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What is EMI (Equated Monthly Instalment)?
An EMI (Equated Monthly Instalment) is the fixed monthly payment made to the lending institution that includes both principal and interest. This payment continues until the loan is fully repaid, providing a structured repayment plan for borrowers.
Difference Between Daily Reducing, Monthly Reducing, and Yearly Reducing
Interest rates on home loans vary by institution, typically ranging from 8.75% to 12%. These loans are often calculated on either a monthly reducing, yearly reducing, or daily reducing balance:
- Annual Reducing: Interest is calculated on the original principal, with reductions made at the end of each year. Interest is charged on the portion of the loan that has already been repaid, making this the least efficient option for repaying your loan.
- Monthly Reducing: The principal is reduced monthly, lowering your interest payments over time and making this method more cost-effective than annual reducing.
- Daily Reducing: The principal is reduced daily, meaning your interest payments are minimized more effectively, making it the most cost-efficient method for repayment.
What is a Fixed Rate of Interest?
A fixed rate of interest remains constant throughout the loan tenure. This means that EMI payments will not change, even if market interest rates decrease, providing predictability for the borrower.
What is a Floating Rate?
A floating rate is tied to market lending rates and can fluctuate. As a result, EMI payments can increase or decrease depending on market conditions, making it less predictable than a fixed rate.
What Additional Costs Accompany a Home Loan?
Home loans often come with additional fees and charges:
- Processing Charges: A fee that lenders charge when you apply for a loan. This can be a fixed amount or a percentage of the loan.
- Prepayment Penalty: A fee charged when you repay the loan before the agreed tenure. It is typically 2% of the prepaid amount.
- Miscellaneous Costs: Additional costs can include documentation fees, consultation services, and other processing-related expenses.
Are Securities Required for Home Loans?
In most cases, the property being purchased serves as the security for the home loan, and it remains mortgaged until the loan is fully repaid. Some lenders may also ask for additional collateral, such as life insurance policies or savings certificates, to secure the loan.
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