When you are buying a house, it shows some progress in your life. Taking a mortgage is the main way that you can actualize this dream. However, attempting to navigate through the world of mortgages is difficult due to the numerous technical terms that exist. This will in turn help you smoothen the process, thus ensuring that your choice does not mislead you. This article discusses some of the most important mortgage terms that any buyer in India should understand.
#1. Mortgage Loan
At the heart of this matter is always the mortgage loans; it is this loan that you get from any financial institution such as a bank or non-banking financial company (NBFC) to acquire your property. You borrow money for acquisition and you agree to pay in equal amounts on a month-by-month basis for twenty to thirty years. Essentially, the property acts as a guarantee in mortgage lending where if one fails to pay back the loan the borrowing institution will be forced to take possession of this property.
#2. Down Payment
Talking about this in the Indian context, a down payment simply means the amount of cash that an individual is supposed to pay when purchasing any property of their choice. In India, the standard down payment is somewhere around 10% to 20% of the property’s value and the rest is covered by a mortgage loan. Larger down payments result in smaller loans which in turn translates into lower monthly payments as well as reduces overall interest over time.
#3. Interest Rate
This deals with the cost of a loan; it is usually fixed or floating.
- Fixed Interest Rate: This one remains constant during the term of the loan thereby providing some level of certainty.
- Floating Interest Rate: It varies with market conditions and repo rate. Should rates go up, your monthly repayments would also increase respectively.
Generally, in terms of the percentage rate chargeable annually on home loans provided in India, it ranges between 8% to 10%. For instance, if you are having a low credit score then there are chances that your interest rates could be high and vice versa.
#4. EMI (Equated Monthly Installment)
EMI denotes the total sum that is usually paid by any individual on a monthly basis on the grounds of repaying his mortgage loan. It comprises both interest and principal amounts. You can either use an online Tax Saving Calculator or request from your bank about EMI schedules for the calculation of EMI. Generally speaking for longer periods shorter EMIs are calculated however this will lead to more interest paid out.
#5. Loan Tenure
The period within which you are expected to fully pay off all your mortgage loan constitutes its tenure in which case it ranges from 5 to 30 years in India. The longer that term is supposed to take the less amount of money every month would be required from debtors but will accumulate higher interests by the end of it while, on the other hand, a shorter one attracts higher EMIs but it leads to lower overall interest rates.
#6. Principal
This refers to the amount borrowed initially from a financial institution like a bank. Thus as time progresses with EMI being paid monthly toward reducing that sum, it decreases respectively. The knowledge about the principal versus interest component of EMI is essential as it determines the time that you will take to pay off a mortgage loan quickly.
#7. Prepayment and Foreclosure
Prepayment: Additional payment is a term used here that denotes making an extra payment towards your repayment of the loan before its due date. This, on the other hand, can reduce outstanding principal and subsequently reduce EMI or loan tenure if paid back earlier than planned.
Foreclosure: If you decide to pay off your loan before the stipulated period elapses, you may choose the foreclosure option. Some lenders charge a foreclosure fee while others do not.
#8. Processing Fees
When applying for a home loan, some lenders require you to pay processing charges. It covers the cost of assessing your application and paperwork. Usually, they are the processing fee can be anywhere between 0.5% to 2% of the loan amount. Always check for these fees as they can add up.
#9. Credit Score
Your credit score plays a crucial role in deciding your mortgage loan’s interest rate as well as acceptance. A credit score of in India over 750 is regarded as excellent for getting better loan terms from financial institutions. If it is lower, it means that there will be increased interest rates or sometimes rejection of application forms regarding this.
#10. Loan-to-Value Ratio (LTV)
Loan-to-Value (LTV) ratio indicates the proportion of the loan amount to the property’s appraised value. In India, most banks provide home loans at an LTV ratio of 80% to 90%, meaning that loan seekers are required to contribute 10% to 20% as a down payment. Higher LTV ratios may invite higher interest rates.
#11. Tax Benefits
Under Section 80C and Section 24(b) of the Income Tax Act, Indians are entitled to several tax reliefs in relation to their mortgages. Under Section 80C, the deduction can be claimed for principal repayments of up to Rs 1.5 lakh while Section 24(b) allows interest-paid deductions up to Rs 2 lakhs thereby leaving one with less income tax liability.
If you are not sure how all these will apply in your case, there are such things as Tax Saving Calculators that can give you an idea of the amount that should be saved by presenting data about the loan amount and schedule of repayment.
#12. Mortgage Insurance
In some cases, mortgage lenders may tell you to buy mortgage insurance against the eventuality of death or disability among other unforeseen incidents. This ensures that in case you die, your family won’t be left with the burden of repaying the loan.
The Bottom Line
It is of great importance to understand these mortgage loan terms since they will aid you in making good financial decisions by avoiding surprises. Moreover, if you know about interest rates, EMIs, and tax benefits then it would be easier for you to involve deeper into the home purchasing process in India where appropriate. Hence, as you plan to take a home loan make sure that you check out various options and read through the fine print while using tax saving calculators to calculate your potential EMI.
With the appropriate knowledge at hand one can obtain a house credit that will be in line with his/her interests and financial circumstances hence setting up a stepping stone to actualize the dream of a beautiful home!
