Here’s how EMI is calculated for home loans

Finance

 

Home loan involves a hefty sum of money that is borrowed from the bank. So, it requires a good amount of planning as this money has to be repaid back to the bank. Home loan is paid back to the bank in terms of EMI or Equated Monthly Instalment. The EMI includes the repayment of the principal amount of the loan and the payment of interest on the outstanding amount of the loan. The calculation of EMI depends on the principal amount of the home loan, rate of interest per month and the number of monthly instalments.

 

There is a formula to calculate the EMI of the home loan. According to the formula

EMI = [P X R X (1+R)^N]/ [(1+R)^N – 1]. Here P is the principal amount of the loan. R is the monthly rate of interest; N is the number of monthly instalments or the tenure of repayment of the loan. The bank generally states the annual rate of interest, so it has to be converted into the monthly rate of interest before substituting it in the formula. It is not very tough; you can easily calculate the monthly interest by dividing the yearly interest by 12.

 

Now, let us discuss briefly the factors on which the EMI of the home loan is dependent.

 

Principal Amount of the Loan

The principal loan amount is commonly known as the loan amount. It is the amount of money that you wish to borrow from the bank in order to purchase your house. Once you have finalised the property, the next most important thing that you need to decide is the principal amount of the loan. It depends on the value of the property and your repaying capacity. Generally, the bank issues up to 80% of the value of the property as a loan. You should also remember that your EMI cannot be more than 40% of your monthly income, so based on that you need to decide the principal amount. The rate of interest is calculated on the principal amount. So, this is considered as the most vital part while applying for the home loan.

 

Rate of Interest

The next most important thing in calculating the EMI of the home loan is the rate of interest. The banks generally state the annual rate of interest. So, in order to calculate your EMI, you have to find out the monthly rate of interest. Currently, most of the banks are offering 8% to 9% as the rate of interest on home loan. There are two types of interest rate; a fixed rate of interest and the floating rate of interest. The fixed rate of interest remains the same throughout the tenure of the loan. In this case, all the EMIs of your home loan will be of equal value. The floating rate of interest changes along with any change in the base rate. So, in this case, all the EMI will not be of equal value.

 

Tenure of the loan

After deciding on the principal amount and the rate of interest for your home loan, you need to finalize the tenure of your loan. It is the time period for which you will be repaying the home loan. Most of the banks offer long tenure for home loans. It can be up to 20 to 30 years. The tenure of the loan and the EMI are inversely proportional to each other. So, we can say that when the tenure is long the EMI becomes low. You can choose the tenure of the loan as per your convenience.

Nowadays, calculating the EMIs for the loan has become quite easy due to the presence of online EMI calculator on many portals. They also serve as a quick reference to compare the rate of interest, the processing fee of many banks at a glance.