Those planning to avail themselves of a home loan must know everything there is to know about EMIs if repaying their loan without feeling hassled in high on their priority list.
Home loans are repaid in the form of EMIs or equated monthly instalments. Each EMI comprises a principal and an interest component. The interest component of the EMI is the lender’s payout for lending money to a borrower. During the initial few years of home loan repayment, the interest component of the EMI is much higher than the principal component. Consequentially, the initial few years of one’s loan tenor are considered ideal for prepayments and foreclosure. EMIs are calculated using two different methods: flat rate and reducing balance. We will explain the difference between these two methods later in this article. However, let us first focus on how are home loan EMIs calculated.
How to Calculate Home Loan EMIs?
How to calculate EMIs? This is a question that almost every home loan borrower asks. Here is the formula used to calculate home loan EMIs.
Home Loan EMI = P x R x (1+R)^N / [(1+R)^N-1]
Here,
P is the principal amount, R is the rate of interest and N is the loan tenor in months.
While one can calculate their home loan EMIs manually, there are far too many variables involved and therefore, the chances of errors creeping into calculations are quite high. Therefore, all home loan borrowers must use a housing loan EMI calculator to calculate their EMIs in advance as well as plan repayment.
The housing loan EMI calculator is an online tool that shares with borrowers their EMIs, the total interest outgo on their loan and the total cost of borrowing the loan based on three pieces of information: loan amount, loan value and the rate of interest offered. These calculators are fairly basic and easy to use. Further, other than helping borrowers calculate EMIs, they also help with monthly budgeting and prepayment planning. Most housing loan EMI calculators also provide borrowers with an elaborate amortization schedule and borrowers can refer to this schedule to figure out the ideal time for prepayments.
Other than the previously mentioned benefits, one can also use a housing loan EMI calculator to compare loan offers and choose the best one for them. Most importantly, these calculators help borrowers save time and energy which they can use to research the best lender for them and negotiate with them for the best housing loan interest rate they can get. Home loan borrowers who wish to avail themselves of the lowest home loan interest rates possible must also use the home loan eligibility calculator to work out the loan amount they are eligible for and decide the loan amount they wish to apply for keeping their eligibility in mind. Doing this will enhance one’s chances of loan approval as well as getting approved for a home loan at the lowest interest rates possible and availing of the loan on terms and conditions that work best for the borrower.
Now that we are familiar with the basics of EMIs, let us also walk our readers through the various ways using which EMIs are calculated.
Various Ways in Which EMIs Are Calculated
Flat Interest Rate EMI Calculation Method
In the flat interest rate EMI calculation method, one calculates interest on the loan amount that one had availed themselves of. With time, your principal amount will continue to decrease. However, your lender will continue to calculate interest on the original principal amount that you borrowed.
To calculate EMIs using the flat interest rate method, one can use the following formula:
EMI = (Principal + Interest)/Loan Tenor in Months
Reducing Balance Interest Rate Calculation Method
When lenders calculate EMIs using this method, they calculate interest on the remaining or the balance principal amount. Thus, the interest payout changes from month to month. Home loan EMIs are calculated using the reducing balance interest rate calculation method. It is quite difficult to calculate one’s EMIs using the reducing balance interest rate calculation method. Therefore, in this case, it is best to rely on home loan EMI calculators.
Final Words
A home loan is a long-term commitment that will easily last 20 to 25 years. Home loan borrowers must therefore borrow cautiously and keep their income and repayment capacity in mind. Using a home loan EMI calculator can help borrowers not only decide the right loan amount for them but also plan repayment and prepayments. So, make this calculator, alongside a home loan eligibility calculator, a part of your home loan application planning.
