How to Calculate Your Home Loan EMI: A Beginner’s Guide
Making a home buying decision brings a lot of factors to consider. As it is an expensive deal, many people opt for home loan to purchase their dream home. Home loan is about paying a fixed amount to the bank every month. This monthly payment is called EMI, and you must understand it well before you borrow.
In this blog we will discuss everything about EMI and how to calculate EMI so that you can plan your finances in a better manner.
What is EMI?
It is a short form of Equated Monthly Installment. There are two parts of EMI:
- Principal: The actual amount you take from the bank.
- Interest: The additional amount you pay to the bank for lending you the loan.
You need to pay the EMI (or you can say fixed amount) every month for a fixed number of years to completely repay the loan.
Why is EMI important?
You must know completely about EMI process. It will help you to:
- Plan your monthly budget
- Know the amount you can afford to borrow.
- Avoid taking loan whose installments are too heavy for your income.
- Know various loan options from different banks.
By knowing your EMI you can take smart decisions to avoid burden on your finances.
How is EMI Calculated?
Let’s take a look on a general formula to calculate EMI:
Here in this formula:
· P = Loan amount or Principal
· R= Interest rate
· N= Total number of months for loan repayment
Example of EMI calculation
Suppose you took a loan of Rs. 30,00,000 at an interest of 8% for 20 years. In this condition:
- Loan amount (P) = RS. 30,00,000
- Interest rate = 8%
- Monthly Interest (R) = 8 ÷ 12÷ 100 = 0.006667
- Loan Term (N) =20 years i.e. 240 months
This formula is helpful to calculate EMI which you will pay every month to bank. You can also calculate this installment through home loan EMI calculator. In this case your monthly EMI will be Rs .25,093.
So, for every month for 20 years you will pay Rs. 25,093 to the bank.
What is an EMI Calculator?
If the formula is confusing for you, you can easily know the monthly installment through home loan EMI calculator online. Here’s how you can do:
· On search engine type home loan EMI calculator.
· Mention your loan tenure, amount and interest rate
· You will get the monthly EMI, total interest and total repayment amount.
Thus, through this home loan EMI calculator you can try different amounts to know the monthly installment that will be in your budget.
Factors That Affect Your EMI
Below are the aspects that will decide the amount of EMI you will pay:
· Loan Amount: The amount you will take from bank, the more amount you will take the more will be your EMI.
· Interest Rate: Your EMI will be higher in case of higher interest rate.
· Loan Tenure: Long duration tenure will give you lesser EMI, but you will end up paying more interest in long run.
Type of interest rate
· Fixed Rate: In this EMI will be fixed for the complete tenure.
· Floating Rate: EMI may vary as per the market conditions.
How Does EMI Change Over Time?
Initially, your EMI will go in repaying interest and its small fraction will go towards principal. This procedure is known as reducing balance method.
How to manage your EMI for home loan
· Plan your EMI as per your income: Consider 20% (or less) of your monthly income as EMI, don’t increase it more than this. For instance, if your monthly income is Rs .50,000 then your EMI should not exceed Rs. 20,000. You can calculate EMI with online calculator.
· Choose the suitable loan tenure: In case of low income, you must opt for long term repayment to reduce EMI. If you can afford the EMI, then go for shorter duration to save on interest rate.
· Make part-payments: You can repay some extra money apart from EMI if you get any bonus amount, gift or tax refund. This means it will reduce your EMIs.
· Don’t skip EMIs: Missing your EMI will decrease your credit score. You can set the EMI payment on auto-debit mode or can set reminders for the same.
EMI vs. Rent: What’s better?
Even after buying a home, you need to pay EMI just like a rent, so which one will be better for you?
- Rent is cheaper in short term, but you won’t owe a house in that case.
- EMI may be expensive, but in the long run you will owe the property.
If you will stay in the same city for longer duration, then buying a home is a smart decision.
Mistakes to Avoid
· Taking a high loan just because you are eligible.
· Ignoring hidden charges like processing fee and insurance.
· Not checking the type of interest rates.
· Taking loans without comparing it from different banks.
Final Takeaway
Your EMI will be the deciding factor to take home loan. Think about the amount you can afford to pay each month and calculate EMI; this will keep your finances in control. Whether you use home loan EMI calculator or follow simple tips, calculating your EMI can help you:
- Buy the right home
- Borrow the right amount
- Avoid financial burden
Before signing your loan papers, take some time to know the EMI to check it with your monthly budget. Keep in mind that buying a home is a dream and knowing your EMI is the first step to make your dream come true.
Frequently Asked Questions (FAQs)
Q. Is it possible to reduce EMI amount in future?
Yes, it is possible. You can do this by increasing the loan term or by doing part-prepayments. Anytime you can calculate EMI through online calculator.
Q: Which one is better fixed or floating interest rate?
If you want stable EMI, go with fixed interest rate. Floating is a good option in case market falls, but will increase later.
Q. What happens in case EMI is missed?
You may need to pay late fee. It will also impact your credit score.
