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Saturday, October 30, 2010

Home Loan Terminology

Here are some terms that you will come across time and again when it comes to home loans or any other type of housing finance. Herein, we try to give you a fair idea of the kind of terms and their meaning:


EMI: These are the Equated Monthly Installments that one must pay till the whole loan amount inclusive of the interest is not paid back. The EMI amount includes a portion of both the principal amount and the capital amount.

Fixed Rate of Interest: Herein, the rate of interest will remain fixed for the duration of the loan.

Floating Rate of Interest: The market lending rate will determine the interest rate. Lending rates might go up or down, and the borrower can be at an advantage or a disadvantage at different periods of time.

Monthly Reducing Balance: The interest rate will reduce on a monthly basis when the repayment amount is repaid.

Annual Reducing Balance: The principal is reduced on a yearly basis and in such an option, a borrower will end up paying an interest on even that portion of the principal loan amount that has been paid back.

Processing Fees: A loan application has a processing fee attached to it

Prepayment Penalty: If a borrower repays the whole loan amount before it is actually due and before the loan tenure ends, most banks and institutions charge a penalty for the same.

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