Financial organisations are actively designing new forms of home loans that cater to the needs of people belonging to the different sections of the society. Yes, your dream of buying your own house can become true due to easy accessibility to home loans nowadays. But before selecting a particular loan, you need to understand the most important part of home loans- the EMIs.
EMI is a short form of Equated Monthly Instalments. It is a specific amount that you have to pay to the lending institutions in order to obtain rightful ownership of the property. You have to pay an EMI of your home loan on a fixed date of each month throughout the tenure of the loan to pay off the outstanding loan amount. In other words, EMIs get deducted from your bank account.
Break-up of EMIs
EMIs are deducted on the basis of a combination of payable interest and principal of the loan. At the starting of loan tenure, EMIs covers the payable interest, whereas the principal is covered as the loan amount reduces. In a way, payable interest reduces with time and finally becomes minimal. However, the amount of a home loan EMI remains the same with the following exceptions,
- In case of floating interest rates, EMIs changes with market fluctuations.
- If the borrower pays a lump sum of the outstanding loan amount (pre-payment or part payment facility), then this amount decreases against remaining balance, and thus, EMIs are also reduced.
Calculating the EMI
Nowadays, you can calculate EMIs on particular home loan amount with the help of online home loan EMI calculator. These calculators work on the following mathematical formula,
EMI = (Amount of Loan x Payable Interest) x (1 Interest) to the power of N/ [(1 interest to the power of N]-1
Or
Where, P = Amount of Loan
I = Interest Rate
N = Number of Instalments
Let’s check out EMI calculation with an example. Assume, MsGopi had taken a home loan of Rs. 70,00,000 from a bank with an interest rate of 9% per annum for 20 years.
Now, P (Principal) = Rs. 70,00,000/-
I (monthly interest) = (0.09/12) = 0.0075
N = 20 years = 120 months
Therefore,
EMI = Rs. 62,981 per month
Factors determining EMIs of home loan
Principal amount: It is the actual amount borrowed to buy a house. The principal amount of the home loan is a decisivecomponent of the EMI that you have to repay during the tenure of the loan.
Interest Rate: It is the rate at which the lending organisation has given money to the borrower. This component actively influences the home loan EMI amount. The higher the rate of interest, the greater is the amount of EMI.
Loan tenure:It is the period for which loan amount is sanctioned. The longer the tenure, the lesser the amount of EMIs, however the higher the payable interest.
Knowing how to calculate EMIs is essential, as enables you to manage finances effectively.
