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New Delhi [India], September 10 : If you are planning to purchase your own home, applying for a home loan can help you get the funds you need to complete the purchase. However, remember, a home loan is a credit that you avail from a lender and you must repay the amount along with the interest within a specific period.
Thankfully, you do not need to pay the full amount at once. Instead, you can repay the amount in smaller instalments, which is known as EMI (equated monthly instalments).
EMI – understanding its meaning
When you apply for any kind of loan, you must repay the amount through EMIs, and a home loan is no different. If you are not sure what is EMI, it is a simple concept to understand than you can imagine.
EMI is basically a monthly payment that you make to the lender until the end of the loan tenure or you repay the full loan amount. The EMI amount or the monthly instalment you pay to the lender greatly depends on the housing loan interest rate, which is decided by the lender at the time of sanctioning your loan. Higher the interest rate, higher will be the EMI and vice versa.
One of the important things to know about EMI is that the amount you pay mostly remains constant throughout the loan tenure. It may, however, change if there is any major change in the interest rate or when you prepay the principal amount. Another important thing about EMI is that these monthly instalments include both the principal amount and the interest rate.
During the initial few years of the home loan tenure, a major portion of your EMI goes towards repaying the interest amount. However, as you keep making the monthly instalments over the years, as you repay the interest, a large chunk of the EMI payments goes towards repaying the principal amount, i.e., the amount you borrow.
Understanding the EMI calculation
Now that you know what a home loan EMI is, you must also know the housing loan EMI calculation formula.
Most of the home loan finance company in India use a simple mathematical formula to compute the EMI. The home loan EMI formula consists of three critical elements vis-à-vis the principal amount, the rate of interest levied by the lender, and the loan tenure or the repayment tenure you choose.
The home loan EMI calculator formula is as follows:
EMI = P × r × (1 + r)n/((1 + r)n – 1)
In the above formula,
P is the principal loan amount
R is the rate of interest
N is the number of monthly instalments
If you are still not sure how to calculate the EMI for home loan, let us understand the EMI calculation with an example.
Let us assume, Miss. Sheetal Shah, a 32-year-old working professional, applies for a home loan of Rs. 10 Lakh. The lender charges an interest rate of 12% per annum on her loan, and she choose a loan tenure of 10 years.
According to the above formula for calculating the home loan EMI, the EMI will be
EMI= INR 10,00,000 * 0.006 * (1 + 0.006)120 / ((1 + 0.006)120 – 1) = 11,714
Factors that affect the EMI
The home loan EMI you pay every month to the lender depends on several factors, including:
Principal amount
It is the amount you borrow from the lender. It is one of the most critical factors that directly impact EMI. Typically, the higher the principal amount, the higher will be your monthly instalments.
So, to manage this factor, it is advisable to assess your financial needs, repayment capacity and borrow accordingly; avoid borrowing more amount than you actually need. This way you can keep the EMI affordable, and manage the EMI payments better.
Additionally, you can consider paying a higher down payment than the minimum amount required by the lender. This way, you can borrow less, and your EMI will be more affordable.
Rate of interest
Just like the loan amount, the interest rate levied by the lender has a direct impact on the EMI. The lower the interest rate, the lower will be the EMI. Conversely, if you borrow at a high interest rate, the EMI will be higher.
So, while looking for the best home loan offer, it is advisable to look for a lender than offer the loan at an affordable interest rate. Typically, reputed lenders like IIFL Home Loans offer the loan at attractive interest rates.
In addition, while you apply for the home loan and sign the sanction letter, it is paramount that you negotiate with the lender about the interest rates. Most lenders are open to negotiation; you can talk about your strong financial standing, good credit history, and high credit score during the negotiation with the lender and try to get a discount on the interest rate.
Prepayments
If you have any surplus funds, you can use them to partially prepay your home loan, i.e., pay off the home loan before the end of your actual home loan tenure. This will have a direct impact on your EMI for the rest of the period.
When you may any additional payments, your outstanding amount reduces, and this can lead to either reduction in the EMI amount or the loan tenure.
Loan tenure
It is the repayment period you choose to pay off the loan. This tenure also plays a critical role in determining your monthly EMIs. The loan tenure and EMIs are inversely proportional.
This means, the longer the duration you choose, the lower will be your EMI. However, with longer repayment term, your interest payment period also increases, which means your overall interest payment will be high.
In contrast, a lower repayment period means, higher EMI. However, you can save a significant amount on the overall interest payments. So, it is advisable to choose the loan tenure carefully, you must strike the right balance between keeping the EMI affordable as well as saving on the interest payments.
Final Word
EMI facility offered by the lenders make repaying the home loan easy. And since many factors affect the EMI, you must do your due diligence so that the EMI is affordable and aligns with your repayment capacity.
If you are looking to apply for a home loan, you can apply for it with top NBFC like IIFL Home Loans. They offer home loans at the most attractive interest rates and you get a repayment period of up to 30 years, allowing you to repay the amount conveniently with affordable EMIs.
Disclaimer: This is a syndicated feed. The article is not edited by the FPJ editorial team.
