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Know your EMI

A calculator sitting next to a model house on a table.

Know your EMI

A home loan must be repaid in equated monthly instalments (EMIs) over a specific tenure. Every borrower who applies for this loan is looking for the lowest interest rate, and a low EMI amount. The idea is to find a deal turns out to be less expensive. So, it is important for borrowers to understand the many aspects of the home loan EMI and how it is structured. Here’s all you need to know.

Understanding home loans in India – how they are structured

When you take out a home loan, you are taking on a long-term financial responsibility in which you make a commitment to repay a part of the loan each month in the form of EMIs. Whether the payment starts immediately after the loan amount is disbursed or after a given moratorium period, you need to understand how this loan is structured before you begin the application process. Typically, there are four essential aspects of the loan

The principal loan amount – Depending upon the market value of the property you intend to purchase and the down payment you can provide, the lender determines your eligibility and the principal loan amount is sanctioned. Most lenders provide up to 80% finance on the market value of the property. This amount is to be repaid in full, with interest.

The interest rate – Since the lender provides a huge amount as the principal loan amount, you as the borrower, have to pay an interest rate on the loan amount. The monthly home loan EMI amount comprises of both, the principal loan amount as well as the interest amount.

The tenure – Lenders offer tenures of up to 25 years or more against home loans. The tenure directly affects your payable home loan EMI amount. Higher tenure loans typically come with lower EMI amounts, although the interest rate levied on high tenure EMIs is quite high. On the other hand if you opt for short tenure home loans, you may have to pay a lower interest rate, but the monthly EMI amount may be significantly high.

The EMI – As mentioned above, the EMI comprises of both, the principal loan amount and the interest rate levied by the lender. When you first start repaying the loan, you pay a higher interest rate component and a lower principal amount. With every EMI repaid, the interest component reduces while the principal amount repaid increases.

Here is an example illustrating the above point

Let say you take on a home loan of ?3,500,000 at an interest rate of 10% and tenure of 20 years. Here is how your home loan EMI is calculated from the 1st to the 60th month.

Month EMI Interest Paid Principal Amount Paid
1st Month ?33,776 ?29,167 ?4,609
2nd Month ?33,776 ?29,728 ?4,648
3rd Month ?33,776 ?29,029 ?4,686
24th Month ?33,776 ?28,197 ?5,578
60th Month ?33,776 ?26,255 ?7,521

The outstanding home loan amount reduces with every EMI payment and yet it appears that the EMI remains the same throughout the loan tenure. This is attributed to the fact that the EMI amount is internally adjusted between the principal and interest amounts payable. With every paid EMI, the interest rate and outstanding loan amount declines until the loan is finally paid off.

Home loan EMI calculator

A good way to understand how EMIs are calculated is through an online tool known as the home loan EMI calculator. This tool is available on every lender website and allows you to understand the EMI amount payable against the principal amount, interest rate and tenure. The tool can be used innumerable times until you arrive at an affordable EMI amount.

Before you approach a lender for a home loan, you must understand how EMIs are structured. The home loan EMI calculator is an essential tool that can help you understand this. It can also help you plan your finances and budget and understand how the loan is to be repaid.

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