Sell Equity And Prepay Home Loan?

Oct. 17, 2012 - PRLog -- For Nagaraja, it was a tricky situation . He had built a basket of stocks and funds worth Rs 10 lakhs over the past five years.A Rs 50 lakhs home loan is Nagaraja's only debt obligation .Should he liquidate his investments in equity and use the money to make a partial prepayment?
   Prepaying a home loan gives the home owner three benefits.He is debt free and is eligible for a new loan.He can even contemplate on investing in a second home.Prepaying with the surplus prevents the risk of defaulting and avoids a blot on his credit history.Finally being debt-free relieves the borrower of the stress of fluctuating interest rates and a huge financial commitment.These benefits out-weigh the tax benefits on a home loan.Prepaying also brings down the cost of borrowing.
   The decision to move must be made on the basis of a host of parameters that determine Nagaraja's financial condition.

Financial goals:
   Depending on a borrower's income level, debt obligations, assets, long and short_term financial commitments, and goals, a financial plan is chalked out.According to a financial plan, a borrower may be investing in equity towards a retirement corpus.The decision to shift from one goal to another must be evaluated.
   Will he be able to save enough towards his retirement, if he has to start again from scratch?will he be in a better financial position if he is debt_free sooner?

Job situation:
   A home loan to the tune of Rs50 lakhs is a huge commitment.For a tenure of 15 years and at 10 percent rate of interest,the monthly EMI works out to be Rs54000.This huge outflow from the monthly budget puts tremendous pressure on lifestyle and spending.
   Further,in the event of loss of income due to job loss, the burden on the family is
tremendous . If there is high probability of relocation or job losss, it is better to clear the debt as soon as possible.
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Economic climate:
   As the global financial crisis snowballed, Greece was illequipped with its budget deficit out of control. Even the bail_out loans from the European Union and IMF could do little to lift it from crisis. The climate across other parts of the globe wasn't encouraging either.
   Back at home,increase in fuel costs and a spiralling inflation have added to the burden of the common man. Increase in fuel costs will have a trickle down effect in the form of increase in the price of food commodities, price rise in raw materials for industries and jump in construction costs.
How long the uncertainty looms is hard for any one to predict and it is wiser to be debt-free sooner.

Market exit strategy:
   Buy low and sell high is the oft_quoted market starategy. When the markets are low and your eqity portfolio is in a pretty bad shape, it is better to look for alternate sources like fixed income investments to meet your financial commitments. When the market cycle shifts and enters a lucrative phase, your equity assets will go up in value. That is the time to withdraw and perhaps even replenish other fixed income investments.
   
   The stock markets have an element of risk associated with them and hence an investor's risk appetite also plays a crucial role.
   Nagaraja must evaluate his appetite for risk. He must not lose focus from his financial goals and make the decision based on his personal financial condition and market climate.  

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