POSTED BY May 27, 2011 12:16 am COMMENTS (3)ON
I am planning to take a home loan which I am planning to repay in 5yrs by doing pre-payments. But to be on safe side (in case I am not able to pre-pay based on future situations) I am going to take a longer term loan. Now my question is should I take a 10yr loan or 15yr loan. If I am anyway going to repay the whole loan in 5yrs, will the duration (>5yrs) of the loan have any effect ?
My thinking is as follows and want to hear to comments if I am correct or not (Assuming no pre-payment penalty)
As the interest component in EMI is more in case of longer term loans, and especially given the fact that more interest component (than principal component) is recovered in the initial EMIs it will be better to take short-term loans. Every month whenever I pay more than the EMI, it will go to interest+principal+prepayment and the loan is recalculated again for the total duration of the loan. At any given point in time, for a longer-term home loan the interest portion will be higher than the shorter-term loan. So, I am better off taking a shoter-term loan if I plan to pre-pay.