Buying a home can be one of life’s most crucial decisions, requiring years of planning and investment.
Many people depend on their investments and savings to purchase their ideal home, while others choose to take out loans from lenders to finance their home buying.
Taking out a home loan is a major financial commitment, and understanding the essential factors can empower borrowers to make well-informed choices.
Home loan terms
As many people would plan to buy their dream house in the coming year, here are 11 most essential terms home loan borrowers must know.
Principal Amount
The principal amount refers to the total money you borrow from a lender to purchase your home, excluding any interest fees.
For instance, if you’re looking to buy a property valued at ₹30 lakh and you put down ₹10 lakh as a down payment, you would need to borrow ₹20 lakh from the lender, which would be your principal loan amount.
The principal amount of your loan will determine its EMI and tenure. A higher principal amount borrowed for a longer time may lead to the payment of a higher EMI on your loan.
Interest Rate
The interest rate refers to the percentage of your principal that a lender charges for their services. There are two main types of home loan interest rates: fixed and floating.
Fixed rates stay the same for the entire duration of the loan, while floating rates can change depending on market conditions and adjustments made by the Reserve Bank of India (RBI) to its repo rates.
Home loan tip for interest rates
Before taking a house loan, compare the loan interest rates of different lenders, whether they are different banks or non-financial banking companies (NBFCs).
Housing Loan EMI
Equated Monthly Installment, commonly known as EMI, refers to the consistent sum you pay to your lender each month to settle your loan. This payment consists of both the principal amount and the interest.
You can conveniently calculate your EMI using various online tools found on the websites of major banks. Understanding your EMI is beneficial for effective budgeting and financial planning.
Loan Tenure
Loan tenure refers to the period for which you borrow the money. It typically ranges from five to 30 years. Borrowers must carefully select the right combination of loan tenure and EMI amount to avoid overburdening themselves.
A longer loan tenure results in lower EMIs but larger interest amounts.Whereas, shorter loan tenure may raise EMIs but ensure lower interest payments.
Loan-to-Value (LTV) Ratio
Sometimes, you may not be able to cover the entire cost of a home because it relies on the amount the lender is prepared to provide. This is where the Loan-to-Value (LTV) ratio becomes important.
The LTV ratio indicates the portion of the property’s value that a lender is ready to finance with a loan. For instance, if a property is valued at ₹70 lakh and the bank lends ₹35 lakh, the LTV ratio would be 50 percent.
A lower LTV ratio means that borrowers need to make a larger down payment, which is the upfront amount paid when buying the property.
Prepayment and Foreclosure Charges
Prepayment allows borrowers to pay off a portion of their principal loan amount before the loan term ends. If a borrower decides to pay off the entire principal amount early, this is referred to as foreclosure.
It’s important to note that some lenders impose penalties for both prepayment and foreclosure. Therefore, choosing a lender that does not charge fees for these options can be advantageous.
Sanction Letter
Once the lender approves a loan application, borrowers receive a sanction letter. This letter contains important details such as the sanctioned loan amount, 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 the home loan, such as lower interest rates or longer tenures.
