Buying a home is more than just a financial decision – it’s a journey towards fulfilling a cherished dream. However, the road to home ownership is often filled with complex terms and decisions, especially regarding housing loans. From understanding the basics of principles and interest to navigating the nuances of LTV ratios and credit scores, clarifying these concepts can make the process less daunting and more empowering.
Here’s a comprehensive guide to decoding the key housing loan terms you need to know before making one of the biggest investments of your life.
1. Principal amount
This is the loan amount that you borrow from a bank or lender. For example, if you need Rs 40 lakh to buy a house, that Rs 40 lakh is your principal.
2. EMI (Equal Monthly Installment)
The monthly payment you make to repay the loan. It includes both principal and interest. Higher loan amount or interest rate means higher EMI.
3. Interest rate
A fee charged by a lender for letting you borrow money. It can be of two types:
Fixed Rate: This does not change during the loan tenure.
Floating Rate: Changes in market conditions, which may increase or decrease your EMI.
4. Tenure of Loan
The period in which you repay the loan. Generally, home loan tenure in India is 5 to 30 years. Longer tenure means smaller EMIs but higher interest paid overall.
5. LTV (Loan-to-Value Ratio)
Banks are willing to lend a percentage of the value of the property. For example, if a property is worth Rs 50 lakh and the bank offers 80% LTV, you can get a loan of Rs 40 lakh. The rest, Rs. 10 lakh, is your down payment.
6. Processing Fees
A one-time charge by the bank for processing your loan application. It is usually a small percentage of the loan amount, ranging from 0.25% to 1%.
7. Prepayment and Mortgage
Prepayment: Pay off a portion of your loan before the tenure is over. It lowers your core and overall interest.
Mortgage: Repaying the full amount of the loan before the maturity of the loan. Some banks charge a penalty for prepayment or foreclosure.
8. Credit Score
Your credit score reflects your creditworthiness. A score above 750 is ideal to get attractive interest rates for housing loans.
9. Margin Money
The amount you should arrange yourself is usually 10-20% of the property’s value. Banks do not cover this part.
10. Balance Transfer
If you find a lender offering a lower interest rate, you can transfer your loan to them to reduce your EMI burden.
11. Stamp duty and registration
These are the state government charges for registering your property in your name. Although not part of the loan, they add to the overall purchase price of your home.
12. Moratorium Period
A grace period when you don’t have to start repaying your loan. It is usually given for a certain period of time during construction or after disbursement of the loan.
Understanding these terms can empower you to make better decisions and save money in the long run. Ready to take the plunge? Use this guide as your roadmap and secure the best housing loan for your dream home.