Long Term Home Loan v/s Short Term – The Better Choice Explained!

Buying a house is a significant achievement in an individual’s life. Such a move requires sound financial power as real estate prices can get expensive. What most home buyers do is apply for home loan plans in order to get the financial support they need. There are many lenders out there offering home loans with flexible repayment terms so borrowers can easily repay their loans. A home loan can have a repayment tenure of up to 20 years. However, should you be making use of the full tenure or repay the loan sooner?

This is something that many borrowers think about. The chosen tenure will directly affect the home loan’s monthly instalments, which is why this has to be a carefully planned decision. A short-term repayment tenure can last up to 5 years, whereas a long-term repayment tenure can last anywhere from 5 to 20 years.

Take a look at 3 important factors that should be considered while deciding which type of repayment tenure is better to pay off a home loan:

1. Interest rate of the home loan

When applying for a loan, many borrowers primarily focus on getting the best home loan interest rate. This is because the loan interest rate can have a major impact on the monthly instalments of the loan. Now, going for a short-term loan can get you a higher interest rate as compared to a long-term loan since the lender might try and make up for the smaller tenure. So, it is important to calculate the interest payments of both tenures to understand which plan is more suitable.

2. Amount of down payment

A home loan will only cover a certain amount of the property cost, typically reaching about 80-90% of the total expense. The remaining 10-20% will have to be paid by you, which is known as the down payment. Now, if you are okay to make a higher down payment, the home loan EMIs can significantly be brought down since the loan amount has decreased. In this case, one option is to go for a short repayment tenure and clear the loan while saving on the interest, and the other is to go for a long one to make the EMI payments easier. Take a decision, which is in accordance with your budget and convenience.

3. Monthly income

Your income will play an important role in deciding a repayment tenure that is suitable. Ideally, it is advisable to not take a home loan through which the EMIs are going to take up more than 40% of your monthly income. To help in setting a financial plan, make use of a home loan calculator, which will help in understanding the exact monthly instalments of the home loan. You can keep changing the tenures to know whether a short-term loan is beneficial or whether it is better to opt for a long-term loan.

Ultimately, it all depends on the monthly instalments that you are comfortable paying off. Make sure to use a home loan EMI calculator to understand which tenure is most suitable for your loan plan.