Step-by-Step Guide on How to Calculate Home Loan EMI

Many Indians dream of owning a house. Unfortunately, in most cases, realizing these dreams calls for taking home loans whose payment terms interest people as EMIs. The knowledge of how to calculate EMI for home loans makes it easier for you to organize your finances well. This editorial will expound on the home loan calculation formula, steps to calculate EMI, and major considerations to make when taking a home loan.

Let us go through it step by step in this article.

What is EMI and How to Calculate EMIs for Home Loans?

EMI means Equated Monthly Installments which means the amount required to repay your home loan every month remains constant. This consists of two things — principal and interest. Principal refers to the initial amount borrowed while interest represents the cost charged by the bank giving you a loan.

Therefore, home loan EMI is calculated based on a specific home loan calculation formula. The formula explains to you how much money is needed every month.

Also Read: How EMI Calculators Simplify Loan Evaluation and Budget Planning?

Calculation Formula for Home Loan EMI

This is the formula used to compute mortgage payments:

EMI = [P x R x (1+R)^N] / [(1+R)^N-1]

Where,

• P = Principal loan amount
• R = Rate of interest (monthly)
• N = Loan tenure in months

For instance, if you borrow INR 50 lakh home loan at 8% per annum for 20 years:

• Principal (P) = INR 50,00,000
• Rate of Interest (R) = 8%/12 = .00667 (monthly rate)
• Loan tenure (N) = 20 x 12 = 240 months

Therefore, by using this formula, you can find out your EMI. However, if calculating manually seems tedious there are online calculators which will help you generate results instantly. But when you can calculate housing loan EMIs yourself, it helps to check the results in order to grasp the loan composition clearly.

Also Read: Home Loan: All You Need to Know

Step-by-Step Process to Calculate Home Loan EMI

Below are the simple steps to calculate home loan EMI:

Get all information on loan:

• This includes loan amount (principal)
• Rate of interest (annual)

Time period of loan (in months)
Change the annual interest rate to a monthly basis by dividing the annual interest rate by 12.

For example, 8% annual interest would amount to a monthly rate being 8/12 = .67% or .0067 in decimal form.

Find out total loan tenure in months:

Multiply the duration of the loan (in years) by 12.

For instance, 20 years = 20 x 12 = 240 months.

Place the values in the formula:

Use the home loan calculation formula as stated earlier where:

EMI = [P x R x (1+R)^N] / [(1+R)^N-1].

Simplify it:

Calculate EMI stepwise to arrive at its value.

Comparison with Online EMI Calculators:

For precision, check the outcomes from a web-based EMI calculator.

Factors Affecting Your Home Loan EMI

Several elements determine your home loan repayment amount every month:

• Original Loan Sum — Big amounts of money result in high EMI payments.
• Interest Rate — Taking an EMI depends on how low the interest rates are set by various banks’ policies.
• Loan Duration — It is clear that if you take longer periods of time paying back a housing debt, then your regular EMI will be small but note that the total interests cannot also go down.

Prepayments — When you make partial prepayments in your credit account, the outstanding balance as well as EMI reduces at the same time.

Also Read: A Home Loan with ‘Design your EMI’ Feature is All You Need

Advantages of Calculating EMI for Home Loan Yourself

The following reasons illustrate why understanding how to compute housing loan EMI is crucial:

• Budgeting — Foresee your monthly expenditures properly through knowing the EMI.
• Comparison of Loans — Make comparisons between loans depending on EMI installments and rate of interests.
• Prepayment Choices — Decide on prepayment based on the EMI calculation

Tools Providing Easy Solutions For Calculating EMI’s

Although manual computation of EMI can be done it is simpler when done online through various tools such as:

• Bank EMI calculators are free tools that most banks have on their websites
• Mobile apps can help you work out EMI requirements on the go

Why You Should Understand The Formula Used In Home Loans

However, many borrowers overlook how EMIs are distributed in loan structures. By understanding this formula, you can:

• Identify the interest component of your EMI.
• Comprehend the effects of interest rates and tenures.

Make informed financial decisions like reducing loan tenure or prepaying.

For instance, at the start of the loan repayment period, most of your EMI comprises interest and goes down with time hence early repayment will have a reduced interest burden.

The Bottom Line

An informed decision on obtaining a home loan is a crucial step you should take when planning for that perfect house. With this knowledge, you will not only be able to keep track of your expenditures but also be in a position to make prudent financial choices. So, apply for a home loan today to take the next step towards owning your dream home.

Whether calculating EMIs manually or doing it using online tools, like using an EMI calculator, it is important for one to know the exact amount with accuracy. This is exactly what these calculators provide you with - speed and accuracy while saving effort.

FAQs

Q.1. How do I calculate 8% interest on a loan?

A. Use a Home Loan calculator to effectively determine your home loan EMI.

Q.2. How do you calculate the loan formula?

A. All you need are the details like the amount borrowed, interest rate, and loan tenure to calculate your monthly EMI. the formula for calculation is – EMI = [p x r x (1+r) ^n]/[(1+r) ^n-1]

Q.3. Should I apply for a joint home loan with my spouse?

A. A joint home loan with your spouse can come with a wide range of benefits like higher eligibility, tax savings, fast approvals, among others.

Q.4. What factors determine the amount of my home loan EMI?

A. The amount of your home loan EMI is determined by factors such as the loan amount, interest rate, and loan tenure. A higher loan amount, interest rate, or longer tenure will result in a higher EMI.

Q.5. Can I prepay my home loan EMI to reduce the total interest?

A. Yes, you can prepay your home loan EMI, either partially or fully, to reduce the overall interest burden. Prepayment can shorten the loan tenure or reduce the EMI amount, depending on your preference.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com