Are Short-Term Home Loans Better Than Long Term Debt?
A decision to buy a dream home is a big move — both personally and financially. And so is shortlisting the right home loan.
Assessing your appetite for a home loan is as important as taking into account the basic parameters you need to meet for banks and financial institutions to lend to you.
It is ultimately your decisions whether you should go for a short-term or a long-term home loan. You have to decide how much time you need to repay your debt, within a given span of time.
MakaaniQ lists the factors that will help you to gauge whether to go the short-term or long-term way for home loans.
Here are the top three factors that help you decide the term of home loans:
This needs no explanation. Your income influences the amount of home loan you are worthy of. You should be able to repay the home loan in the form of equated monthly instalments (EMIs). This is one of the factors that may help you decide between a short-term and a long-term home loan. For instance, if your monthly income is high and you have no other advances running, you can opt for a short-term home loan. This is because you can handle the burden of high monthly installments. Just make sure that you do not have to cut down on important expenses, and that you have ample savings to meet exigencies.
If your income is high, short term could be a good idea as higher monthly installments might pinch you much. Similarly, if your income is low, opt for a long home loan tenure so that the monthly burden is lower.
Age is not just a number when it comes to sanctioning of home loans. This is the second most important parameter that the lender will look into while deciding your home loan tenure. The older you are, lesser will be the home loan tenure and the younger you are longer will be your home loan tenure. For instance, if you are in your 20s or 30s and have just started earning, you can opt for a longer home loan tenure, because this will give you a longer span to repay your debt. But if you are close to your 40s or 50s, you will have no option but to opt for a shorter home loan period to repay your liability. Also, if you are close retirement age, you can club your home loan with your child, by taking him/ her as the co-applicant (remember: your daughter can be a co-applicant only if she is a co-owner in the property) in the home loan. This is so because after you retire, the home loan tenure will be based on the age of your child and you will get to enjoy higher home loan tenure.
The rate of interest:
The rate of interest plays an important role in deciding your home loan tenure because this is the cost of credit you pay for taking the home loan. Higher the home loan rate of interest, greater will be the cost of credit and vice-versa. Understand that you end up paying this cost of credit untill the end of the tenure of the home loan. So, make use of EMI calculators available on various websites to calculate your cost of credit for 'N' number of years. This will help you budget your expenses. Do not forget to take into account the extra costs you pay while applying for a home loan.
How to decide between short-term and long-term home loan tenure.
Some people try to get rid of the burden of home loan as soon as possible. They enthusiastically choose the short-term for the home loan and ends up paying a high EMI. Understanding that paying a high EMI will eat a big chunk of your monthly salary. So, there is a risk involved in taking a short-term home loan. Also, if interest rates rise in future, you will be in soup and might land in a state of financial crisis.
With inputs from Parul Pandey