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Decoding Commonly Used Home Loan Terminologies

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“No pre-payment/ Foreclosure penalty will be levied on floating interest Home Loans irrespective of the period for which the account has run or source of funds.”

“The Borrower may drawdown the Facility either in tranches or by one-time drawdown. In the event of drawdown in tranches, the Lender may at its discretion make applicable different or same Rate of Interest, tenure, Repayment Schedule etc.”

Confused? More often than not, while applying for a home loan, you may find yourself reading clauses with terminologies unheard of. However, we advise that you understand these terminologies or more commonly referred as, technical jargons, to make the right choice and understand what you are getting into.

Here, we have listed out a few technical terminologies used by financial institutions for you. So, next time you encounter them, this article can come handy if you are a first-time homebuyer and want to get off to a flying start.

Home Loan
Let’s start with the primary term itself. What is a home loan? It is a mode of finance that gives you the required funds to buy your dream home. Sanctioned by lending institutions, a home loan provides you the financial muscle to buy the home of your choice. Home loans come in several forms. They are:

  • Home Purchase Loan: In the home loan glossary, a home purchase loan refers to the loan that helps you buy an under-constructed or fully constructed property that could be a flat, apartment, or villa, among others.
  • Home Construction Loan: A home construction loan refers to a loan you can avail of to construct a home on a piece of land or plot. If you have a plot of land and wish to build a house on it, you can opt for a home construction loan.
  • Home Improvement Loan: Sometimes, you may not have the required funds to carry out improvement work related to your home. It could be either a renovation or painting work. In such a scenario, you can avail home improvement loan from a lender.

Margin
Also referred to as down payment or Own Contribution (OCR), it is the amount that you need to pay upfront to buy your home. The lender pays the remaining amount. Note that no lender will disburse the full price of the property as loan. Most lenders pay 70% to 80% of the property’s value, while you need to pay the remaining amount as a down payment. So, for instance, if the total price of the home you wish to buy is INR 50 lakhs, the lender will provide you a loan amounting to INR 40-45 lakhs. You need to pay the remaining amount, i.e., INR 5 to 10 lakhs, as a down payment.

Parallel Funding
One of the evolving home loan terminologies, parallel funding refers to the provision of splitting the down payment amount into smaller amounts so that it becomes easy for you to pay. Home purchase is a crucial economic decision where at times arranging for a lumpsum payment can be problematic. To ease the financial burden of the homebuyers, many lending institutions offer the option.

Home Loan Rate
Expressed in percentage, home loan rate is the interest that you need to pay on your home loan. This rate differs from one lender to the other. While shopping for home loans, along with other factors, you should watch out for the rate of interest offered as well. This is because your home loan EMI is directly proportional to the rate of interest. Higher the rate of interest, greater is the EMI amount.

EMI
Equated monthly installment (EMI) is the amount you need to pay monthly to your lender for your loan. EMI has two components - principal and interest. Home loan EMIs generally run for extended periods of 20 - 30 years or even more. For example, if you opt for a home loan of INR 50 lakhs at 7% interest with a repayment period of 10 years, the EMI you need to pay is INR 58,054. The total interest payable is INR 19,66,480, and the total payment at the end of 10 years stands at INR 69,66,480. You can use this Home loan calculatorsHome loan calculators to know the EMI you need to pay towards your loan.

Tenure
In the home loan glossary, tenure refers to the period you need to pay the EMI. Home loans are long-term commitments, and the tenure can run for a considerable period. It’s essential to choose the tenure with care. This is because if you extend the tenure, your EMI will come down, but interest payment will go up and vice versa. The table below highlights the fact:

Loan Amount Interest Rate Tenure EMI Amount Total Interest Payable
Rs. 50 lakhs 7% 10 Years Rs. 58,054 Rs. 19,66,480
Rs. 50 lakhs 7% 15 Years Rs. 44,941 Rs. 30,89,380

Credit Appraisal
When you send your application for a loan, the lender factors several considerations before sanctioning the loan. These include your age, income, credit score, and existing liabilities, among other things. After considering them, they decide whether to sanction the loan or not. The entire process is known as credit appraisal. Financial discipline can aid in credit appraisal and get your loan sanctioned quickly.

Foreclosure
One of the most common home loan terms, foreclosure means closing your home loan before the tenure. In other words, you pay the outstanding loan amount at one go and close your loan before its intended period. While foreclosure helps you pay off your loan earlier, note that it can incur additional charges. If you intend to foreclose your loan, talk to your lender, and find out about the charges that you need to incur. Generally, foreclosure charges are written in the fine print of the loan document.

Part Payment
Another widely used home loan terminology is part payment. This refers to the process whereby you make payments in small parts when you have surplus funds. Part payment brings down the principal amount and helps you close the loan early. While foreclosure allows you to make a lumpsum payment and close your loan, you make partial payments in lumpsum to close your loan in part payment. It helps you save considerably on interest. So, when you receive a windfall in the form of a bonus or inheritance, it’s a good idea to consider pre-payment towards your home loan. However, just like a foreclosure, make sure to know the applicable charges, if any.

Top-Up Home Loan Sometimes, you may need additional funds above and beyond your home loan. In such a case, you can apply for a top-up home loan. It’s recommended to find out if your lender has the provision of a top-up home loan or not.

Sanction Letter It’s an official letter from your lender stating that you are being considered as an eligible borrower. However, note that receiving the offer letter doesn’t guarantee a loan. This letter has details regarding the loan amount, interest rate, tenure, etc., and is valid for up to six months.

Godrej Housing Finance is one of India's reputed housing finance companies, disbursing home loans at a competitive interest rate. With the highest home loan eligibility in the market, you can get a loan on easy terms and conditions. Click here to know more about the offering.

Disclaimer:The above information is for illustrative purpose only. For more details, please refer to the product or service document and/or connect with our customer representative prior to making any financial decision.