Decoding The Loan Payment Structure

Loans are an essential component of buying a property be it your house or office space. Especially, if you want to invest in premium places like projects in Ghaziabad or Noida, that are costly. A long term loan designed to help a buyer purchase a property is often referred to as ‘mortgage’. So, it is important that the borrowers especially the first time property buyers know explicitly about how the structure of the mortgages work. 

On a basic knowledge we are all aware about the terms principal, interest and payment period. While you borrow money or take a loan you also need to pay some interest to the lender besides paying the principal amount. The property and its neighbourhood serve as collateral in this case.

We often come around such words and things in finance pages of the newspapers and on various financial programmes that mention these words such as mortgage, appreciation or depreciation in interest rates, the trends in rates and other things like that. Loans extend a helping hand financially to buy a property like if you want to buy a flat in Ghaziabad. 

Thus it is important that we know how it exactly works even if you are not taking one. There are many home loan plans available and it is you who choose it according to your preference. While repayment of these mortgages the size and terms of the role decide the repayment structure. Size is the amount borrowed and terms are the payment period and interest rates charged. Principal, interest, taxes and insurance play an important role in the payment structure.

PRINCIPAL

Principal is the main balance that you have borrowed suppose to buy a flat in Ghaziabad. With each EMI of repayment a portion is dedicated to the repayment of the main borrowed amount or the principal. Usually, in loan structures of repayment, the amount of principal returned starts with small portions during each monthly installment and then keeps increasing with each mortgage payment.

INTEREST

Interest is what the lender earns on giving you the loan as of course the mortgage does not comes free of cost or just to show generosity. The bank or the lender is in a profit as by charging an interest he is returned more than that was lended. The interest rate is directly proportional to the size of loan payment.  

If the interest rates are high this means you will have to pay high installments of payment and if they are low you will have to pay less of that extra money that you are repaying for the ease of handy availability of finances when you want to invest in projects in Ghaziabad or any other desired region. In other words interest is what the lender charges as a fee to the borrower for lending him money.

TAXES

We are all familiar with this term as we do pay the income tax. Tax is what government charges us for accumulating funds for carrying out further development and other activities in the country. Similarly taxes are also imposed on real estate as it is a commercial activity and these taxes are assessed by government agencies. The taxes are calculated by the government on yearly basis but individuals can pay them in monthly installments. The due amount of taxes is divided by the total number of monthly payments in a year.

INSURANCE

In case of home loans two types of insurances are available. The first is property insurance that protects the property against theft, fire and other disasters and the second is PMI (that protects the lender against non-repayment) which is compulsory for homeowners who purchase house with a down payment of less than 20%. The PMI is dropped once the borrower has at least 20% home equity.