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Home Loan Terminology You Must be Aware Of
Compact List of Home Loan Terminology
Your home is an asset that makes sure you are safe and secure. And to help most of us on
our quest to buy a home,
lenders offer home loan products tailored to meet our needs. That being said, all
financial fields have their own jargon
and home loans are no exception, and this could often confuse borrowers when they seek
basic information. However,
correctly understanding home loan terminology is of utmost importance if you want to
make the right decision while
opting for a home loan and this article makes your learning of such terms a
This piece covers some of the most critical home loan terms that you will need to know.
Margin is the down payment which you are supposed to pay when you book a property to
buy. The difference between the
amount of loan that your bank will provide you with and the total value of the property
is the margin. So, if you are
planning to buy a property of Rs.80 lakhs and your bank is providing you 80% of the loan
amount, then you must bear the
cost of the remaining 20%. So, the margin will be Rs.16 lakhs.
The base rate is the rate of interest that is set by the central bank. Your lender
cannot offer you any interest rate
which goes below this benchmark rate. The floating home loan interest rate changes per the changes in this base
A floating interest rate is one type of interest rate offered by lenders where the rate
of interest being charged is
sensitive to market conditions. If you choose a floating interest rate for your home
loan repayment, then your interest
rate can both increase and decrease at specific intervals, along with the market
As indicated by the term itself, this type of interest rate is fixed. In this case, your
interest rate will be fixed
before you opt for a loan. Your EMIs will not vary for the entire tenor, and this
interest rate is not affected by
changes in the base rate.
Tenor is the time of a home loan that is specified by the lender. You must pay off your
loan amount, both the interests
and the principal amount, within this specific time span. Tenor can be of 20 to 25
years, while in some cases lenders
also offer tenor of 30 years. The higher the tenor, the higher your interest will be.
Resale is a term that indicates that you are not buying a home straight from the builder
but from a prior owner who is
willing to sell it. It indicates that the home you are buying is not brand new, and in
that sense, is a resale.
Joint ownership indicates that the property is jointly owned by two individuals. In most
cases, these individuals are
spouses. In the case of joint ownership, the financial responsibility of loan repayment
is equal for both applicants.
Also known as the home loan sanction letter
, this is a formal letter that marks confirmation of a loan by the bank. The
bank will send out an offer letter that acknowledges that it recognizes you as an
eligible customer for a home loan,
spelling out your loan terms and conditions clearly on the document.
Collateral, which is also termed as security, is an asset which you need to provide the
bank against the loan. Home
loans are big-ticket loans, running into lakhs and crores and your lender needs a
security against which they can
sanction the loan. So, this collateral acts as an asset in case you fail to repay the
loan within your tenor.
A post-dated cheque is a cheque that is addressed for a date in the future. These
cheques can never be processed ahead
of their time. The banks often ask you to supply them cheques for at least a year, or at
times two to three years.
When the loan amount is released to you by the bank, the process is called disbursement.
Disbursement is done after the
bank has verified all your relevant documents. It is called full disbursement if the
entire loan amount is disbursed at
once, and partial disbursement if the bank disburses its smaller instalments.
The loan to value ratio tells you what percentage of the property’s
value can an applicant get as a loan amount – in the
case of a home loan, this is the total cost of the property you are purchasing and in
the case of a loan against
property, it is the total value against which you’re seeking a loan. So, if the property
for which you are taking loan
amounts to Rs.1 crore, and the bank offers you a loan of Rs.65 lakhs, the LTV is 65%.
EMI or the Equated Monthly Instalments is the monthly payment that you must give to the
bank, through the act of paying
back your loan. The EMIs are a combined amount of the interest and the principal amount
after the amount has been
disbursed fully by the bank. In case the bank has made partial disbursement, then EMIs
are paid on the amount that has
been disbursed, and it is called Pre-EMI.
A bank must evaluate your financial status before it grants you a loan. This evaluation
is called credit appraisal. The
bank does an assessment to find out if you are eligible for the loan or not.
If you can pay off your loan amount in full before the end of your tenor, then it is
called foreclosure. In foreclosure,
you will pay the remaining loan amount in a single go and not in EMIs.
If you are planning to avail yourself of a home loan, we hope this glossary of terms
related to home loans and real
estate will help you read the fine print of your home loan agreement in a better way and
negotiate a satisfying deal
with your lender.
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