Important Terms That Every Home Loan Buyer Should Know In India
Home Loan Terminology in India: Key Terms Explained
When you own a home, you don’t just own a place for accommodation but also peace. Peace for the whole life from living as per your landlord’s will, worrying about rent increments, and most importantly, the hassle of shifting.
But that peace is not cheap, and you have to work hard to achieve it. However, not everyone can afford it at once, so many people opt for a more complicated, expensive, and indirect route: a "Home Loan."
A home loan is a process where a lender provides you with money to own a home, in exchange for an interest on the entire amount annually, along with a part of the principal amount, called EMI (Equated Monthly Installment). This process continues until your home loan tenure ends.
While going through this process, you will come across several Hoam Loan related words. If you are not familiar with them, you could get into a trap. Therefore, it’s extremely important for anyone thinking of taking a home loan to understand these terms for better clarity, financial management, and to protect themselves from any disputes.
Let’s understand what these terms are and their usage.
Understanding Home Loan Terminology
Below are some Hoam Loan related words used when going through a home loan:
EMI (Equated Monthly Installment)
EMI is a part of your total home loan amount, including the interest rate, payable to your lender every month. EMI consists of two components: the principal and interest amount. For example, if you take a loan of 50 lacs for 10 years at an interest rate of 10%, your monthly EMI would be Rs. 66,075/-.
Interest Rate
The interest rate is the additional amount payable on your home loan amount to the lender. It typically ranges from 8% to 10% per annum. There are various types of interest rates, such as floating, fixed, and compound interest rates. To know more about these interest rates, read our blog on Types of Interest Rates in India with Examples.
Credit Score
A credit score is a rating that reflects a borrower’s likelihood of repaying debt and their repayment history. The lender reports all information about paid/unpaid dues, penalties, and repayment details of a borrower to the Credit Information Bureau (India) Limited (CIBIL).
Based on this information, CIBIL assigns points to the borrower, which can be accessed by any lending institution to assess the borrower’s history. Other credit rating agencies in India include Experian.
Margin/LTV (Loan-To-Value)
Margin or Loan-To-Value (LTV) refers to the percentage of the loan amount provided relative to the total value of the property. For example, in India, the government sets LTV limits:
• Up to ?30 lakh: The maximum LTV is 90%
• Between ?30 lakh and ?75 lakh: The maximum LTV is 80%
• Above ?75 lakh: The maximum LTV is 75%
If you’re buying a home costing 1 crore, the bank will only provide you with up to 75% of the loan amount (?75 lakhs), and the remaining ?25 lakhs will be your responsibility, often referred to as the down payment.
Collateral
Collateral in real estate is the property a borrower pledges to a lender to secure the loan. If the borrower cannot repay the loan, the lender can take the collateral and sell it to recover the money. In a home loan, the original property papers are held by the bank, and if the borrower defaults, the bank can sell the property to recover its funds.
Amortization Schedule
An amortization schedule shows the detailed repayment period, from the first month to the last month of your EMI schedule. It provides information on how much interest and principal are charged until the loan is closed.
Default
Default refers to a situation where a borrower fails to repay the loan and falls behind on their payments.
Balance Transfer
Balance Transfer refers to transferring a home loan from one bank to another, which offers better terms and interest rates. It’s a useful term for homebuyers to save money by transferring their loan to a bank with more favorable terms.
Foreclosure
Foreclosure means paying off the entire loan amount before the loan period ends. For instance, if you took a home loan for 20 years but paid off the full loan amount in 15 years, that would be considered foreclosure. Banks usually charge a minimal fee for foreclosure, ranging from nil to 3%.
Loan Disbursement
Loan disbursement is the process a bank follows after approving the loan amount, and the funds are credited to the borrower’s account.
Conclusion
Understanding key Home loan terminology, is crucial for anyone looking to secure a loan. Familiarity with terms like EMI, interest rates, credit score, and LTV will help you manage your finances, avoid confusion, and protect yourself from any issues during the loan process.
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