Purchasing a home is one of the crucial dreams and a home loan assists you to meet it. The home loan market over time has evolved considerably with digitalization serving as a main enabler. Having said this, before you deep dive to search for an ideal lender, it is crucial for you to understand all the crucial terminologies linked with home loans. Doing this would assist you in understanding the offering better and allow you to make an informed decision.
Home purchase loan – Home loan for salaried person and self-employed are common means of securing adequate funds to finance your home purchase. As suggested by the name, a home loan is a kind of loan that helps you in buying a flat, apartment or home of your preference.
The property you look to avail of via a home loan can either be under-constructed or constructed. Remember that a home loan endows funds of up to 90 per cent of the value of the property. And in the case, you want to use a part of your savings, you also consider providing a higher down payment to bring down your loan proceed requirement and your EMI and overall interest constituent. You may also wonder “How to apply for Pradhan Mantri Awas Yojana”? Note that for this, ensure to visit the authentic webpage of Pradhan Mantri Awas Yojana to get an idea about the steps you must follow to avail this loan.
Home construction loan – A home construction loan is slightly distinct from a regular home purchase loan. Here in this loan type, you can avail funds to construct a new home on the land or plot you own. If you have a plot and want to construct your home on it, then you must consider selecting the home construction loan option.
Home improvement loan – A home improvement loan is distinct from a home construction or home purchase loan. As suggested by the name, it is a kind of loan that you take up to cover your expenditures linked with home renovation and repairs including remodelling, painting, electric repair, and others.
Security or collateral – Collateral or security is the asset you must pledge to the lender before you take the home loan. As the loan proceeds are massive, lenders require some security to fall on in the case of continuous default in repayment from your end. Remember that in most scenarios, security for the home loan is the home itself. If you fail to make the loan repayment on time or constantly default, the lender may seize your home and sell the same to recover your outstanding dues.
Home loan principal constituent – This refers to the amount for which you get approval from your bank for purchasing your house. Based on the value of your property, your liabilities, and your cash flow, the lender sanctions you on the proceeds. And you must pay interest on the amount you borrowed.
Interest constituent – It is the constituent you require to pay above the principal constituent to your bank. Home loan interest is major of two kinds – floating and fixed rate of interest. At a fixed rate of interest, the interest stays the same across the repayment tenure. In the case of a floating rate of interest, the rate differs based on the market dynamics.
Repayment tenure – Lenders provide home loans for a particular time period. This is addressed as tenure. To place it otherwise, you require to continue paying the EMI (equated monthly instalment) towards your loan till repayment tenure. The tenure may range anywhere between 10 and 20 years or even more. Remember that loan EMI is proportional inversely to the repayment tenure. This means the higher the loan repayment tenure, the lower would be the loan EMI and vice versa.
Loan EMI (equated monthly instalment) – EMI stands for equated monthly instalment. You require repaying your loan on a monthly basis to the lender. EMI contains both your interest and principal constituent. The EMI proceeds are based on the interest rate and loan repayment tenure. Today, most lenders hold an online home loan EMI calculator on their site using which you can know all regarding the EMIs you require to pay towards the home loan.
Down payment – It basically is the difference between property value and loan amount that you must pay from your pocket. At times, it is even known as the margin. For example, if your bank approves 80 per cent of the value of the property as a loan, you must pay the rest 20 per cent in the form of a down payment.
So, in the case, the value of the property equals Rs 1 crore, then your bank would offer Rs 80 lakh in the form of a loan while you require paying the rest Rs 20 lakh from your own pocket as a down payment.
Disbursement – Disbursement refers to the procedure of releasing funds to your bank account by the bank. Remember that you get loan proceeds to your bank account just after the bank authenticates all your submitted documents.
Offer letter – Also called sanction letter, it is a confirmation sent by the bank formally stating your request for a loan has been considered. It contains all the crucial details linked with your loan proceeds, rate of interest, loan repayment tenure and other crucial terms. Remember that holding an offer letter does not mean that your credit will be disbursed. Just after you have finished all formalities you get the loan proceeds into your bank account.
Loan to value (LTV) ratio – This is a ratio that indicates the loan amount divided by the overall property value. For instance, if your loan proceeds equal Rs 80 lakh and the value of the property is Rs 1 crore, then the LTV (loan to value) ratio would be 80 per cent. Being aware of the crucial terms eases your financial journey and assists you seal a prudent deal. So, always ensure to be well-versed with the terms mentioned above in order to get the deal of your choice and even negotiate with the lender as per your repayment capacity.