So you are all set to get that home loan for your dream home. But hold on a minute. Your financial institution (FI) is explaining the intricacies and you realize that all the terminology seems Greek and Latin to you. All the jargon can be quite difficult for anyone to understand. Here is an attempt to help you make sense of the jargon to equip you better while handling a home loan discussion.

EMI
Equated Monthly Instalment is the most important aspect of any home loan considering it is the amount you will pay every month through the tenure of loan as repayment of the loan amount. An EMI is an unequal combination of your loan amount and it’s interest, and remains constant through the repayment period. During the initial years, EMIs have larger interest payments.

EMI is calculated as l x r [(1+r)n /(1+r)n-1 ] x 1/12
Where:
l = loan amount
r = rate of interest
n = term of the loan
Pre-EMI interest
This is the interest on the portion of the loan disbursed that may need to be paid before the final disbursement of the loan. It is payable every month from the date of each disbursement up to the date of EMI commencement.

Principal
This is the amount of money that has been borrowed. Interest is generally payable on the principal outstanding from time to time.

Down payment
When you take a loan, the home loan company will in most cases, not finance the entire amount. Usually 80% to 90% of the cost is financed. The balance of 20% or 10% is the down payment which will have to be made by you and is also referred to as the margin. 
 
Term
This is the period from the start of the loan till the date the same is repaid. Banks normally offer terms like 5, 10, 15 and 20 years. A few banks may even give you a term of 30 years in rare circumstances.

Loan agreement
This is your contract with the FI that lays down the terms of the loan and associated conditions. This includes details like the principal amount, repayment schedule, interest rate, security factors etc. It is vital to read the Loan Agreement carefully especially the fine print and get legal and financial opinion before signing the same.

Interest rates
Floating interest rates are applicable when the interest rate changes over the tenure of the loan, depending on the interest rates in the economy. If interest rates rise, the home loan interest rate will rise. If interest rates fall, the home loan interest rates will fall. In the case of fixed interest rates, it stays constant irrespective of how interest rates are moving in the economy.  However, always make sure you read the fine print of the loan agreement, as fixed rates are normally not fixed through the tenure of the loan. FIs offer loans on annual rest, monthly rest and even daily rest.

Annual Rest: In this annual reducing method, the principal for which you pay interest, reduces at the end of the year. Thus you continue to pay interest on a certain portion of the principal that you have actually paid back to the lender.

Monthly Rest: In the monthly reducing system, the principal for which you pay interest, reduces every month as you pay your EMI.

Daily Rest: In the daily reducing system, the principal for which you pay interest reduces from the day you pay your EMI. EMI in the daily reducing system is the least.

 Pre-approval
Many builders get their properties pre-approved by home finance companies and this augurs well for the builder. FIs’ examine the legal documentation, approvals, the builder’s ability and track record before approval of the loan.

PDCs
Post-dated cheques (PDCs) are cheques that are future dated and cannot be processed till the date indicated. Generally, the home loan company will ask for a year’s supply of cheques. These signed cheques will be addressed to the home loan company, for the exact EMI to be paid. 

Charges
FIs’ charge several different kinds of charges in the process of sanctioning a home loan. As a consumer it will hold you in good stead if are aware of what charges are being explicitly stated and what is hidden.
Processing Charge is the fee payable to the lender on applying for a loan. It is either a fixed amount not linked to the loan or may also be a percentage of the loan amount. The loan amount required by you cannot be less than the processing fee.

Pre-payment Penalties are levied when a loan is paid back before the end of the agreed duration and is usually between 1% and 2% of the amount being pre-paid.

Commitment Fees are charged when the loan is not availed within a stipulated period of time after it is processed and sanctioned.

Miscellaneous Costs refer to documentation or consultant charges.

Prepayment
If you get some extra money during the tenure of the loan, the same can be paid towards the principal before the prescribed repayment schedule. The benefit of interest is given to the party in such cases as per the norms of the home loan provider. Most FIs’ charge some fee for pre-payment of loan before the tenure and is normally in the range of 1-2% of the pre-paid amount.

Guarantor
A guarantor may be insisted by finance companies to ensure that the loan is paid back in full and in time. The guarantor is responsible for the repayment of the loan if the borrower defaults. Generally FIs’ do not insist on a guarantor in many cases.