Difference Between Short Term and Long Term Home Loan

HOUSING | Know More 12 November 2021

Introduction

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.

Difference Between Short Term and Long Term Home Loan

Types of Home Loans

Financial institutions and banks usually provide two types of home loans:

  • Short-term
  • Long-term

Short-term Home Loan

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 ability to borrow a significant amount
  • Lower interest rates charged on loans
  • Affordable repayment schedules

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.

Comparison Table:

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.

Summary

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 ]

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