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Basics of home loan

If you are new to home loans or if you have just started your preparation to apply, there are some basic terms and concepts you need to be familiar with.

Collateral: It is a security or asset provided to the lender by the borrower in lieu of the loan amount. Upon failure of repayment, the lender can seize the asset (usually property or real estate).

Down payment: The total cost of the house is almost always never financed. The partial value of the house needs to be paid to the seller of the house as down payment. Tip: the more your down payment amount, the lesser the loan amount and thus you might get better terms on your loan.

Loan term Loan: This is the length of the loan repayment period. It can be a flexible span of time depending on your income – higher the income, a longer term can be chosen, your age – the younger you are, as you have most of your working life ahead of you to enable repayment, you are more likely to get a long-term loan.

Equity: The difference between the current market value of your house and the current liability on the property. Over time, as the value of the home increases and the amount of loan decreases, the equity of the home generally increases.

Refinancing: The process of paying off an existing loan and establishing a new loan.

Title: The evidence of the right to or ownership of property.

Annual percentage rate: It is the rate of interest that will be paid back to the lender. The rate can a fixed rate or variable.

Principal: This is the amount of money borrowed for the mortgage. The principal amount keeps decreasing as the borrower makes steady repayments.

Foreclosure: In the unfortunate event of the inability of loan repayment, the lender takes back the balance of the property by forced selling.

Monthly amortization: This is the process of paying monthly installments of the principal amount and the interest rate. Consistent payments will ensure that the loan is repaid on time.

Loan to value ratio: LVR refers to the amount of financing you are getting in relation to the house’s value. LVR of more than 80% requires the borrower to purchase private mortgage insurance (PMI).

PMI: This protects the lender against loss if the loan has defaulted. The monthly PMI payment is added to the mortgage repayment installment amount.

Get a good hold of all these basic terminologies before getting into talks and negotiation with the Bankers.

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