Purchasing a home can be a once-in-a-lifetime experience for many of us but it can be an expensive one. Although interest rate levels for home loans are at an all-time low it is becoming increasingly affordable to own your dream house and there are multiple lenders available in the market that are offering home loans at competitive interest rates.
When you apply for a home loan you need to keep in mind that you need to make a down payment of 20% on the cost of your home and the remaining balance is financed by the lender. The tenor can be inclusive of your existing home loan. Borrowers who have an outstanding home loan and have been diligently paying their EMIs without defaulting can easily avail of a top-up loan. You need to establish your affordability in the form of monthly instalments before applying for a home loan.
What are EMI’s?
EMI stands for Equated Monthly Instalments, and each EMI compromises a portion of the principal and interest amount. Your outstanding principal amount reduces with each payment that you make month after month, through the tenor of the loan.
Your tenor and interest rate play deciding factors for your monthly instalments. If the tenor period is for a longer duration, the EMI will be relatively lower in comparison to a tenor that is shorter.
What key points do you need to calculate your home loan EMI?
The principal amount is the financing that you will receive from the bank for purchasing your property. Usually, banks will finance up to 80% of the property’s market value. The principal amount is to be paid back in the form of monthly instalments.
The interest rate is one of the most important factors when applying for a home loan because the interest rate that is offered to you will determine the EMI that you will be paying. A lower interest rate will result in a lower EMI, although there are other factors such as gender, income, age, etc. that will alter your interest rate.
A home loan is the duration for which you will be paying your home loan, and a home loan can last upwards of 20 years, and in some cases, even 30 years. A longer tenor will have a lower EMI, but the total interest payable will be much higher. It is important to establish your affordability and opt for a term period that is feasible for you.
A lender will finance up to 80% of your loan, but the remaining 20% needs to be furnished by you as a down payment against your home loan. You can choose to pay more than 20%, and that will help reduce your overall debt.
How to calculate EMI using various methods?
Calculating via the formula:
Here is how you can calculate your home loan EMI using the formula.
P = Principal amount
R = Rate of Interest
N = Tenor
Calculate with the help of a home loan EMI calculator:
There are plenty of online home loan calculators available these days that can help you establish your monthly instalments. Here is how you can use one:
- Enter your required principal amount
- Enter your Interest rate
- Enter your tenor period
By entering these details, the home loan EMI calculator will help you establish your monthly instalments and the interest payable by the end of the tenor.
Calculate using Excel:
You can use the Fx Function of PMT where you be required to enter the following details:
EMI = [P x (R/100) x (1+R/100) ^n] / [(1+R/100)^ n-1]
- Rate of interest
- Tenor in months
- Principal amount
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