Home Loans Terms you must know
Home loans have allowed you in relishing the dream of having an own home. While lots of people have been working hard day and night to relish this dream, there are a few, who make it a reality every day. The number of the homeowners has been on the rise and this number is rising owing to the good job of the banks and other lending agencies that have been innovative in their offerings for the home loans, which equip the people with a strong hand for the purchase of the home.
A home Loan offers several benefits to the people, and when it comes to the costing of the fund availability, no other loan types can match the home loan by any means. Considered as the cheapest loan type, the home loan serves to meet the people’s dream of purchasing an own home and offer an own space to the family, where they can enjoy the life, with complete freedom and a private space of their own.
However, every Home loan comes with various terms, which a person must know, in order to get a better deal for their home loan requirements. Opt for the home loan and turn your dream into a reality of buying an own home, but not before knowing some particular terms on home loans:
Down Payment or Margin
Down payment or margin is the amount, which is to be done by your side as a down payment during the purchase of the property. If you are looking for the bank home loan, perhaps, you are looking for the funds, that bank cover in the purchase of the property, since the amount available with you is not enough to cover the cost of the property. The amount, which is available with you and you are ready to utilize it for the purchase of the property is called as the Downpayment or margin.
For example, if the total cost of the property is 30 lacs, and you got 8 lacs in hand, which you are ready to pay during the purchase, and looking for the additional 22 lacs from the bank home loan; in such a case, 8 lacs is the down payment.
While, you are looking for the home loan, and since a home loan is a secured type of loan, which required pledging a collateral against the loan disbursed, you need to put in a kind of security, thus to make sure that you will not default on your loan or in simple words, you will not run away with the loan. The loan sanctioned on the basis of a security allows the lower rate of interest at the borrowed money. The title deed of the property, which you pledge to the banks in lieu of the loan amount, is called as the Collateral or security. In the case of the home loan, the property, for which the loan will be sanctioned, will be used as a security or collateral. In case, the bo0roower fails to repay the loan amount, the bank reserves the right to the ownership of the home and may sell it and recover their money.
The CIBIL Score is the rating, which a person is being allotted by the CIBIL, an agency for the CIBIL Score allotment. The CIBIL Score is calculated based on your financial journey and your repayment history and is reflected on a maximum score of 900. The more is the more, the better your rating is, and more is creditworthiness, you are in the eyes of the banks and other lending agencies. The constant defaulting on loans, the late payment on your EMIs and other not paying your credit card dues, will drastically lower your Credit Score.
It’s not the offer letter for your job but is the confirmation letter from the bank that bank has considered you as an eligible loan customer and you are hereby invited to take a home loan from them. This offer letter is valid up to 6 months, and in case, you don’t receive a loan within the stipulated time, the entire process will start again from the beginning.
The sanction letter is same as the offer letter and is just a synonym of the offer letter.
EMI is the Equated Monthly Installment. One of the most commonly heard terms, whenever you are approaching any bank for any kind of loan; EMIs are the amount, which you need to pay each month in order to repay the loan borrowed from the bank. The EMIs depend on various factors and is a pre-calculated one, which varies depending on factors like Loan Amount, the rate of interest and Loan Tenure.
While most of the people may have heard the word, EMI, there may be very few who must have heard the word Pre-EMI. For those ignorant readers, after a partial disbursement of a loan, only interest payments will be made on that amount, which is called as Pre-EMI. The Pre-EMI usually happens when a property is under construction.
Resale property is nothing but a property who is previously owned by someone else. When someone purchases a property from someone else, who already owned it, the property is called as a resale property. While, a fresh property is one, which is bought directly from the builder, and for which you are the first owner and has not been owned by someone else, in the history.
Credit appraisal is the evaluation of the applicant financial status in order to assess whether the applicant of the home loan is eligible to get a loan or not. In fact, the bank considers several factors, before deciding whether to lend the applicant any loan or not. The factors like income, age, qualification of the applicant, savings and responsibilities along with the employment status and several other factors like any running credits, etc, which accumulatively determine whether a person is eligible to take a loan or not and if the loan amount should be sanctioned or not. This complete checkup of the applicant’s eligibility is called as Credit Appraisal.
