Considering the skyrocketing property prices, most people choose to avail a home loan and make EMI payments for their dream home. Availing a housing loan can keep them away from draining their savings while helping to repay in small, manageable chunks monthly. However, this monthly payment adds up to a significant portion of the total expenditure. Still, very few people try to know how their EMI is calculated. Don’t be one of them.
Continue reading to know the process of home loan EMI calculation.
How Is EMI Calculated?
To calculate your EMI, banks consider your loan amount, the rate of interest on which you availed the loan, the loan tenure and the method of interest calculation (banks usually charge interest using one of the three methods – daily reducing, monthly reducing and annually reducing balance for home loans).
Banks use these four variables to calculate your EMI, which consists of two components – principal and interest. During the initial years of your loan, the EMI you pay to the bank comprises a smaller chunk of the principal amount, and the higher part is the interest outgo. As the tenure progresses, this is reversed, and you pay less interest and more of the principal amount because your interest is calculated on the outstanding balance of the principal.
Along with calculating your EMI using the variables you choose, the banks also offer you a detailed amortization schedule that gives you a break-up of your principal repaid and interest component during the entire tenure. It also reflects the outstanding dues at the end of each month after you have paid your EMIs.
Can You Calculate Your EMI?
Yes, you can calculate your EMI using one of the two methods – the mathematical formula method or using a home loan EMI calculator.
Calculating Home Loan EMI Using the Formula:
The mathematical formula to calculate EMI on your home loan is:
[P x R x (1+R)^N] / [(1+R)^N-1] where –
P – loan amount
R – interest rate
N – tenure or loan calculated in months
Using this formula and substituting it with your variables will help you find the EMI for your home loan. However, calculating EMI becomes easy with an online home loan calculator.
Calculating EMI for Home Loan Using EMI Calculator:
A home loan EMI calculator is an online tool that you can use to calculate your EMI yourself. Most banks offer their customers an easy-to-use EMI calculator. All you need to do is visit their website, add in your details like principal amount, interest rate and tenure in the given online calculator. Your results will show instantly. You can alter the values of tenure and loan amount to find a comfortable EMI. With an EMI calculator, you can check whether you can afford the EMI for the loan amount, you wish to avail.
Knowing how your EMI is calculated can help you plan your loan better. It can also help to make changes in tenure or loan amount to make it more affordable for you. Now that you know how EMI is calculated, you can assess your financial condition and apply for a home loan accordingly.