Taking a longer or shorter loan is often a question that home buyers have. With a longer loan term, they have a lower monthly instalment. However, they need to pay the monthly instalment for a longer time. Resulting in conflicting benefits. Trying to identify the weight of each benefit can be tough, in this article I will share with you on how to weight the benefits of a shorter or longer loan making your choice a better one.
|Investment Period||10 Years|
|Interest of Loan||3.5%|
|Loan Term||20/30 Years|
We will discuss an investment period of 5 years. The difference in loan term would be 20 and 30 years. Assuming a fixed rate mortgage.
Finance Aspect of Loan Term
If you are someone who only values heavily on rate of return, a hardcore investor. Taking a shorter loan term is better. Without doing any calculation, when you take a longer loan term, you actually pay more interest as you drag the loan. Thus, the interest will eat into your profits.
|20 Years Loan||30 Years Loan|
|Monthly Payment||Ending Loan Balance||Monthly Payment||Ending Loan Balance|
|$ (55,676.13)||$ 469,195.23||$ (43,108.29)||$ 619,415.00|
|Year 0||$ (200,000.00)||Year 0||$ (200,000.00)|
|Year 1||$ (55,676.13)||Year 1||$ (43,108.29)|
|Year 2||$ (55,676.13)||Year 2||$ (43,108.29)|
|Year 3||$ (55,676.13)||Year 3||$ (43,108.29)|
|Year 4||$ (55,676.13)||Year 4||$ (43,108.29)|
|Year 5||$ (55,676.13)||Year 5||$ (43,108.29)|
|Year 6||$ (55,676.13)||Year 6||$ (43,108.29)|
|Year 7||$ (55,676.13)||Year 7||$ (43,108.29)|
|Year 8||$ (55,676.13)||Year 8||$ (43,108.29)|
|Year 9||$ (55,676.13)||Year 9||$ (43,108.29)|
|Year 10||$ 875,128.64||Year 10||$ 737,476.71|
(numbers) are negative numbers. Assumptions that there are no other cost involved for easy computation.
As you can see the loan with a shorter loan term will have a higher IRR.
Having a shorter loan term would mean that the monthly instalment is higher, some individuals may prefer a lower monthly instalment. This could be due to their monthly disposable income. Individuals may also have other investment vehicles such as stocks, insurance, bonds, etc. The difference in loan payment can be used to fund those investments getting a better return. If you do have other investments which can give you a better yield than the bank’s interest rate, it would be better to use the difference in monthly payment for those investments. Note: The bank’s interest rate is towards the remaining balance of the loan, however, investment vehicles are usually compounding.
Should You Take A Longer Or Shorter Loan Quiz
Start this quiz whenever you are confident!If you want a lower monthly payment, should you take a longer or shorter loan?Longer
Wrong!I want to save on the interest paid to the bank!I need a shorter loan
I need a longer loan
I do not take a loan!
Wrong!I have the money and I am not doing other forms of investment. I want to have a higher rate of return. I should...Get a shorter loan
Get a longer loan
Share the quiz to show your results !
Get Notified to More Exciting Real Estate Articles!
Click here if you don't want to fill the formShould You Take A Longer Or Shorter Loan?
I got %%score%% of %%total%% right%%description%%%%description%%