You’ve finally decided to get your dream home! You’ve found the perfect property, got your finances in order, and you’re now ready to take out a home loan to finance the whole deal. But how much are you going to need? How do you figure out the EMI on your home loan?
It may seem complicated at first, but don’t worry – we’ll walk you through it step by step! This guide will discuss the most critical steps you need to consider when calculating your EMI. Ready? Let’s get started!
3 Key Factors That Decide Home Loan EMIs
Three factors determine home loan EMIs. Let’s see a quick overview of each factor first and see how it affects your monthly payment. The three factors are principal amount, interest rate, and tenure.
- Principal Amount: Principal amount is one of the most important factors that impact your EMI. Depending on how much you borrow for your home loan, you could end up paying anywhere between 10% and 30% of your income towards EMIs each month.
- Interest Rate: An interest rate can have an incredible effect on what you pay as EMI every month.
- Tenure: If you choose a shorter tenure for your home loan – say 15 years instead of 20 – be prepared to pay higher EMIs every month.
Step 1: Principal Amount
The first step is to calculate your principal amount. You need to find out how much money you have received from your financial institution as a home loan.
For example, if you took an amount of Rs 10 lakhs, then your principal amount will be Rs 10 lakhs. Note that the principal amount may differ based on factors like good cibil score for a home loan, property value, and borrower’s paying capacity.
Step 2: Interest Rate
The interest rate for home loans is determined by many factors, including your loan amount, where you live, and your credit score. These interest rates are levied on the principal amount.
The average interest rate for home loans in India is 6 to 8%, although it can vary from bank to bank. Your cibil score plays a key role in purchasing a home loan as it decides the monthly interest rates and EMIs.
The lower your credit score and you’re applying for a large loan (Rs 15 lakh or more), the lenders will usually offer higher interest rates.
Moreover, there are two types of interest rates: fixed and floating. A fixed interest rate keeps your monthly EMIs the same throughout the whole loan tenure. The floating interest rate fluctuates your monthly EMIs as per the base rate.
The better your credit history and repayment track record are, the better rate of interest you will get.
Step 3: Tenure
This is where you choose how long you want to remain tied down with your home loan. The tenure options are 10, 15, and 20 years.
While it is always tempting to go for a longer tenure as it seems like we will pay less money for the EMIs by doing so, opting for too long of tenures often leads us into trouble when interest rates rise.
Formula To Calculate Home Loan EMI
So, how to calculate home loan EMI? How did the online home loan EMI calculator calculate your monthly EMIs on your home loan? The formula for calculating home loan EMI and its explanation is provided below.
P x R x (1+R)^N / [(1+R)^N-1]
- P= Principal amount of your loan
- N= tenure of a loan in months
- R= Interest Rate levied per month
Note: Interest Rate (R) is always calculated per month on your home loan, and its formula is:
R = Annual Rate of interest/12/100
Let’s say the interest rate is 6% per annum then r= 6/12/100= 0.005
If you have a home loan of 15 lacs (principal amount) and annual interest rate levied on it is 6% with a tenure of 120 months (ten years), then your EMI will be calculated as shown below:-
EMI= P x R x (1+R)^N / [(1+R)^N-1]
EMI= ₹15,00,000 * 0.005 * (1 + 0.005)120 / ((1 + 0.005)120 – 1) = ₹16,661.
After 120 months, you will pay a total amount of 16661*120= 1999320
The principal amount here is 15 lacs and the interest you pay in 120 months is 4,99,320.
Knowing the EMI for your home loan can help in planning your loan amount. The idea is that you should not take a higher loan than you can repay through monthly installments or an EMI. In this article, we’ve discussed various ways through which you can calculate the EMI on your home loan. For more information, you can take help of an EMI calculator on your lender’s website.
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