Home loans can sometimes become tricky if you are not well versed with some technical terms. Knowledge of financial jargon becomes useful for a better understanding of the terms of your home loan. Here’s a guide to help you understand some commonly used financial jargon in the home loan world.
Key Financial Jargons
Following are some of the financial jargons most commonly used yet lesser known by the borrowers:
- Balance Transfer (BT): Home loan balance transfer transfers your outstanding loan amount from one lender to the other. Reasons may include lower home loan interest rates, better terms and conditions, etc.
- Collateral Security: For home loans, the house against which the loan is taken is the primary security for the lender. However, as the amount involved in home loans runs into lakhs and crores, banks and financial institutions may ask for collateral security as well, viz., security other than the house. It can include LIC policies, shares, securities, or other assets. This reduces the lender’s risk, which in turn benefits the borrowers in terms of lower interest rates, better LTV (covered later) ratio, etc.
- Base Rate: This is the minimum interest rate below which the lender will not offer the home loan to their borrowers. As and when the base rate changes, the floating-rate changes as well.
- Floating Interest Rate: This home loan interest rate fluctuates with the markets. Therefore, a borrower with a floating home loan interest rate may pay different amounts of EMIs over the loan period.
- Loan To Value Ratio (LTV): It is the amount of loan provided against the property’s value. It is derived by dividing the loan amount by the property value. Therefore, if a loan of Rs. 80 lakhs is sanctioned against a Rs. 1 crore property, then LTV is 80%.
- Margin: Margin is the difference between the actual property value and the loan amount provided by the lender. In most cases, borrowers use margin and down payment interchangeably because the borrower shall bear the cost other than that covered by the home loan in the form of a down payment. In most cases, 70%-80% of the property value is financed by the banks and financial institutions (LTV), while 20%-30% forms part of the margin.
- Foreclosure: The prepayment of outstanding loan amounts by borrowers with adequate excess funds. This is a common practice where borrowers resort to partial or complete repayment to pre-close the loan as it leads to saving in interest costs. It is known as foreclosure. Many institutions levy prepayment or foreclosure charges for closing the loan in advance.
- Credit Appraisal: Credit appraisal evaluates your loan application based on set parameters like age, income, credit score, occupation, etc. This is done to determine the borrower’s eligibility and decide whether to approve or reject the loan application.
In a Nutshell
If you are looking to apply for a home loan, the knowledge of the above jargon will help you better understand the terms of your loan. Apart from that, financial tools like the home loan EMI calculator can help you pre-plan your expenses well in advance before applying for the home loan. You only need to insert the loan amount, home loan interest rate, and tenure to get the exact EMI amount you will need to pay. Always read and understand the terms before applying for any loan.