Planning to buy a dream home is indeed a big move and perhaps something almost everyone aspires to. But, unless one has a lot of money saved, all you need is the right home loan to fund the purchase. To sanction a home loan, banks and financial institutions take into account certain eligibility criteria such as the financial condition and age of the borrower, loan tenure & amount, and the borrower’s credit score. The recent decline in interest rates, availability of many loan options to choose from and hassle-free home loan processing has made it possible to turn this distant dream of many Indians into a reality. Although there are ample lenders providing housing finance in the market, before applying for a loan, one must carry out detailed research to find the best option that suits one’s need.
Financial institutions and banks usually provide two types of home loans:
Long-term loans are loans that are repaid over a long duration. The loan period varies from over a year to up to even 30 years. These loans are characterized by high loan amounts and lower interest charges. The key benefits of long-term loans are:
The demerits of these loans are that the borrower makes an overpayment of amounts that could otherwise be saved due to the long repayment tenure.
Short-term Home Loan vs. Long-term Home Loan
|Criteria||Short-term Home loan||Long-Term Home loan|
|Loan Tenure||Five years or less.||More than one year up to as high as 30 years.|
|Interest Rate||Higher interest rates||Lower interest rates.|
|EMI||High EMI, but the total interest amount on the loan is less.||Low EMI, but the total interest amount is high due to the extended term.|
|Mortgage period||Short mortgage period. The house will be in the borrower’s name within a shorter duration.||House will be mortgaged for a longer period. Since housing finance products are secured, the property won’t be entirely in the borrower’s name until the loan is paid back.|
|Loan Disbursement||Fast Loan disbursement due to the small amount and less documentation.||Loan disbursement takes time as the loan provider has to check the borrower’s credit score and repaying capacity.|
|Objective of purchase||If the purpose of purchase is an investment and the borrower would like to liquidate it, it’s better to opt for a short-term home Loan. It saves the foreclosure charges which will be applicable when closing the loan account.||If the property is purchased for self-use, a long-term loan is better, as lower EMIs reduce the risk of default in payment.|
There is no thumb rule as to which loan is the best - it all depends on what the needs are. Both these home loans (short-term and long-term) have their pros and cons and are meant to serve specific needs. To opt for a short-term or a long-term home loan depends entirely on the borrower’s repayment capacity. When a borrower considers which type of home loan to opt for, the things that matter are: (1) the loan amount required (2) how fast the loan is needed, and (3) the financial strength and ability of the borrower to pay back the loan.
[Also Read: How Credit Score Can Impact Your Home Loan Interest Rate ]