Are you planning to take a Home Loan soon? If yes, know that paying off Home Loans can be quite bothersome. That’s because you will have to repay in equated monthly installments or EMIs over a course of 10 to 30 years. Therefore, you will have to be comfortable with the amount of EMI you need to pay. This is why you should take help of a Home Loan EMI calculator to know the amount you will be most comfortable with.
A clear knowledge of the amount helps you make an informed decision. For example, if you think that paying Rs.40,000 as EMI will drain your income, insist on a loan with longer tenor to bring down the EMI. You can do these calculations on your own with a Home Loan EMI calculator. These resource is available online and is quite easy to use.
So, let’s get started.
Understand the components of your Home Loan
There are four major factors that determine your loan EMI.
- Principal amount: The actual sum that you are borrowing from the lender.
- Rate of interest: The interest rate at which you borrow the money from the lender. The higher the rate of interest, the greater is the EMI.
- Loan tenor: This is the duration for which you take the loan. The longer the duration, the lesser is the monthly EMI.
- Computation: There are many ways to calculate the EMI. Some of the common methods are:
- Annual reducing method
- Monthly reducing loans
- Daily reducing loans
In the annual reducing method, interest is calculated on the reduced principal at the end of each year. The monthly reducing loan is a popular and accepted method of calculating EMIs. As you go on paying your EMIs every month, the principal reduces. The interest accrues on the outstanding balance.
In the last method, interest calculations are done on the reducing principal on a daily basis. However, since instalments are not paid regularly, this method is not the most practical one for calculations.
How does the Home Loan interest calculator work?
You will need to know four things while calculating your EMI.
- The amount you intend to borrow from the bank/NBFC
- The interest you will pay
- The service charge you need to pay to the lender
- The tenor of the loan
Once you have these inputs, you will need to feed them to the EMI calculator. The calculator will do the rest for you.
The calculator follows the below given standard formula while calculating the EMI
E = P x r x (1+r)^n/((1+r)^n – 1)
E stands for EMI which you will pay every month
P is the amount you want to borrow.
r is the applicable monthly rate of interest. You have to divide annual interest by 12 and multiply it by 100 to derive r
n is the duration of the loan, which you must multiply by 12. For example, if you have chosen five years as the loan tenor, n will be 60.
The lender also charges a processing fee while sanctioning your Home Loan. This may vary from 1% to 3% depending on the lender. Some EMI calculators ask you to key in the processing fee while calculating the EMI.
You can also look up the amortization table. This lets you plan your repayment schedule in advance. An amortization schedule calculator can estimate the different amounts you are paying towards the principal and the interest.
The last word
Use a Home Loan EMI calculator to get the best approximation of your possible EMIs. The simple, easy-to-use tool will guide you about your commitments. You get to prepare and structure your repayment schedule. It’s a must for all borrowers.