Commonly Used Home Loan Terminologies

When you apply for a Home Loan, you may often come across jargons that may be difficult to understand.

“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 these kind of clauses with terminologies unheard of. This blog, a home loan glossary, if you will, is your way to ace the home loan process.

Also Read: Zero-Touch Home Loans: Your Key to Homeownership

Home Loan
Let’s start with the primary term itself. What is 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 ready-to-move-in 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 house 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 35-40 lakhs. You need to pay the remaining amount, i.e., INR 10 to 15 lakhs, as a down payment.

Parallel Funding
What is 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 Interest 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 home loan 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.

Also Read: Is Interest Rate Everything in Home Loans?

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 EMI generally run for extended periods of 20 - 30 years. 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. But how to calculate home loan EMI? You can use this Home Loan EMI calculator to know the EMI you need to pay towards your loan.

Tenure
In the home loan glossary, loan 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 monthly EMI will come down, but interest payment will go up and vice versa. The table below highlights the fact:

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 loan process is known as credit appraisal. Financial discipline can aid in credit appraisal and get you instant loan sanction.

Foreclosure
What is 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.

Also Read: Home Loan Prepayment: Advantages and Disadvantages

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 or pre-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.

Also Read: A Complete Guide to Home Loan Management

Ready to take the next step? Wondering how to get a home loan? It’s easy, click to Apply for a Home Loan today!

Godrej Capital is the financial services arm of Godrej Group which offers home loans, Loan Against Property and other secured loans. With innovative products and offerings, customers can get hassle-free loans on easy terms and conditions. Click here to know more about the Godrej Capital Home Loan offering.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially.
The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements.
Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com