Plan to buy a house? Here are essential terms to know before borrowing home loan

Buying a home is one of the crucial decisions of life, and it requires years of planning and investment. While many rely on investments to buy their dream home, others borrow money from lenders to fund the purchase of their new house. A home loan is a significant liability, and knowledge of key aspects of a loan can help borrowers to make an informed decision.

Home loan terms

As many people would plan to buy their dream house next year, here are the ten most essential terms home loan borrowers must know.

Principal Amount

Principal amount is the sum of money you will borrow from the lender for your home. The money doesn’t include interest charges. For example if you are planning to buy a property worth ₹30 lakh, and are ready to pay ₹10 lakh down payment. In that case you will borrow ₹20 lakh from the lender which will be the principal amount of your loan.

The principal amount of your loan will determine the EMI of your loan and its tenure. A higher principal amount borrowed for a longer time may lead to the payment of a higher EMI on your loan.

Interest Rate

Interest Rate is the percentage of your principal amount which the lender has charged for its services. Home loan interest rates are of two types, ie fixed rate and floating rate.

Fixed Rates of home loans remain unchanged throughout the tenure. Floating Rate gets revised based on the market conditions and whenever the Reserve Bank of India changes its repo rates.

Home loan tip for interest rates

Compare loan interest rates on different lenders, whether they are different banks or NBFCs, before taking a house loan.

Housing Loan EMI

Equated Monthly Installment, aka EMI, is the fixed amount you pay to the lender every month to repay the loan.It includes both the principal and interest components.

People can easily calculate the EMI from different tools available online on the websites of leading banks. Knowing your EMI helps in budgeting and financial planning.

Loan Tenure

Loan tenure refers to the period at which people borrow the money. Loan tenure typically ranges from 5 to 30 years. People must be careful of selecting the right combination of loan tenure and EMI amount to avoid overburdening them.

A longer loan tenure results in lower EMIs but larger interest amounts. Whereas, a shorter loan tenure may raise EMIs but ensure lower interest amount payment.

Processing Fee

The processing fee is the one-time charge paid by the lender to process your loan application. The processing fee is a one-time charge levied by the lender to process your loan application. It’s usually a percentage of the loan amount or a fixed fee, ranging from 0.25% to 1%.

Loan-to-Value (LTV) Ratio

It is always not possible to fund the full amount of the house, because it depends upon the lender on how much they are willing to lend for the house, that is when LTV comes into play.

LTV ratio is the percentage of the property value that a lender is willing to finance through the loan. For example, if a property costs ₹70 lakh and the bank offers ₹35 lakh, then the LTV ratio is 50%.

When the LTV ratio is higher, borrowers are required to pay a higher down payment, which is the initial payment made when purchasing a loan.

Prepayment and Foreclosure Charges

Prepayment is option to pay a part of principal amount of loan before the completion of loan tenure. When the borrower is willing to pay the full principal amount before tenure, then it is called as foreclosure.

Some lenders charge penalty on prepayment and foreclosures, hence it is beneficial to opt a lender where the option can be availed without any fine.

Amortisation Schedule

Amortisation schedule is the detailed table which shows the breakup of your EMIs into principal and interest components over the loan tenure.It also displays the outstanding loan balance after each payment. Amortisation schedule allows borrowers to keep a tack of their pending loan amount.

Sanction Letter

Borrower get a sanction letter after the lender approves the loan application. It contains important details such as loan amount sanctioned, applicable interest rate, repayment tenure, EMI amount, etc.

Balance Transfer

A home loan balance transfer allows you to shift your existing loan to another lender offering better terms on home loan, such as lower interest rates or longer tenures.