Planning to buy a new home?
“There is no place more delightful than one’s own fireside” ~Cicero
Our forefathers used to save money for years with the hope that one day they will save enough to have their own house. A place which will be their “home”, where they can stay happy, and spend a calm and ideal retirement life.
Fast forward to this era, we millennials can’t wait to own our space. With the emergence of financial institutions & ease in getting a loan at an early age, millions are in the process of buying their home at an early age; as early as in their 20s. Don’t you agree, that maintaining a home these days is the most “prized possession”?
So if you are also one of them who has already set eyes on your dream house, then read this article. It will help you understand the basic terminology related to buying a new house, and preparing for a loan so that you’re better equipped when making a big decision.
Buying a property or taking a Home loan? Here are some terminologies you should know:
Collateral:
It is a form of security required by the lender to cover the risk of default. So in case, the borrower is unable to pay the money back, the lender may liquidate /sell the security & recover their loan. For a housing loan, generally, the land or property itself can be given as collateral for the loan.
Interest:
It is the amount paid by the borrower over & above the principal loan amount as a charge for the loan provided. The amount of Interest to be paid depends on the Principal Amount, Rate of Interest agreed & Tenure of the Loan.
EMI:
So the entire loan amount along with Interest is paid in form of EMI. Here EMI stands for Equated Monthly Installments. The loan amount is decided based on the Borrowers EMI paying capacity. To understand the impact of EMI & Interest, you may check this Mortgage calculator whereby changing interest rate & principal amount we can see how EMI value changes.
Fixed & floating Interest Rate:
If the Interest rate is fixed for the entire loan tenure and doesn’t change as per the market conditions then it is called a Fixed Interest rate. In another case, if the Rate of interest changes based on the benchmark rate with which it is linked, then it is called a Floating interest rate. While in the case of Fixed-rate, EMI remains same but in Floating interest rate, the Interest component of EMI changes.
Pre-closure:
At any point in time, if the borrower wants to complete his/her loan then he/she can apply for pre-closure. Here the lender will share a lump sum amount based on the outstanding amount to date & may add a pre-closure penalty based on the agreed condition at the time of loan disbursal. This generally happens if the borrower gets a windfall of money or feels the Interest paid is too high. At times, the borrower might want to sell the property, and the buyer may request that the property should be free of collateral, then a borrower can apply for pre-closure.
LTV ratio:
It simply means the percentage value of the loan divided by the value of the property for which the loan is taken. Generally, lenders provide 70-90 % of property value as a loan, according to the borrowers’ paying capacity. Secondly, it depends on the purpose of the loan, if it is for house improvement or house extension, or land purchase loan.
Generally, the lenders are Banks, Non-banking Housing Finance companies, and Cooperative societies. At times, even the builder provides the option of a loan on the property offers.
Hope that this article helped you understand the lingo used by lenders before applying for a home loan.
Meanwhile Happy house hunting!
Love & Light,