The preapproved property is the property, for which the builders already got a pre-approval from several lending agencies. In fact, the pre-approved property can be approved by several lending institutions considering the legalities of the projects and documentation furnished. If all the factors are in favor of the projects, the project will get a stamp of approval from those lending agencies.
However, there are some important aspects associated with the preapproval of the property. Any application for the home loan will be assessed individually and even if the property is pre-approved, it’s never a guarantee that the pre-approved project will always be approved. Also, the pre-approval of the projects doesn’t mean that the lending agencies have anything to do with the construction delays and such cases. The pre-approval of the property is done on the basis of builder’s reputation and taking in a note of the property legality and has nothing to do with the allotment of the project to the buyers and many such issues.
Post Dated Cheque (PDCs)
PDCs or post-dated cheque as goes by the name is the cheque written out for the future date and is one of the most common practices for the EMI Payment for home loans. These cheques cannot be cashed out ahead of time. These are the series of Cheques, which are issued by the loan borrower and bear the date for around 1-2 years as alternatives to repayment of EMIs.
The word Disbursement is the release of the loan amount from the bank to the applicant’s bank account. It may also be called as the sanctioning of the loan amount. If the person agrees on all the terms and conditions and signs of the papers for the home loan, after the process of the home loan, the bank release the loan amount in the applicant’s bank account, which is called as the disbursement.
The full Disbursement is the release of the entire loan amount in the applicant’s bank account, for which the applicant applies for the home loan.
The Partial Disbursement is the part payment to the loan applicant from the bank. It’s the partial Disbursement of the loan amount, to the bank account of the home loan applicant, while the rest amount will be disbursed depending on the conditions in the home loan agreement.
Advanced Disbursement is done when the entire disbursement is made before the completion of the project. The Advanced Disbursement is done on request and with the understanding that a builder will complete his project on time.
Prepayment is a term, which is applicable in the case, a borrower is looking towards the closure of the loan account much before the actual loan tenure is. Consider, if the loan borrower took a home loan for 20 years, but after 5 years of the home loan continuation, the borrower decides to close the entire loan, by paying all the remaining dues, the term is called as prepayment of the loan. However, the prepayment can also be done partially, where the borrower may opt to pay some lump sum to ease off the EMI on the shoulders, and also to save a certain interest incurring on the loan.
The prepayment is a good step towards the early closure of the loan amount, or to ease the burden and save a good amount to be paid as interest. However, the prepayment may involve some limitations from the bank’s side, and may attract some penalty charges etc. Also, there are some banks, which don’t allow prepayment of a loan until a certain period of loan tenure; thus one must check from the bank to know exactly what’s the prepayment terms and conditions of the concerned bank are! Prepayment is also known by the term foreclosure.
Loan to value ratio (LTV)
The LTV or Loan to Value Ratio is the ratio, calculated involving the factors like the loan amount and the total value of the property. Just calculate the total loan amount by the total value of the property and you will get the Loan to Value Ratio. Consider, if the loan amount is 18 lacs and the total value of the property is 30 lacs, the LTV will be 18/30 lacs equal to 60%.
The interest is the total amount, which needs to be paid to the banks for borrowing the loan amount. This must be paid by the loan borrower. The EMI, which the loan borrower pays every month, have a certain split of the principal and interest. The total interest to be paid by the borrower depends on various factors like total loan amount, the loan tenure and the rate of interest
Floating rate of Interest
There are two kinds of rates of interest; one is the floating rate of interest, while the other is the fixed rate of interest. Both feature their own benefits and limitations; the floating rate of interest is the interest rate type, which keeps on changing which the changing market. If the current market rate if high, the floating rate on the loan will be high and thus the EMIs to be paid every month will be high. While, in case, the market bears the low rate of interest, the same applies to the floating rate loan, and the person needs to shell out less money to be paid during the EMI payment every month.
Fixed rate of Interest
The fixed rate of interest is the one, which remains fixed for the entire duration of the loan. The loan taken with the fixed rate of interest doesn’t have any effect of the market conditions, and if the loan is borrowed at 9.7% for the loan tenure of 20 years, the rate of interest for the entire duration of 20 years will be 9.7% and will not change at all!
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