Home Loan Terminology

HOUSING | Tips & Advice 24 November 2021

Introduction

People spend decades of their lives working with the ambition of owning their own home and nurturing their families in it. Home loan is the most common tool which empowers people to accomplish this dream. With so many banks and other kinds of lending institutions offering home loans online, it is advisable to understand the different terminology associated with home loans. This ensures you are well aware of the concepts involved and can make an informed decision while choosing the ideal lender to partner in this journey. In the next section, we will inform you regarding the most common terms worth knowing about while securing a home loan.

Home Loan Terminology

List of Home Loan Terms

  • Home Loan

    This term in itself is an umbrella under which there can be several types. Let us quickly examine the most common types of home loans.

    • Home Purchase Loan: Used for the purpose of purchasing a ready-to-move or under construction flat/apartment/home.
    • Home Construction loan: Used for people who own land/plot or are looking to buy one and have their home constructed as per their plans.
    • Home improvement loan: Used for renovating or making improvements, repairs to an existing property.
    • Home extension loan: Used to undertake remodelling, additions of rooms, rebuilding or addition of floor to the existing property.
    • Land Purchase Loan: Used to purchase a plot of land to construct your home. Such loans are usually taken by people looking to build farm-houses, bungalows and villas, and the plot serves as the collateral.
  • Collateral/Security

    Since the amounts borrowed are large and repayment duration is long, the lending financial institutions require some sort of security as assurance. In the case of home loans, this is in the form of the property in itself is considered collateral. In case of failure to repay the entire loan in a timely fashion, the lender holds the right to liquidate or sell off the property as re-compensation.
  • Down Payment / Margin

    Used interchangeably, this term means the upfront amount which needs to be paid to secure rights to the property. In other words, it is the difference between the overall price of the property being purchased and the loan availed. Some experts suggest the thumb rule of 80% loan and 20% down payment, but this is subject to the terms and conditions of the lender and the borrower's credit history plus financial capacity.
  • Credit Appraisal / Rating / Assessment

    As mentioned in the previous point, the borrowing limit and associated terms and conditions are largely dependent on the borrower’s financial history. This comes under the term of Credit Assessment. Each lender needs to ensure that the likelihood of repayment of the loan is high and stable. To establish this, several factors are considered before the loan application and final amount is approved. Your home loan eligibility is highly dependent on this aspect.
  • Loan to value ratio (LTV)

    This is a basic mathematical calculation under which the total loan amount is divided by the total value of the property. For example, for a property worth 50 Lakhs, if the loan taken is 30 Lakhs, then the LTV becomes 60%.
  • EMI

    Equated Monthly Installments (EMI) is the combination of principal + interest which is calculated as per the overall amount to be repaid and tenure to be repaid in. These EMIs need to be paid within the predetermined frequency and date to avoid additional charges and penalties.
  • Pre-EMI

    This term is prevalent mostly in regards to under-construction properties. Before the EMI payments begin, the borrower must pay the lender an interest rate on the partially disbursed amount for securing the rights to the said property. This is known as Pre-EMI.
  • Fixed interest rate

    As the name suggests, this means that the home loan needs to be paid at a fixed rate throughout the tenure, resulting in the same monthly installments and ease of calculation and future financial planning.
  • Floating interest rate

    Another way of determining the home loan interest rate is through the mechanism of floating interest. It fluctuates or floats as per the prevalent market conditions. This can result in different EMIs each month but can also be beneficial in the long run.

Conclusion:

In the list discussed above, there would be some terms which the reader would be well versed with. But, it is recommended to understand each term and its implications to avoid any unpleasant surprises or having to pay charges that were not factored into your financial plan.

Popular Blogs