While our ancestors saved up for years to buy a house after retirement, the scenario is anything but similar today. With access to credit in just a few clicks, more and more millennials are realising their dreams of owning a house.
But although a home loan can help you finance your home without burning a hole in your pocket, you must be aware of certain home loan terminologies to make an informed decision. After all, your home is an asset that will stay with you throughout your life and secure the financial future of your children. Here are the nine important home loan terms that you must know-
1. Credit score
A credit score indicates your ability to repay the borrowed amount. It's a number ranging between 300 and 900, with 900 being the highest. Usually, a credit score below 650 is considered poor. Multiple factors like your credit history, credit usage, repayment record, etc., determine your credit score. A strong credit score builds confidence in the lender that you are financially responsible and capable of repaying the loan.
2. Margin
This is nothing but the down payment of the property. It's the difference between the loan amount and the actual property value. Financial institutions typically extend 80% of the property value as the loan amount, and you have to bear the remaining 20%. For example, if you're buying a house worth Rs. 1 crore, you have to pay Rs. 20 lakhs as a down payment and take a loan for Rs. 80 lakhs.
3. Collateral
As home loans are big-ticket loans, lenders usually require an asset as security in case you fail to repay the loan. This is called collateral. Lenders typically extend home loans against collateral at lower interest rates. In a home loan, the property that you're buying generally serves as collateral. If you fail to repay the loan, the lender will recover the amount by selling the property.
4. Loan disbursement
When the lender releases the loan amount, it is called loan disbursement. It happens only after the lender verifies your documents and approves the loan. It is of three types -
- Advance disbursement: This is when lenders release the money before the builder completes the project on the understanding that they will complete it before time.
- Partial disbursement: This is when your lender releases only a limited portion of the loan amount.
- Full disbursement: This is when the lender releases the entire amount at once.
5. Equated Monthly Instalments (EMI)
You must repay the home loan in monthly instalments. These instalments include the principle as well as the interest amount. Your Home loan EMI will be determined by factors like the loan amount, loan tenure, rate of interest, collateral, etc. You have to EMIs until you've repaid the entire loan amount and its interest. If the lender has made partial loan disbursement, then you must pay EMIs on the disbursed amount. This is called pre-EMI.
6. Tenure
Financial institutions extend home loans for a specific duration. This duration, called the loan tenure, can range from 20 to 25 days. In some cases, lenders also offer home loans for up to 30 years. You have to pay monthly instalments throughout the loan tenure.
7. Fixed interest rate
If you opt for a fixed rate home loan, you will have to pay a fixed rate of interest throughout the tenure of the loan. This means that your monthly instalments will remain the same for the entire loan duration. Fixed interest rates help you plan your monthly budget and guard against market fluctuations.
8. Floating interest rate
Floating interest rates fluctuate based on market conditions. This means your monthly instalments will keep changing based on the interest rates. If you opt for a floating rate home loan, you will have to pay a base rate. This is the minimum interest rate below which lenders are not allowed to extend loans. Floating interest rates are typically lower than fixed rates.
9. Balance transfer
If you're unhappy with your lender or want lower interest rates, you can transfer your loan to a new lender. This is called a home loan balance transfer. With a balance transfer, you can shift your outstanding loan to another financial institution for better services or lower interest rates. This gives you higher flexibility and more control over your finances.
The takeaway
With competitive interest rates and attractive offers, buying a home today is not a distant dream. But not all offers are as fantastic as they sound. There's only one difference between a valuable investment and a financial mess- smart choices. And these home loan terminologies will help you ace just that! Understanding the meaning of these home loan jargon will help you make informed decisions and avoid any surprises later.
Ready to take the leap? Become the proud owner of the home of your dreams today. If you're looking for affordable home loan interest rates with a quick and hassle-free process, then Tata Capital's home loan is an excellent choice for you.
With flexible repayment plans and a wide range of options, you'll find the perfect loan to finance all your housing requirements. What's more? You can apply for a housing loan without visiting a branch. All you have to do is visit our official website, click on the 'Apply' button, and fill in the required details. That's it! Our executive will connect with you and discuss the next steps.
28 June 2022
5 mins read
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