Understanding common Home loan terms to make better decisions

This article will help you decrypt the mortgage industry’s vocabulary and make your loan application a lot less stressful.

Common Words and Acronyms

Here is a complete glossary of common Home Loan terms and acronyms, for your reference:

Floating Rate Interest Home Loan

This scheme offers an interest rate that changes periodically. There is usually an upper limit to how much it can increase.

Fixed Rate Home Loan

Unlike Home Loans with floating rate of interest, this is an interest rate that the same through the tenor of your Home Loan (which could stretch anywhere from 15 to 50 years).

Closing Costs

This covers costs such as origination fees, attorney’s fees, documentation fees, etc. This is usually paid by the buyer at the time of purchasing a property.

Collateral

This is the property or asset that the borrower gives to the lender as security. This basically means that if you can’t repay the loan, the lender will have ownership over the assets you’ve used as collateral.

Credit Appraisal

When you apply for a home loan, the loan company does a background check on you – your credit score, monthly income, savings, and other loans are all analysed. This helps them determine your eligibility for the loan, how much of a loan you qualify for. This entire process is called a credit appraisal.

Disbursement

This is the term used to signify the release of the loan from the financial institution to the borrower

Down Payment/Margin

According to the Reserve Bank of India, when you buy a property, you can take a loan of up to 80% of the property’s value. The remaining 20% has to be directly paid by you. This amount is called the down payment.

Equated Monthly Instalments

EMI is an acronym we often hear. EMI is defined as the amount you repay to your lender every month. This combines both the principal loan amount, as well as the interest owed. Certain financiers provide you three EMI-free months to give you a financial cushion, in case you need it.

Foreclosure

Completely paying off your loan before the end of your loan’s tenor is known as foreclosure.

Joint Ownership

This happens when two individuals, usually spouses, buy a property together.

Loan-to-Value Ratio (LVR)

The Loan-to-Value (LTV) ratio is a fundamental concept in lending, especially in the mortgage industry. It represents the percentage of the property's value financed through the loan and plays a crucial role in assessing risk, determining interest rates, and influencing loan approval decisions. Borrowers and real estate investors should be aware of the LTV ratio's implications when seeking financing for property purchases.

Lock-in Period

Many institutions have a clause that states that a borrower must stay with them for a fixed number of years. If you decide to change lenders before that period is up, then you may have to pay a penalty fee.

Maturity

This is the lifespan of a Home Loan, within which the debt must be repaid.

Post-Dated Cheques (PDC)

These are cheques with future dates. These cannot be processed before the mentioned dates. Many lenders ask the borrowers for a years’ supply of PDCs that have the EMI amount and your signature on them.

Resale

This means that you are buying a property that has been previously owned by someone else. Use of the word implies that you are not the first owner of the property and that you did not buy it from a builder. In such cases, be sure to ask the seller to hand over all financial records of the property. Most people are not aware of Home Loan terms in India. If you apply for a loan without any knowledge about mortgage terms and acronyms, you may not be able to get the best deal. So, first understand the important terms, do some additional research, and then apply for the Home Loan that best fits your needs.