Some 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.

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