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Be Smart with your Home Loan Tenure

Few days back, one of my readers inquired about the appropriate home loan tenure:

"I am in the process of availing a home loan of 20 lakhs from XYZ bank. However, I am unable to decide on the tenure because the EMIs vary according to the tenure. For example the bank person told me that for a tenure of 7 years, my monthly EMI will be around Rs. 33,000, and if I go for a tenure of 12 years the EMI will be roughly between Rs. 20-25,000. Thus, he said that higher the tenure, lower will be the EMIs. 

Now, the reason for my confusion is that my aim is to make part-prepayments regularly and pre-close the loan as early as possible. In view of the same, I am wondering whether going for a greater tenure (lets say 15 or 20 years) be advantageous when compared to shorter term such as 7 or 10 years (which will result in higher EMIs), provided that in any case I will do part pre-payments.

I am highly confused on deciding the loan tenure as I am not very good at the basics of loans. Hence, I would be very thankful if you could provide your suggestions/advice on how to go about this."

Here's my simple solution to his dilemma:

Shorter Tenure-Higher EMIs result in LOWER total interest payout over the life of the loan vis-a-vis Longer Tenure-Lower EMIs option. So higher EMIs is the desirable option.

However, higher EMIs would lead to difficulty in managing ones monthly finances.  

To balance between the two, you have to fix your EMIs based on your comfort level. Normally EMI around 45-50% of the net monthly take-home pay should work fine. But if you can afford higher payouts, you should opt for higher EMIs.

Whether you will make part-prepayments in future or not, does not affect the above choice. However, as and when you prepay, keep the EMIs unchanged and instead reduce the balance tenure of your loan. And as and when you get pay hikes, take a hike in EMIs too. 

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