Today’s blog post continues from last week’s post about important terms with regards to home loans.
Interest can be of two types:
Fixed Rate Loans – A fixed rate loan is one with a rate of interest that is fixed for either a part of the tenure of the loan or the entire duration of the loan. When it is fixed for the entire loan, it is called a pure fixed loan. The EMI for whatever duration is fixed and unaffected by market rates. For interest rates that are fixed for only a part of the tenure of the loan, banks introduce a reset clause after reviewing the rate at the end of the fixed time period. The bank could increase or decrease the interest rate after considering the rates in the market. So, when it is only for a short period, it is not really fixed, in the exact sense of the word.
Floating Rate Loans – A floating rate loan is one where the interest rate is never fixed at any point throughout the tenure of the loan. This rate depends on the base rate, which is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers, along with the spread which is the difference in borrowing and lending rates of financial institutions in nominal terms The EMI is decided by the based on the tenure and constantly adjusted according to the market.
The table which details the principal and interest on a loan at any point in time is called the Amortization Schedule.
Pre – EMI
Pre-EMI refers to the interest on the disbursed loan amount that is paid before the rest of the regular EMI payments. This system is used when getting a loan for a property that is under construction. You will be given an option to pay a Pre-EMI which lowers the amount of each regular EMI payment or regular full EMI payments. Regular EMI payments in this case with a property under construction will have interest that is calculated based on the loan amount disbursed to the builder, with the remaining amount counted as part of the principal. This is called EMI under construction, wherein EMI remains the same.