What Is A Loan Term In Real Estate?

Loan terms are an integral component of the borrowing process. In any lending space, the loan term is the predetermined timeline of repayment. Additionally, it dictates many of the other considerations regarding the borrowed capital. Indeed, thinking of a loan as the purchase of financial capital can help you make better fiscal decisions at all levels.

Investopedia notes that loans are often calculated primarily with interest costs in mind, and the terms of your loan play the largest role in determining the overall costs of any borrowing opportunity. Combined with the agreed-upon interest rate or APR figure, which accounts for both the base interest rate and any other fees added to the loan agreement, your loan term is the most important indicator of how much you can expect to pay on top of the borrowed amount.

Your loan term identifies the repayment time

The most direct ramification of your agreed-upon loan term is the length of time that the loan will remain in effect, explains Quicken Loans. A 15-year mortgage, therefore, should be repaid over the course of 15 years. Loan terms, however, can be fluid or specified, as is the case in comparing a line of credit or a credit card account with a personal loan, auto loan, or mortgage product. When borrowing for any kind of spending need, it's important to understand the length of time that you are committing to. 

Having a mortgage, for instance, means that you won't have to pay rent to a landlord anymore, but it does place a similar, yet different financial burden on your cash flow. In fact, while eviction and foreclosure are different processes, the end result is much the same for you and your family, warns Investopedia. This means that repaying your debts has to become a central aspect of your cash management when borrowing for a large purchase. Unlike using a credit card, real estate financing is constructed with specified starting and ending terms, along with clear-cut rules for how repayments should be handled, and this begins with the term of the loan.

Loan terms affect other aspects of borrowing

In addition to simply influencing the length of time that you need to budget for repayments, loan terms play a significant role in the overall cost of the financial product in question, states Quicken Loans. The length of the repayment also directly influences the effect of your interest rate on the principal amount that's borrowed upfront. Forbes Advisor reports that the interest for a 15-year, fixed-rate mortgage rests at around 4.60%. This means that a $100,000 loan will cost $4,600 per year (or the equivalent part of any remaining principle when repayments are factored into the equation). Fortunately, with many lenders, there are no prepayment penalties, so paying off your loan balance early can reduce or even eliminate this added interest.

Another important factor to consider in a real estate loan is whether the capital is coming from a fixed or variable rate loan. Variable rates are excellent for borrowers in an uncertain marketplace that's leaning toward cuts to the federal rates. However, timing a loan and reading the market isn't an exact science, and you should never rely on any future outcome in your decision-making process. Still, doing your homework can help you make an educated choice about your loan terms, including the length of your borrowing and the resulting repayment period.