How To Pick The Right Home Loan Tenure?
Choosing the right term for your loan can reduce the overall loan burden. Therefore, do your due diligence about your income, loan amount and time remaining to pay off your loan to choose the appropriate term.
Buying your home is one of life’s biggest investments. Since it is a high-cost transaction and cannot be undone or made repeatedly, it is important for buyers to carefully evaluate each step of the process. A mortgage loan is one of the important things that we must evaluate when buying a home. And while there are many factors to consider and negotiate, one factor that has a big impact on money outflow, in the long run, is the length of the loan term.
Why is it necessary to analyze and negotiate the term of a mortgage loan? Here are five factors that affect the term of a loan, and understanding them better can help you choose the right length of your home loan.
In general, the repayment term of a mortgage loan can start from five years and go up to 30 years. Some lenders may be willing to consider a 35 year old on rare occasions.
The term has a direct impact on your EMI and the interest you end up paying. This is because the interest to be paid on the loan is initially calculated based on the expected term and then the principal and interest are divided into monthly installments i.e. equal monthly installments. Therefore, the longer the term, the higher the interest accrued on the loan. A longer term gives you the advantage of smaller EMIs, but the total interest you end up paying goes up. Similarly, if you choose a shorter term, the EMI will be higher, but the overall benefit will be much lower.
Getting to the nice point between term and EMI is essential, as a mortgage loan is a long-term financial commitment, and you must repay it steadily and effortlessly, as not being able to do so will have very serious consequences for your stability. Financial and emotional.
If you are in your twenties and thirties, it makes sense to opt for a longer period of 20-30 years. Doing so will help you manage your loan well for the time being, which will have a positive impact on your credit score. You can even take this opportunity to negotiate a lower interest rate for your current payments in the first few years of payment. You can always pay off your debt when you have extra money to pay off some or all of your mortgage loan. But make sure your mortgage lender allows you to prepay or foreclose without penalty.
Your age may also affect how long you will be eligible for. For example, a 25-year-old borrower will retire at the age of 60. Therefore, you can choose the term of a mortgage loan from 30 to 35 years. A 40-year-old may need a loan for less than 20 years to pay off debt before retirement. However, if you are an employee receiving a pension, you may want to consider staying put until after retirement, as you will continue to receive a regular income.
Your tenure is also a function of your income. A simple arithmetic can tell you to stick to a specific monthly installment if you choose a specific period. Lenders consider the Fixed Liability Income Ratio (FOIR), which is a measure of your total obligations, including EMI, and fixed expenses like rent, food, groceries, etc., when considering a loan application. In general, it is desirable to keep the overall FOIR around 50-60 percent. This means that you should not have a monthly premium of more than 30-40 percent of your total monthly income, so that managing all expenses and other emergencies does not put undue pressure on your finances. This is why it is important to consider your current income when deciding on the term of your home loan. The ideal term ensures that your EMI remains well below the FOIR margin so you have no trouble getting approved or repaid the loan.
Home Loan Amount
A larger mortgage loan means a higher EMI due to higher principal and accrued principal. Therefore, the shorter the term, the smaller the premiums, but the larger their size. As a general rule, you want to make sure that you don’t fall behind on your mortgage loan as much as possible. You can reduce this risk by borrowing only what you need and can pay comfortably from a financial institution – in other words, preserving your financial information.
– The author is CEO of Bank Bazaar, an online marketplace for financial products