What You Need to Know about EMIs in Home Loans

When applying for a home loan, the financial jargon and various calculations involved could potentially lead to some errors on your part. Most people are also clueless about how their EMIs are calculated.

To clear things up, here's a comprehensive look at how a lender would calculate your EMI.

What is an EMI?

EMI is the abbreviated form of Equated Monthly Instalments. It refers to the amount that you, the borrower, pay to your lender on a monthly basis, in order to repay your outstanding home loan amount. EMI is one of the most crucial components of a loan, and is usually paid on a fixed date of every month.

The Variables

In order to calculate EMI, there are 3 variables that come into play. It's best that you understand these terms before learning the mathematics behind EMIs.

1. Principal Amount

This is the actual sum of money that you have borrowed from the bank. The higher the principal, the higher the EMI.

Interest Rate

This is the rate at which you need to repay the loan granted by your bank. Before applying for a home loan, you should scout the market to find the financial institution that charges the lowest interest rates. In this case, the higher the interest rate, the more you'll have to pay to the bank every month.

Tenure

This term refers to the duration for which the loan has been taken. Generally, you pay lower EMIs with a longer tenure.

However, this also means that in the long run, you have to pay a higher amount of interest to your lender. The alternative is to pay off the loan within a short period of time, which can only be done if you've got enough funds.

How to Calculate the EMI?

When calculating your EMIs, there are two methods that you can employ.

Manual Calculations

If you want to calculate your EMI yourself, this is the formula that you have to use:

EMI= P x r x (1 + r)^n / ((1+r)^n -1)

Here, 'p' = principal amount, 'r' = rate of interest per month, and 'n'= the tenure in months.

So for example, if you take a loan of Rs.1 lakh for a duration of two years 2 years (24 months) at a rate of 1%, then the formula would equate to:

EMI = 1,00,000 x 0.01 x (1+0.01)^24 / ((1+0.01)^24 -1).

This calculation should equate to a total of Rs.4,707.

Online Calculator

The other alternative is to use an online home loans calculator. This is an easy-to-use application that helps you arrive at your EMI amount. All you have to do is fill in the values that the calculator asks for, and you'll get an accurate sum of how much you'll need to pay as EMI.

So before applying for a home loan, do your own calculations in order to get a basic understanding of the EMI you'll be paying. You'll then be at a better position to understand the terms, conditions, and parameters that your lender puts forth when giving you the loan.

Source : articlesbase.com