup that can protect a family and provide with sources of income. Perhaps most importantly, it means accumulating enough money to retire comfortably.

Ideally, the most logical course of action when deciding between paying off your debt and investing should be to evaluate them:

• The rate of after-tax interest you are repaying on your debt.
• The after-tax rate of return you would expect to earn on your investment.

In other words, if you can gain a higher return on your savings than the interest on your debt, then you must invest. Otherwise, you should pay off your debt balance. 

If the same is asked to a financial planner, there are high chances that he would tell you to repay the loan first. This can be taken when the loan payment is much higher and important to clear. 

However, there are certain warnings to this suggestion. Long-term investments in an equity mutual fund will possibly bring higher returns than the interest that is paid on housing loans.

In the case of a home loan, the successful trade-off is further in favour of not repaying the loan soon because of the tax breaks one gets on the interest repaid. If you compensate for that and determine the real effective interest rate, then you’ll notice that your savings have crossed an even lower bar.

The real benefit you get from having received the loan will also include the fact that you no longer must give rent. It’s only when one has built up a large enough financial saving and is in a situation where no great loss is expected that it would be acceptable to retire the loan instead of saving.

The most important thing is human psychology. Basically, if anyone has little or no investments at all, then whatever the position is, no matter what the interest rates are, the individual would prefer to carry a loan but have some funds reserved. In such a situation, it would make sense to have access to the savings if they are needed, even if the savings are fetching the same or fewer returns than the one is paying on the debt one has taken.