Understanding Common Home Loan Terms to Make Better Decisions

A home provides protection and a sense of belonging, identity, and privacy. Owning a house feels like a dream come true for many. With housing loans, you are one step closer to achieving your dreams.

A housing loan is simply a sum of money borrowed from a bank to purchase a home. It includes a legal agreement with an adjustable or fixed interest rate as well as payment terms. The property is mortgaged to the lender as security until the loan is repaid. The bank will keep the claim to the property until the loan is repaid in full, including interest.

Below are the terms most commonly used while getting a home loan:

1) Tenor

The time it takes to repay a housing loan. The total value of the loan and the interest that must be paid within a specific period. 

2) Joint ownership

This involves two people acting as claim partners. Two parties, usually a family member, come together in the hopes of obtaining a loan for a specific property

3) EMI (Equated Monthly Instalment)

The total of the principal and interest paid each month. This is the amount paid back to the lender to repay the loan amount.

4) Credit Appraisal

A detailed check of the income, savings, and other borrowings to accept the person’s eligibility for the loan.

5) House Loan Interest Rate

A fee is charged by a lender from a borrower to use the principal amount. The interest rate on the home loan determines the monthly EMI.

6) Floating Rate of Interest

It changes periodically and is not constant. However, there is a limit to how much it can be increased.

7) Fixed-rate Home Loan

An interest rate that remains unchanged throughout the loan’s term.

8) Collateral

A property that is given as a security in exchange for a loan. If a borrower is unable to repay the loan, the claim of the property is transferred to the lender in exchange for the loan.

9) Disbursement

Disbursement is the amount made available to the borrower by the lender. This takes place only after the paperwork has been completed and the loan value has been agreed upon. 

It can be of three types:

a) Advance disbursement- The total amount disbursed before a project is completed. This occurs under the agreement that the builder will complete the project within the time frame. 

b) Partial disbursement- When the lender only gives out half of the loan amount to the borrower. 

c) Full disbursement- The lender pays out the entire loan amount at once.

10) Foreclosure

A foreclosure occurs when you pay off the loan in full before the end of the term. In this case, the borrower must repay the entire sum.

11) Pre-EMI: Before the actual EMIs begin, only monthly interest payments on the amount disbursed are made. Such a payment is called a pre-EMI.

12) Balance Transfer or Refinance

It is a special service provided to existing home loan borrowers who want to transfer their accounts to a new lender and pay off the balance with the proceeds of a new loan.

13) Down Payment/Margin

It is also referred to as the initial payment. A downpayment is simply the difference between the lender’s loan amount and the actual property value. Most lenders lend 80% of the actual property value, with the borrower in charge of the remaining 20% as a margin or down payment.

14) Offer Letter

A letter sent by the bank agreeing that the borrower has been accepted as an eligible loan customer is known as the offer letter.

15) Loan-to-Value Ratio (LTV)

The LTV is calculated by dividing the loan amount by the property’s total value.

16) Top-up Home Loan

If your financial needs exceed the amount of your loan,  the borrower can apply for a top-up home loan.

17) Base Rate

The lender’s set the lowest house loan interest rate. This is the limit below which the lender will not issue a home loan.

18) Resale Property

When buying a home from a homeowner who is selling their property, the borrower is not buying a brand new house here but rather taking it from a house owner who has chosen to give away his or her house.

19) Credit Score

The credit score represents a rating of a borrower’s ability to repay a housing loan.

20) Default

Default occurs when a borrower fails to pay the EMI on time. In the event of a default, lenders charge penalty interest on subsequent EMIs.

Types of Home Loans

Below is a list of the different categories of housing loans:

1) Basic Home Loan

The basic home loan is the most common type of loan used for purchasing a home. It allows parties to borrow money from a lender to purchase the home of their choice. 

2) Home construction loan

If the party already owes land and wants to build a house on it, they should look into a home construction loan. It is usually disbursed in instalments based on the progress of the project.

3) Home Improvement Loan

A home extension loan can help if the borrower already owns a house but wants to add a room or floor. On the other hand, a home improvement loan is used to renovate an existing home.

4) Home Loan Balance Transfer

If the borrower already has a home loan and is repaying it, they can switch to a different lender. Borrowers generally do this when they can obtain a home loan from a different lender at a lower house loan interest rate.

Application Process

A home loan is easier to obtain than ever because of the various mediums that have emerged with the upgrading of technology. One can choose between a physical mode and an online application. All that is required are a few documents to assess your ability to repay the home loan.

Wrap Up

Everyone has a basic need for a place to live. This is due not only to its emotional value but also to its rising market value. With favourable housing loans at your disposal, it’s high time to have one.

For more such articles, head to the Piramal Finance website and learn more about housing loans.