home loan document terms
If you have taken a home loan, this familiar exercise must
ring a bell. The borrowers are given a booklet and are made
to sign on every page. This is your home loan document where
you agree to all the rules and promise to abide by the restrictions.
Margins, lending rates, surety - the jargon are plenty. It
is always wiser to go through the document, before getting
down to the dotted lines.
Here are a few terms that you often come across:
Borrower: the person who approaches the
bank for a home loan and on whose name the loan account is
opened and operated is called the borrower.
Loan application: Application submitted
by the borrower to the bank in order to avail a loan is called
the loan application process. The application process is the
first that starts off a series of activities and processes
that finally culminates in the disbursement of the loan amount.
EMI: Equated monthly installment is the
money that the borrower needs to pay to the bank every month,
in order to repay the loan. It orders to repay the loan. It
comprises both the interest component and the principal repayment
component. Your financier computers your monthly payable EMI
based on three vital elements – the quantum of the loan,
the interest rate applicable and loan tenure. In case the
bank hikes interest rates, either EMI is increased or the
loan tenure is increased.
PEMII: Pre-equated monthly installment interest
refers to the interest on the loan from the date of disbursement
to the date of commencement of EMI.
Amortisation schedule: The amortisation
schedule gives the break- up of every EMI towards interest
repayment and outstanding principal of your loan.
Margin: A home loan that a borrowed procures
for a house is not the entire cost of the property. What you
get in hand is only 85 to 90% of the cost of the house. The
rest of the money say, 10 to 15% needs to be paid upfront.
This down payment is called the margin.
Construction: Building, modifying or extending
a house or an apartment falls under the broad definition of
construction. Loans for construction or renovation can be
availed from certain banks.
Alienation of property: Create a third
party interest in the property by selling, mortgaging or surrendering
it. The borrower is restrained from trying to alienate from
the property without approval from the bank. The restrictions
& regulations vary from lender to lender.
Reducing balance: Assume that your interest
is calculated on monthly rests. This means that the principal
on which interest is charged reduces every month. Hence, you
pay less over the long run. If your interest is calculated
on annual rests, the principal reduces only at the end of
the year. In essence, in this case you still pay interest
for the portion of the principal that you’ve already
paid back. This is what is termed as annually reducing balance.
Prime lending rest: When a customer takes
a loan at a flotation rate, the interest rate is linked to
a prime lending rate, the interest rate is linked to a prime
lending rate (PLR) , which is based on cost of funds of the
lending institution. Economic upheavals coupled with numerous
other factors affects the cost of funds of the financial institution.
This in turn affects the PLR and hence the interest rates.