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Common Home Loan Terminologies

Common housing loan terminology that you must know

Buying a home is one of our foremost dreams, and home loans help fulfil it. The home loan market has evolved significantly over the years, with digitalisation acting as a major enabler.

Having said that, before you go to search for the lender, it’s essential to understand the common terminologies that are associated with home loans. Doing so will help you to understand the offering better, and make an informed choice.

Home Purchase Loan: This is the most common type of home loan. As the name suggests, a home purchase loan is a type of loan that aids you in purchasing a home, flat, or apartment of your choice.
The property you wish to purchase through a home purchase loan can be either constructed or under construction. Note that a home purchase loan gives funds around 100% of the property’s value. And in case you wish to utilize a portion of your savings, you can do so and reduce the loan amount.

Home Construction Loan: A home construction loan is a little different from a home purchase loan. In this type of loan, you get funds to build a new home on a plot of land you own. If you have a piece of land and wish to construct your house on it, you must opt for a home construction loan.

Home Improvement Loan: Home improvement loan is quite different from home purchase and home construction loan. As the name suggests, it’s a type of loan that you can avail of to cover expenses related to home repairs and renovation, including painting, remodeling, electric repairs, etc.

Collateral: Collateral refers to the security you need to pledge to your lender before availing of a home loan. Since the loan amount is huge, lenders need some security to fall back on in case of non-repayment. Note that in most cases, the collateral for a home loan is the home itself.
If you fail to repay the loan on time or default, the lender can seize your property and sell it to recover the dues.

Home Loan Principal: This is the amount of money you get approved from your lender towards buying your home. Depending on the property’s value, your cash flow, and liabilities, the lender sanctions this amount. It can range from a few lakh of rupees to crores. You need to pay interest on this amount.

Interest: It is the amount you need to pay up over and above the principal amount to your lender. Home loan interest is of two types - fixed and floating interest rate. At a fixed rate, the interest remains the same throughout the loan tenure. In floating interest, the rate varies depending on market dynamics.

Tenure:: Lenders offer home loans for a specific period. This is known as tenure. To put it otherwise, you need to keep paying equated monthly instalments (EMIs) towards your loan until the tenure. The tenure could range from 10 to 20 years or more.

Note that EMI is inversely proportional to the loan tenure. It means higher the loan term, lower the EMI, and vice versa.

EMI: EMI refers to monthly equated instalments. You need to repay your loan in monthly instalments to your lender. EMI consists of both the principal and interest components. The EMI amount depends on the rate of interest and the loan tenure.

Today, most lenders have Home Loan EMI calculators on their website, using which you can find out about the EMIs you need to pay towards your loan.

Down-payment: This refers to the difference between the loan amount and property value that you need to pay from your pocket. Sometimes, it’s also called margin. For instance, if your lender approves 80% of the property value as a loan, you need to pay the remaining 20% as a down payment.

So, if the property value is worth 1 Crore, then your lender would provide 80 Lakhs as a loan while you need to pay the remaining 20 Lakhs from your pocket as a down payment.

Disbursement: Disbursement is the process of releasing funds into your bank account by the lender. Note that you get the loan amount into your account only after the lender verifies all the documents.

Offer Letter: Also known as the sanction letter, it's a formal confirmation sent by the lender saying that your loan request is being considered. It contains details regarding the loan amount, interest rate, loan tenure, and other terms and conditions.

Note that having the offer letter doesn't mean that your loan is going to get disbursed. Only after you complete the formalities do you get the loan into your account.

Loan to Value Ratio: This ratio indicates the amount of loan divided by the total value of the property. For example, if the loan amount is 80 Lakhs and the property’s value is 1 Crore, then the loan to value ratio is 80%.

Knowing these essential terms will ease your loan journey and help you seal the best deal.

If you are scouting for home loans at a competitive rate of interest, look no further than Poonawalla Housing Finance. You can procure a high loan amount on easy terms and conditions. Contact us at 1800-266-3204 or write to us at customercare@poonawallahousing.com, and our representatives will get in touch with you.

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