10 Home Loan Terms You Should Know

Understanding a variety of terms and conditions is necessary when applying for a home loan, which is a significant financial commitment. Gaining a thorough awareness of the essential terms related to home loans will help you avoid surprises during the application and repayment processes, regardless of your level of experience as a real estate investor or first-time homebuyer. You can improve your financial planning and obtain better loan conditions by being aware of these terminologies.

To help you get started, here are 10 essential home loan terms that every borrower should know:

1. Principal Amount

The initial sum of money you borrow from the financial institution to fund the purchase of the home is known as the principle. It stands for the base loan balance, without any interest. Every monthly installment you make goes toward lowering your loan’s principal and interest. In addition to reducing the length of your loan, paying down your principal sooner will save you money over time by drastically lowering the overall amount of interest you will pay. 

2. Interest Rate

The percentage of the primary loan amount that a lender charges as the cost of borrowing money is known as the interest rate. It has a direct effect on both the overall cost of the loan and your monthly loan repayments, and is usually expressed as an annual percentage rate (APR). There are two types of interest rates: fixed and variable. A fixed interest rate provides stability and predictability because it remains consistent for the duration of the loan. A floating interest rate fluctuates according to market conditions, which could eventually cause changes in your Equated Monthly Installments (EMIs). To choose a loan that fits your financial objectives, it is essential to comprehend these possibilities.

3. EMI (Equated Monthly Installment)

Equated monthly installments, or EMIs, are the set monthly payments you have to submit to the lender to cover the principal and interest on your loan. Since it enables efficient financial planning and management, it is an essential component of loan payback. Being familiar with your EMI amount in advance guarantees that your loan repayment is within your financial capabilities and helps you to make a feasible budget. At the start of the loan arrangement, lenders usually give you an EMI schedule that specifies your payment responsibilities for the duration of the loan.

4. Loan Tenure

The term “loan tenure” describes how long the loan agreement will last, or how long you will be repaying the loan. Although shorter and lengthier durations are also available, the majority of home loans have tenures of 15, 20, or 30 years. While a shorter duration may result in higher EMIs but a lower total cost of the loan, a longer tenure means lower EMIs but higher overall interest payments.

5. Down Payment

The amount you must pay in advance when buying a property is known as the down payment. Financial institutions often need a down payment of at least 10–20% of the property’s value. Your interest load may be reduced if you make a greater down payment because you will need to borrow less money overall.

6. Amortization

Amortization is the process of paying back a loan over time, usually in regular installments. The interest is paid with a greater portion of your EMI in the early stages of the loan, and the principal is reduced with a larger percentage of the payment as the loan term extends.

7. Processing Fee

The processing fee is an amount that the lender charges to cover the costs of handling your loan application. This charge, which is usually expressed as a percentage of the loan amount, fluctuates depending on the financial institution. It is an upfront fee that borrowers must pay or that is added to the overall cost of the loan. The cost of processing must be taken into account when calculating the total costs for getting a loan because it affects the overall amount of money required.

8. Prepayment

The concept of “prepayment” means paying back either all or part of a home loan prior to the due date. Loan prepayment might reduce the amount of principal paid and, consequently, the total interest rate. If you make the choice to pay off your loan early, certain lenders might charge a prepayment fee, so it’s important to review the terms before doing so.

9. Foreclosure

When a borrower defaults on their loan, the lender can take possession of the property through the legal process known as foreclosure. It’s important to understand that, even though this is a distressing circumstance, lenders often use the property of the borrowers as collateral for recovering the unpaid loan sum. To collect the unpaid balance, the lender may seize your house and sell it if you are unable to make your payments. To prevent foreclosure and losing your property, you must make your payments on schedule. 

10. Loan-to-Value (LTV) Ratio

One important indicator that banks use to decide what percentage of a property’s value they are ready to loan is the Loan-to-Value (LTV) ratio. It is determined by dividing the loan amount by the purchase price or the property’s appraised value. Although it also signifies a higher level of risk for the lender, a higher LTV ratio shows that the lender is funding a larger amount of the property’s worth. A lower LTV ratio, on the other hand, indicates that the borrower is making a higher down payment, which lowers the lender’s risk and may lead to better loan terms.

Conclusion

To successfully complete the mortgage application procedure with greater confidence and effortlessly, it is essential to understand these key home loan terminologies. Understanding these terms will enable you to make well-informed decisions regarding your home loan, whether that means knowing how your EMI is determined, the effects of your loan tenure, or the numerous fees and rates involved. You may make sure you understand your financial responsibilities by taking the time to carefully go over your loan agreement. Speaking with a lender or financial advisor might provide you the information you need to proceed with confidence if you have any questions or concerns. Shubham Housing Finance offers home loans to borrowers with informal income. It is a leading housing finance provider in the country that has helped over 65,000 customers buy a dream home with easy EMIs and repayment options