A guide to important Home Loan terminologies you should know about
A Home Loan refers to a type of secured Loan you avail yourself of from a bank to buy a property while offering it as collateral. You can use the sum you borrow to buy a new or resale house or construct a home. You can also use the money from this Loan to extend or renovate an existing house. If you are new in the market and considering applying for a Home Loan, you may find it challenging to understand the complicated terms related to a Home Loan.
To help you make an informed decision, here are essential terminologies associated with Home Loans:
Equated monthly instalments
The equated monthly instalment is the fixed sum the borrower needs to pay every month towards repayment of their Home Loan. The Home Loan EMI amount includes the principal amount and the interest component. While the EMI remains the same throughout the tenure of your Home Loan, the portions of principal and interest amounts change over time.
Tenures
The tenor refers to the repayment timeline of a Home Loan specified by the bank. Borrowers need to repay their Loan amount, i.e., the interest and the principal amount, within this allocated period.
Down payment
The RBI usually permits banks to sanction 70% to 90% of the property value as a mandate. Consequently, your preferred bank can disburse up to 90% of the property’s value as a Home Loan. You need to arrange the rest of the money. This sum that you pay by yourself is termed the down payment.
If you have enough savings, you could pay a high sum as the down payment while buying a home. This might help you with the Home Loan at a competitive interest rate.
Fixed interest rates
A fixed interest rate is a type of Home Loan interest rate that stays the same throughout the tenure of the Loan. Since the interest rate does not change based on market conditions, it offers certainty regarding the monthly repayment amount.
Floating interest rates
A floating interest rate is a Home Loan interest rate that is sensitive to market conditions. If you opt for a floating interest rate for your Home Loan, your interest rate could increase or decrease throughout your repayment tenor, depending on the market conditions.
Loan-to-value ratio
The percentage of the property's value you can get as the Loan amount of your Home Loan is called the LTV ratio. This ratio depends on various factors, like the type of property and the borrower's creditworthiness.
Prepayments
Prepayment is the option of repaying your Home Loan in full or partially before the scheduled Loan tenure.
Conclusion
Keeping these terminologies in mind can let you better understand the terms and conditions the bank offers. Consequently, it could help you make an informed decision while applying for a Home Loan.