My house or my lifetime loan? This is the question many young people ask themselves when they want to have their own home, because ownership comes with a long-term loan: 30 years, usually.
30 years has come to represent an unlucky number, a number that brings, just by saying it, migraines. 30 years is associated with burden, debt. How can you think about 30 years when you have only been working for 5?
My house or my lifetime loan?
Many young people, because they notice the pressure of a long-term debt, choose to take out a loan for a short period: 15 years. The simple calculation: 28 years + 15 years of loan = 43 years – age at the completion of the loan and obtaining the property versus 28 + 30 = 58 years. Optimistic is the first calculation and the decision is made: for 15 years! ”And that’s a long time, comes the reply, but it’s still half way through!”
This is a decision made from a psychological point of view.
Let’s see how the decision stands from a financial point of view!
A loan of 65,000 euros taken for 15 years implies a monthly installment of 525 euros versus 361 euros for 30 years. The financial impact in the short term is greater than the long term. ”Okay, but better a short-term effort than a long-term effort. Even if the effort is greater, I know I’ll finish faster.” This is the motivation for a great financial effort.
The financial risk associated with such a motivation is that of the impossibility of paying the loan if problems arise such as losing your job or reducing your income from various situations, including health impairment. The psychological impact involved in such a decision is the pressure on your budget. The pressure manifests itself in the frustration of not going out as often, of not taking an extra vacation a year, of not having small pleasures anymore, plus a very high rate also means reducing your fixed costs a lot, and we are not even considering savings/investments.
You can use time and money to your advantage!
Taking a 30-year loan does not mean that you will support it for 30 years, you can close it much earlier, even in 15. The difference in money between the 15-year and 30-year installments is 525 – 361 = 161 euros, respectively 794 lei. This money can be invested so that the loan closes 15 years earlier.
If we look at the amount repaid on the 15-year loan versus the 30-year loan, we will find an amount lower than the 30-year loan: 456,700 versus 628,900.
In the case of early repayment in this way, the amount will be reduced by 98,800 lei. 98,800 lei interest that is no longer paid because the loan is closed early.
In what situation do I recommend taking out a 15-year loan?
When age no longer allows for a long period. Of course, this is the only option in which no other choice can be made. When a choice can be made, choosing 15 years instead of 30 is beneficial if there is also the possibility of making constant savings and investments, also constant, in addition to the monthly commitment to your own home. In short: if the financial situation allows for a high rate and there is also the financial availability to invest and save monthly.
https://www.psihologiabanilor.ro/casa-proprie-achizitionata-prin-credit/
How can I manage a loan in my favor?
Whether it is for 15 years or 30 years, it is necessary to have safety nets for a loan. The nets are: the emergency fund that covers between 2000 and 4000 lei maximum for any unforeseen situations that may arise and the financial safety fund that includes at least 3 months of fixed expenses, including, of course, the installment. With the two funds, we can move on calmly to the early closing of the loan and also plan the next financial objectives.
If you are afraid of market fluctuations or other obstacles that may arise, the funds are designed to not jeopardize your financial situation and the achievement of this financial goal.
We have secured our wealth: the home that is about to become personal property. As long as there is a mortgage, the house is owned by the financial institution that provided most of the money for its purchase.
Investments are the solution!
If you invest an amount of 700 lei, as we saw above, you end up closing the loan early to have your home. But isn’t it risky? may be your question. The risk is that the interest rate will increase and be an even higher rate. If the return received on the money invested increases or decreases, you may end up closing sooner or later. This is the risk you assume by closing the loan early using this financial mechanism.
An easy closing option can be this: to invest the amount you allow yourself to save monthly. The amount can result, as you have seen, from the simple decision you make regarding the duration of the loan.
How to manage myself psychologically and financially correctly?
There are no miracle solutions, but wise decisions, both financially and psychologically.
Let’s say your income increases so much or you have such a high income that even the 15-year installment is not an impediment for you, then why not do it for the maximum duration and have more money in the account that you can let accumulate, capitalize (see here the effects of capitalized interest https://laurentiumihai.ro/puterea-dobânzii-compuse/) in order to have more money with which to retire from work?!
If you can afford it, you can complete the loan without repaying it early. You can use the accumulated money to buy another property and rent it out. 794 lei allocated monthly at an annual return of 7% generates, after 30 years, 800,000 lei, which represents 165,000 euros. As you can see, with a loan you pay for one property, as much as two, but you own one. Would you like to allocate money monthly to have two properties instead of one?
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Success in becoming aware of money (and of the solutions to multiply it to optimally achieve your goals)!
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