Owning a home remains one of the most cherished dreams for many of us. With home loan interest rates at a multi-year low level, the current real estate market could be a once-in-a-lifetime opportunity for someone looking to buy a residential property. While home loans are available these days with relative ease, the concern that most prospective homebuyers have is about the repayment and how will they manage it.
Once you have identified your dream home, you can approach a bank for a home loan. Typically, after making a down payment of around 20 per cent of the cost of home, the balance can be financed by a bank. However, the one number that can strengthen your decision-making in the process is the monthly repayment amount, often called the EMI.
Importance of EMI
EMI stands for Equated Monthly Instalment. Each EMI includes a portion of the principal amount as well as the interest on the loan that the borrower pays to the lender. After payment of each EMI, the principal loan outstanding keeps reducing over the tenure of the loan.
The factors that can result in increasing or decreasing an EMI are the loan amount, tenure and interest rate. For the same loan amount and interest rate, a longer tenure will result in lower EMIs and a shorter tenure will mean you pay relatively higher EMIs.
There are different ways to calculate a home loan EMI, but before we get there, it is crucial to understand some of the important terms you will come across.
Key Terms in EMI Calculation
Down Payment: Once you have finalized a home of your choice, before approaching a bank for a home loan, you need to arrange a certain amount from your own resources. This is called down payment and is generally around 20 per cent of the home value. You can also opt for a higher down payment.
Principal Amount: The amount of home loan that most banks extend is around 80 per cent of the home value as balance has already been put by you as down payment. The EMI calculation will be on the loan sanctioned in your name. The principal amount of loan is to be paid back along with interest to the bank over the tenure of the loan through regular EMIs.
Interest Rate: The home loan interest rate is a key factor in determining your EMI. The lower the rate of interest on home loan, the lower will be the EMI. The actual rate may vary depending on various factors like your profession, gender, income, credit profile, loan amount and loan tenure.
Tenure: Home loans are available for a tenure of as long as 20 years or even more. Opting for a longer tenure will keep the EMI low but the overall interest outgo will be high. Therefore, choose a tenure that you can service comfortably while keeping the interest outgo under control.
Calculating Home Loan EMI
The above-mentioned variables can now be used to calculate the EMI if you are to go ahead with a loan. You can use one of the following ways to do this calculation.
Calculating EMI Using Formula
You can calculate the home loan EMI using the standard formula.
(P*R*(1+R)^N)/(1+R)^N -1), where P is the principal loan amount, R is the rate of interest of the home loan and N is the tenure. P, R and N are the three variables and one may use different possible combinations to calculate the EMI as per one’s need.
Calculating EMI using Excel
Calculation of home loan EMI can also be done using spreadsheets like Excel and the monthly instalments can be calculated as per one’s own situation. Here also, you need the three variables of principal loan amount, rate of interest of home loan and the tenure.
In an Excel sheet, you need to use the Fx Function of PMT where you will have to enter figures for rate, NPER or tenure in months, PV will be the loan amount and FV as the final loan amount which will be zero.
Using a home loan EMI calculator
A home loan EMI calculator is the easiest and most user-friendly way to calculate your probable EMIs. While using the housing loan EMI calculator, you will have to primarily use the same three inputs loan amount, home loan interest rate and the tenure of home loan.
Calculation of home loan EMI using the formula or using the Excel Function is a bit complex and a time-consuming process. The best part about using a home loan EMI calculator is that you can simply use different combinations of principal amount, rate of interest and tenure to arrive at an EMI that will best suit your cash flow.
EMI Route to Your Own Home
As a home loan is a long-term commitment, being comfortable with the EMI you will be paying every month for years to come, is of utmost importance. To reach that stage, a housing loan interest calculator is preferable over other traditional methods that involve manual calculations or complex formulae making it prone to human error.
Housing loan EMI calculator from leading banks like Kotak Mahindra Bank shows not only the EMI but also gives a break up of interest and principal repayments to help you understand exactly how much the loan will cost you over the years.
Now that you are familiar with the concept of home loan EMIs, it’s time to play around with the EMI calculator and choose a home loan with the best home loan interest rate suitable for your budget.