Home loans are a popular way for individuals to finance their dream home. With the help of a home loan, you can purchase a house or a plot of land, and then repay the loan in easy instalments called Equated Monthly Instalments (EMIs). In this article, we will take a closer look at home loan EMIs and how they work.
When you apply for a home loan, the lender will assess your creditworthiness, income, and other factors to determine the loan amount and interest rate. The loan amount and interest rate will then be used to calculate the EMI. An EMI is a fixed amount that you need to pay to the lender every month, until the loan is fully repaid. The EMI consists of two parts: the principal amount and the interest. The principal amount is the original loan amount, while the interest is the cost of borrowing the money.
The EMI can be calculated using a simple mathematical formula:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]Where:
For example, if you take a home loan of INR 20,00,000 at an interest rate of 8% per annum for 20 years, the EMI would be INR 17,948 per month. It is important to note that the EMI remains constant throughout the loan tenure, but the proportion of principal and interest changes with each EMI. In the initial stages of the loan, the interest component is higher, while the principal component is lower. As you continue to pay the EMIs, the principal component increases and the interest component decreases. This is known as the 'Amortization Schedule' of the loan.
The interest rate on a home loan can be fixed or floating. In a fixed rate home loan, the interest rate remains constant throughout the loan tenure. In a floating rate home loan, the interest rate is linked to an external benchmark, such as the Reserve Bank of India (RBI) repo rate, and can change periodically. If the interest rate increases, the EMI will also increase, and vice versa.
One of the most important factors to consider when taking a home loan is the loan tenure. The loan tenure is the number of years for which you take the loan. The longer the loan tenure, the lower the EMI, but the total interest paid over the loan tenure will be higher. On the other hand, if you opt for a shorter loan tenure, the EMI will be higher, but the total interest paid will be lower.
You can also choose to pre-pay your home loan by paying a lump sum amount or by increasing the EMI. This will help you to reduce the total interest paid over the loan tenure and also help you to close the loan earlier. However, it is important to check with the lender if there are any charges or penalties for prepayment.
Home loan EMIs can be a significant financial commitment, so it is important to carefully consider your income and expenses, as well as your future plans, before taking a home loan. It is also important to compare the interest rates and other terms and conditions of different lenders before making a decision.
To summarise, Home loan EMIs are the fixed instalments that you pay to the lender every month to repay the loan. The EMI consists of two parts: the principal amount and the interest. The interest rate, loan tenure, and the type of interest rate (fixed or floating) are the major factors that determine the EMI.