I have handled this question many times, and have come out with similar answers. However here are some questions which are IRRELEVANT ….
1. How much has the house appreciated by: Many people write in to say ‘I paid Rs. 20L now it is worth Rs. 37 lakhs’…This is completely immaterial. Your house appreciating has NOTHING to do with how it was funded. Whether you paid money and bought it, it was gifted by your father (or her father!), or you got it as a bribe for a terrorist activity – THE MARKET DOES NOT KNOW, nor is it bothered!
2. What is your tax slab: Imagine telling a businessman ‘please incur this expense because this is tax deductible’ yuck it makes NO SENSE at all.
3. How long are you going to live in that house: makes no sense UNLESS you think that the new buyer will NEED that loan. However, however, however, whether that person will get the loan depends on whether his FORM 16 is strong enough to support that loan, NOT WHETHER you have the loan or not.
4. Are you planning to buy a new house SOON? If you have any plans of buying a new house. Let us say you have about Rs. 18 lakhs of loan to be repaid, and you are planning to buy a new house for Rs. 100 lakhs – and for this you need a 55 lakh rupee loan, it may make some sense to keep this loan and take a fresh loan for the difference amount. Sometimes EVEN this may not be correct especially if you can get a nice clean big deal from a new lender (normally that is what happens)….
What is relevant to ask?
1. Do you have a car loan, personal loan, etc? – then please repay those loans. They are far more expensive than a home loan.
2. Can you get a better return on your own? Let us say your loan is Rs. 18L and you are paying 10.8% p.a. as interest, then it makes NO SENSE to put Rs. 4L in PPF and earn 8.3% p.a. Minimising the cash outflow makes sense.
3. How much is your emergency cash situation, JOB situation, and immediate money requirement for kids education, medical expenses, marriage of children,…..etc…
having said that the following article could also be useful
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