Finance

5 Financial terms that will help you understand home loans better

Availing a home loan is a once-in-a-lifetime event that most people look forward to and save up for. Often, home loan terms and jargon can confuse a first-time home loan borrower. Since a home loan is a long-term liability and commitment, understanding the various home loan terms helps you make a well-informed decision regarding selecting a home loan.

Here are a few home loan-related financial terms that you should understand well:

1. Credit appraisal

Before you get a home loan, your lender will consider a few factors to decide if you get the loan’s approval and how much will be sanctioned for you. Your home loan eligibility will be based on factors such as your age, income, financial worth, and employment status to check your repayment capacity. Your credit score and outstanding bills will also be checked under the credit appraisal exercise.

2. Interest rate

Home loan interest rates are generally of two different types. A fixed interest rate remains constant during the loan’s tenure, so you can easily estimate your interest cost with the help of a home loan EMI calculator. A floating rate of interest fluctuates with the RBI interest rate decisions and can eventually be higher or lower than the fixed interest you initially agreed upon. For example, due to the interest rate cuts, a floating rate now would be much cheaper than a fixed interest rate agreed a few years ago.

3. Pre-EMI

If you are purchasing a property still under construction, you may get the option to pay a pre-EMI. It includes only the interest of your home loan and is aimed to reduce your overall loan burden. Once you get possession of the property, your actual EMI would start. Pre-EMI is a reduced amount that doesn’t consider the principal amount of the home loan and is useful, especially if you have cash flow issues.

4. Margin

Margin is the portion of the property value over and above the loan amount and is sometimes used interchangeably with a down payment. For example, if you get Rs 80 lakhs for a property whose value is Rs 1 Crore, the margin to be borne by you would be Rs 20 lakhs.

5. Foreclosure

If you manage to arrange the payment of the loan early, you can foreclose your home loan. However, there may be a penalty for such prepayment, which is why you need to understand the foreclosure terms of your home loan.

Educating yourself about something that may have a direct impact on your life and finances is a must. Thus, if you plan to avail of a home loan, understand the terms mentioned above and more to get the best deal.

Leah Leonard

Coffee expert. Troublemaker. Typical music guru. Friendly beer fanatic. Introvert. Web specialist. Uniquely-equipped for implementing bullwhips in Ocean City, NJ. Spent a year importing licorice in Hanford, CA. Have some experience licensing cigarettes for the government. Once had a dream of selling toy monkeys in Las Vegas, NV. Spent the 80's working on hula hoops in Minneapolis, MN. What gets me going now is working with action figures in the government sector.

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