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Seven Home Loan Terms You Must Know

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Real estate has gone out of reach of common man. However, owning a home has and always will be a dream for an average Indian. It’s an emotional quotient. Banks have made this job of owning a home in your city easy with introduction of home loans. The interest rates of home loans are one of the cheapest among all the loans and hence encourage you to own your dream home at the earliest.

However, home loan is not as simple as a fixed deposit where you invest an amount and you get back fixed amount in the form of interest. Here is an attempt to make your aware of seven important terms frequently used in home loans.

1) Fixed or Floating

Whenever you approach a bank for a home loan, this would be the first thing you have to encounter. The bank would ask you if you need fixed or floating interest rate. Of course, lot of times bank may not give you the option too. They just give you what’s beneficial for them. Floating rate is a situation where the interest rate of the loan varies whenever RBI tinkers with the interest rate in the market. Fixed rate means having the same rate throughout the tenure of the loan. Each of these will have their own benefits. Floating rate might give you the benefit of lower rate whenever the rates go down but makes you pay more when the rates are high. Fixed rate helps you plan well in advance since you already know the amount that needs to be payed.

2) Refinance/Switch

This term has gained popularity ever since RBI removed the pre-payment penalty on home loans. This is the penalty which was levied by banks whenever you fore-closed the loan in advance or switched it to another bank which offered a better rate. It does not exist anymore, though. You are free to refinance or switch the home loan any bank which offers a better interest rate.

3) EMI

This is the most important part in any loan for any loan taker. EMI or Equated Monthly Instalments is the outgoing amount from your wallet to the bank. It is a combination of two parts – Principal and Interest. Principal is the amount that you have initially taken as loan from the bank and Interest is the profit margin for the bank. Both of these parts offer different tax benefits.

4) Disbursement

It implies the amount of loan that is being or has been given to you for purchasing or constructing a home. Banks usually do not disburse the entire amount in a single go. If the house is under construction, amounts will be disbursed in phases matching the requirement of the builder. Interest starts whenever loan is disbursed.

5) Eligibility

This term comes into action even before you get a loan. In fact, as the name suggests, it tells you the amount of loan that you are eligible for. Usually, this is up to 80% of the home value and the rest of the payment has to be borne by you. It is not standard for all banks and it varies as per your income, age, etc.

6) Pre-EMI

This is similar to EMI. This comes into play if you apply for a loan in the construction stage of the house. The major difference between EMI and Pre-EMI is that here only interest part applies. It continues till the house is handed over completely. Principal amount does not reduce till EMI starts. The tax benefits are also slightly different for this.

7) Part Payments

This is probably the least used term in the entire tenure of home loan. You can repay the home loan in parts throughout the loan. This will help reduce the principal and interest amount of your loan. Also, since pre-payment penalties have been banned by RBI, part payments will help you reduce the loan burden in a great way.

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