Picking the right loan term isn’t a simple decision. Would you prefer one with a 30-year term? Or a shorter option? The length of your loan affects various factors like how much you pay monthly. It also affects the total interest paid over time. So which do you choose? Home loan brokers are here to help but it’s also best to understand the basics yourself.
The Definition of Loan Term
Your loan term tells you many years you will pay off your mortgage. It dictates how much you will pay every month and the total interest over time. The terms commonly range between 15 to 30 years. Although some lenders may offer longer or shorter options.
Shorter loan terms mean higher monthly payments. But you will pay less interest overall. In contrast, longer terms have lower monthly payments but higher interest in the long run. Choose which fits your current budget and financial goals best.
How Interest Works with Different Loan Terms
Lenders can charge less interest on a shorter loan term because the principal gets repaid more quickly. But the interest piles up on a longer team because you have more monthly payments to make.
Think about it this way: a 30-year loan term seems better at first thanks to lower monthly payments. But more monthly payments also mean more interest payments (ending up in thousands more spent over time). A shorter term can seem scary at first. But your lender could charge you a lower interest rate to motivate you to clear your debt faster. This also means you have fewer monthly payments to make. Consult home loan brokers to understand how this can fully benefit you.
Things to Consider When Choosing a Loan Term
There are various factors you must consider that can affect your decision. Think about these carefully so you can make a smart decision that fits your current and long-term goals.
- Financial Capability: Your money situation dictates your ability to make regular loan payments. Check your income, expenses and other financial obligations. Is everything on point? Or do you have to make adjustments? Knowing where you are financially helps you choose a sustainable loan term.
- Interest Rate: Different lenders offer varying interest rates. It also depends on the loan term length. It would be better to consult licensed brokers for this so you can make accurate decisions.
- Ability for Repayment: Can you comfortably afford higher monthly payments with a shorter loan term? Or is a longer term with lower monthly payments more affordable for you even if it means paying more interest over time? Think carefully
- Flexibility and Early Repayment: Are the loan terms flexible? Do they allow early repayment? Some loans have prepayment penalties if you decide to pay the loan sooner than your term agreement. So choose flexible options with no extra charges if you think you can make extra payments or pay the loan in full earlier.
Loan Term and Refinancing Options
You can refinance if you start with a longer loan term but your financial situation improves over time. Doing so can help you shorten your term and possible lower your interest rate. But remember that refinancing can have appraisal fees so take this into account.
Keep an eye on interest rate and market trends so you can use refinancing as a strategy to improve your loan term. Speak to home loan brokers about this.
Affordability vs. Overall Interest
The loan term you choose directly affects your financial situation. So weigh your options well. Do you have a bigger budget? Then you can pay off your loan quickly and save on interest payments with a shorter loan term (even if the monthly payment is higher).
Or are you more comfortable with a lower monthly payment? You’ll have a longer loan term but that also means the interest payments accrue over time and you’ll pay much higher. But this works if you have other payments to make as well and you need to make your budget fit. Either way, both are good options towards homeownership depending on your capability. Look for flexible options as well.
Choose the Best Interest Rate
There are different types of rates to take into account. Pick the best according to your goals.
- Fixed Interest Rate: You will pay a fixed amount on your interest throughout your loan term. This makes it easier to manage your budget.
- Variable Interest Rate: This can go up or down depending on the lending market. It has more loan features that offer better flexibility. But it makes budgeting harder.
- Partially-Fixed Rate: Not sure whether you should go with fixed or variable? Choose a partially-fixed rate for a bit of both. A portion of your loan stays in a fixed rate and the rest has a variable rate. Decide how you want to split the loan.
Talk to Licensed Home Loan Brokers
Professional help will always be handy when you need good judgment. This is especially true when it comes to money matters. Make the smart move of consulting with brokers who provide tailored advice based on your situation. They help you make informed decisions by letting you know the current market and giving available loan options. They also have access to lenders with better deals to suit your loan term preferences.
AFMS Group: Helping You Choose the Right Loan Term
Our company recognises the importance of choosing the right loan term. Which is why our team of home loan brokers collaborate closely with you to grasp your objectives and present optimal choices tailored to your financial circumstance. Allow us to alleviate any concerns you may have by assisting you in selecting the loan term that will be advantageous for your needs. Reach out to us today.
