What is Best for You? – Short-Term or Long-Term Home Loan
Purchasing a new house is a significant financial decision, and so is choosing the right loan option to fund your purchase. Besides the home loan interest rates and loan amount, loan tenure is a crucial factor deciding your Equated Monthly Instalments (EMIs) and your overall repayment cost.
Since lenders offer two types of loans – short-term and long-term, choosing the right tenure is vital. So, here are the factors you must consider to choose a loan tenure that suits you best.
Housing loan EMIs can reduce your monthly budget by 30-40%. That’s why your monthly income is a deciding factor in selecting a loan amount and tenure. A longer tenure means lower EMI payments, while a shorter tenure means you will pay bigger EMIs.
Here, you can use a home loan EMI calculator to decide on a monthly instalment you can comfortably pay. If you have an income where you can set aside a sizeable amount for repaying the loan every month, you can choose a short tenure. This way, you’ll be debt-free early.
Alternatively, if you want to reduce your monthly debt burden, opt for a long-term loan. However, in the longer term, the total amount spent on interests will be high.
Rate of interest
The interest rate on long-term loans can be lower since they are typically spaced out over 5-30 years. Whereas for short-term loans, lenders may charge higher interest rates to compensate for the smaller tenure.
Using a home loan calculator, compare between different loan terms and interest rates. This, in turn, will help you figure out and compare the total cost and EMIs of your short and long-term loan options.
Down payment amount
Since housing loans typically cover 75-90% of your property’s total value, you pay the remaining 10-25% as a down payment. If you have adequate funds in your kitty to make a larger down payment, your EMIs decrease significantly. Here, you can choose a shorter tenure to quickly close your home loan. Similarly, you can opt for a longer tenure to conveniently shell out smaller EMIs and repay the loan.
Since home finance is a secured offering, your property stays mortgaged with the lender till you repay the total amount. Hence, the longer the tenure, the longer your property remains mortgaged. In comparison, a short loan tenure allows faster debt repayment so that you can release the mortgaged property early.
To sum up, the longer you take to repay your loan, the higher will be the interest payable. If you want smaller instalments and aren’t concerned about paying a higher interest amount, the long term option suits you. In contrast, if you wish to get debt-free early repaying a high-interest loan, then the short term is ideal for you.
Thus, both long-term and short-term loans have their own sets of advantages and disadvantages. Your choice should depend on your repayment capability and financial fitness. Consider the abovementioned factors and compare home loan interest rates from multiple lenders before selecting a loan tenure.