Owning a home remains one of the fondest dreams of many of us. With mortgage interest rates at a multi-year low, today’s real estate market could be a once-in-a-lifetime opportunity for someone looking to purchase residential property. While home loans are available these days with relative ease, the worry that […]
Owning a home remains one of the fondest dreams of many of us. With mortgage interest rates at a multi-year low, today’s real estate market could be a once-in-a-lifetime opportunity for someone looking to purchase residential property. Although home loans are available these days with relative ease, the concern of most potential buyers is repayment and how they will handle it.
Once you’ve identified your dream home, you can go to a bank for a home loan. Typically, after you make a down payment of about 20 percent of the cost of the house, the balance can be financed by a bank. However, the only number that can strengthen your decision making in the process is the monthly repayment amount, often referred to as EMI.
Importance of EMI
EMI stands for Equated Monthly Payment. Each EMI consists of a portion of the principal amount along with the loan interest that the borrower pays to the lender. After each EMI is paid, the outstanding loan principal continues to decline over the life of the loan.
Factors that can cause an EMI to increase or decrease are loan amount, term, and interest rate. For the same loan amount and the same interest rate, a longer tenure will mean lower IMEs and a shorter tenure will mean you’ll pay relatively higher IMEs.
There are different ways to calculate a home loan EMI, but before we get to that, it’s crucial to understand some of the important terms you’ll come across.
Key Terms in EMI Calculation
Deposit: Once you have finalized the accommodation of your choice, before approaching a bank for a mortgage loan, you must have a certain amount from your own resources. This is called the down payment and is usually around 20 percent of the home’s value. You can also opt for a higher deposit.
The principal amount: The home loan amount that most banks give is around 80 percent of the home’s value because the balance has already been put by you as a down payment. The EMI calculation will be done on the sanctioned loan in your name. The principal amount of the loan is to be repaid along with interest to the bank during the term of the loan through regular IMEs.
Interest rate: the mortgage interest rate is a key factor in determining your NDE. The lower the interest rate on the mortgage, the lower the EMI will be. The actual rate may vary depending on various factors such as your occupation, gender, income, credit profile, loan amount, and loan term.
Mandate: Home loans are available for a term of 20 years or more. Going for a longer term will keep the EMI low, but the overall interest expense will be high. Therefore, choose a term that you can comfortably maintain while controlling interest expense.
Calculate the EMI of a mortgage
The variables mentioned above can now be used to calculate the EMI if you want to get a loan. You can use any of the following methods to perform this calculation.
Calculate the EMI using a formula
You can calculate the EMI of the home loan using the standard formula.
(P * R * (1 + R) ^ N) / (1 + R) ^ N -1), where P is the principal amount of the loan, R is the mortgage interest rate and N is the term d ‘occupation. P, R and N are the three variables and one can use different possible combinations to calculate the EMI according to one’s needs.
Calculate EMI using Excel
The calculation of the EMI of the home loan can also be done using spreadsheets like Excel and the monthly payments can be calculated according to one’s own situation. Here, too, you need the three variables of the principal amount of the loan, the interest rate on the mortgage and the tenure.
In an excel sheet you need to use the Fx function of PMT where you will need to enter numbers for the rate, NPER or tenure in months, PV will be the loan amount and FV the final loan amount which will be equal to zero.
Use a home loan EMI calculator
A home loan EMI calculator is the easiest and most user-friendly way to calculate your likely EMI. When using the EMI Home Loan Calculator, you will mainly need to use the same three entry loan amount, the home loan interest rate, and the term of the home loan.
Calculating home loan EMI using formula or using Excel function is a bit complex and time consuming process. The best part of using a mortgage EMI calculator is that you can simply use different combinations of principal amount, interest rate, and tenure to come up with an IME that will best suit your cash flow.
EMI route to your own home
Since a home loan is a long-term commitment, being comfortable with the EMI that you will be paying each month for years to come is of the utmost importance. To reach this point, a home loan interest calculator is preferable to other traditional methods that involve manual calculations or complex formulas making it prone to human error.
The home loan EMI calculator from big banks such as Kotak Mahindra Bank not only displays the EMI but also gives a breakdown of interest and principal repayments to help you understand exactly how much the loan will cost you over time. year.
Now that you are familiar with the concept of home loan IME, it’s time to play around with the EMI calculator and choose a home loan with the best home loan interest rate for your budget.
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