Plan to buy a house? Check these 11 essential home loan terms first

Buying a home can be one of life’s most crucial decisions, requiring years of planning and investment. 

While many rely on investments and savings to buy their dream home, others borrow money from lenders to fund their house purchases. 

A home loan is a significant liability, and knowledge of key aspects can help borrowers make an informed decision.

Home loan terms

As many people would plan to buy their dream house in the coming year, here are 11 most essential terms home loan borrowers must know.

Principal Amount

The principal amount is the sum of money borrowed from the lender for your home. This amount does not include interest charges. 

For example, if you plan to buy a property worth ₹30 lakh and make a ₹10 lakh down payment, you will borrow ₹20 lakh from the lender, which will be the principal loan amount.

The principal amount of your loan will determine its EMI and tenure. A higher principal amount borrowed for a longer time may lead to the payment of a higher EMI on your loan.

Interest Rate

The interest rate is the percentage of your principal amount that the lender charges for its services. There are two types of home loan interest rates—fixed and floating.

Fixed home loan rates remain unchanged throughout the tenure. Floating rates are revised based on market conditions and whenever the Reserve Bank of India (RBI) changes its repo rates.

Home loan tip for interest rates

Before taking a house loan, compare the loan interest rates of different lenders, whether they are different banks or non-financial banking companies (NBFCs).

Housing Loan EMI

Equated Monthly Installment, aka EMI, is the fixed amount you pay the lender every month to repay the loan. It includes both the principal and interest components.

You can easily calculate the EMI using different tools available online on the websites of leading banks. Knowing your EMI helps with budgeting and financial planning.

Loan Tenure

Loan tenure refers to the period for which you borrow the money. It typically ranges from five to 30 years. Borrowers must carefully select the right combination of loan tenure and EMI amount to avoid overburdening themselves.

A longer loan tenure results in lower EMIs but larger interest amounts.Whereas, shorter loan tenure may raise EMIs but ensure lower interest payments.

Processing Fee

The processing fee is the one-time charge paid to the lender to process your loan application. It’s usually a percentage of the loan amount or a fixed fee, ranging from 0.25 per cent to 1 per cent.

Loan-to-Value (LTV) Ratio

It is not always possible to fund the full cost of the house, as it depends on how much the lender is willing to give. This is where the LTV ratio comes into play.

The LTV ratio is the percentage of the property’s value that a lender is willing to finance through a loan. For example, if a property costs ₹70 lakh and the bank offers ₹35 lakh, the LTV ratio is 50  per cent.

When the LTV ratio is lower, borrowers must pay a larger down payment, which is the initial payment made when purchasing the property.

Prepayment and Foreclosure Charges

Prepayment is an option to pay part of the principal loan amount before the completion of the loan tenure. When the borrower is willing to pay the full principal amount before tenure, then it is called foreclosure.

Some lenders charge penalties for prepayment and foreclosures; hence, opting for a lender that does not levy fines for this option can be beneficial.

Amortisation Schedule

An amortisation schedule is a detailed table showing the breakup of your EMIs into principal and interest components over the loan tenure. It also displays the outstanding loan balance after each payment. This schedule helps borrowers track their pending loan amount and plan repayments.

Sanction Letter

Once the lender approves a loan application, borrowers receive a sanction letter. This letter contains important details such as the sanctioned loan amount, applicable interest rate, repayment tenure, EMI amount, etc.

Balance Transfer

A home loan balance transfer allows you to shift your existing loan to another lender offering better terms on the home loan, such as lower interest rates or longer tenures.