Source: Understanding Home Loan Terms and Jargon: A Comprehensive Guide for Homebuyers (aavas.in)
Buying a home is a significant milestone for many individuals and families in India. However, navigating the complex world of home loans can be overwhelming, especially with the abundance of financial jargon and terminology. To ensure that you make informed decisions throughout the home loan process, it is crucial to familiarize yourself with the key terms and jargon associated with home loans. In this comprehensive guide, we will demystify the important home loan terms and explain their significance, empowering you to make confident and well-informed choices.
- Interest Rates and Types of Interest
Interest rates play a vital role in home loans, as they determine the cost of borrowing. In India, home loans typically have two types of interest rates:
- Fixed Interest Rate:Â Under this type, the interest rate remains constant throughout the loan tenure, providing stability and predictable monthly payments.
- Floating Interest Rate:Â Also known as variable or adjustable interest rates, they fluctuate with market conditions. The interest rate is usually linked to a benchmark, such as the Marginal Cost of Funds Based Lending Rate (MCLR) or the Reserve Bank of India’s repo rate. Floating-rate loans offer the potential for savings when interest rates decrease, but the monthly payments may vary.
2. Loan Tenure
Loan tenure refers to the duration of the loan, typically measured in years. Home loans in India usually have long tenures, ranging up to 30 years. A longer tenure results in lower Equated Monthly Installments (EMIs). -
- 3. EMI
EMI is the fixed monthly installment that borrowers repay to the lender. It comprises both the principal amount and the interest. The EMI amount depends on the loan amount, interest rate, and tenure. Utilizing online EMI calculators can help you estimate the EMI and plan your budget effectively.
 4. Down PaymentÂ
The down payment is the initial amount paid by the borrower while purchasing a property. It is a percentage of the property’s total value, and the remaining amount is financed through a home loan. In India, lenders typically require a down payment of 10-30% of the property’s value.
  5. Loan-to-Value Ratio:
The loan-to-value (LTV) ratio in a home loan simply shows how much of the loan is provided compared to the total value of the mortgage. The LTV ratio is considered to determine the maximum amount of loan that can be given against the property.  6. Pre-EMI and Full EMI
During the construction phase of a property, lenders may offer the option of pre-EMI. It is the interest payable on the disbursed loan amount until the property’s possession. After possession, borrowers start paying the full EMI, which includes both the principal and interest components.
  7. Processing Fee and Other Charges
Financial institutions charge a processing fee to cover the costs of loan processing, documentation, and verification. The processing fee is usually a percentage of the loan amount.
  8. Prepayment: Prepayment refers to making extra payments towards your home loan before the completion of the loan tenure. By prepaying, borrowers can reduce the outstanding principal amount and save on interest costs.
  9. Foreclosure: Foreclosure, on the other hand, refers to repaying the entire outstanding loan amount before the scheduled tenure.
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