How Does a Home Loan EMI Calculator Work?

What is Home Loan EMI?

When an individual gets a loan from a bank, he or she repays the loan amount in parts known as equated money (EMIs). It is a systematic and comfortable way to repay loans. The amount repaid is the sum of the borrowed amount plus the interest charged. This amount is divided by the tenure of the loan that gives a uniform amount payable per month. Such an equal amount pad every month is known as EMI.

What is Home Loan Amortization Schedule?

The borrowers are allotted a loan amortization schedule that indicates the balances per year towards home loan deduction as interest and principal. The initial installments have a higher percentage towards the interest amount and then later to the principal amount. An amortization schedule explains the break-up of the EMIs to be repaid every month. It is basically a road map that indicates the break-up of your repayments and how you will complete the repayment cycle.

Role of EMI in Home Purchase Planning

Before borrowers decide to start the home loan application process, they must calculate the estimated EMIs using the EMI calculator. It gives borrowers a clear picture of the precise loan amount they require and what will be the monthly burden to repay the loan amount. EMI is elementary to know your eligibility for a home loan. EMI helps the banks and financial companies to assess the borrower’s loan eligibility and how much loan amount can be sanctioned to you. After assessment of the loan eligibility and EMI, financial companies decide the loan amount based on the property’s cost.

Why should you know your Home Loan EMI in Advance?

It is quite a rational process to calculate the home loan EMI in advance for the reasons given below-

• You can know how much EMI you can afford toward the home loan every month

• You can decide whether to opt for a shorter or longer-term loan

• You can be aware of the amount that you have to pay as a down payment

• It becomes easier to plan your monthly budget

Factors affecting Housing Loan EMI

Several factors affect the EMI of a housing loan. Before you apply for a home loan, it is essential to understand the different aspects of borrowing that affect your EMIs.

• Principal– The principal amount is the amount of loan sanctioned to the borrower. It is the amount borrowed from a bank or financial company by the borrower to purchase a home. It is directly proportional to the EMIs i.e., the higher the principal, the higher would be the EMIs.

• Home Loan Interest Rates– A home loan is sanctioned to the borrower at an interest charged by the bank. The EMI includes the amount of interest plus the principal divided by the tenure of the loan. The higher the interest rate, the higher would be the EMIs. Hence, before applying for a home loan, the borrowers must apply to such banks which offer home loan lowest interest rate.

• Tenure of the loan– Another very important aspect of a home loan is tenure. You can go for a home loan for up to 25-30 years. The tenure of the loan is inversely proportional to the EMIs. The longer the tenure, the lower would be the EMIs. If you want to repay the loan amount quickly, you can go for a shorter tenure or vice versa.

What is a Home loan EMI calculator?

Home loan EMI calculator is an online calculator that helps borrowers to get an estimate of loan amount and EMIs based on your principal, tenure, and interest rate. On the different websites offering financial services, you can see a home loan EMI calculator asking for three details such as principal amount, tenure of the loan, and home loan interest rates. As soon as you fill in the details, you will get the EMI amount that you need to pay to the bank every month.

How does the Home Loan EMI calculator work?

The home loan EMI calculator works using a mathematical formula to calculate the EMI of your home loan.

The formula for EMI= (P X R X (1+R) ^N]/[(1+R) ^N-1],

where P is the principal amount,

R is the rate of interest, and

N is the number of years.

If you change any of the variables, the housing loan EMI would change. For example, if you are taking a home loan of Rs. 40 lakhs at an interest rate of 13% for tenure of 11 years, the approximate EMI would be 50,080 Rs by applying the formula – {40,00,000 X 0.01 (1+0.01) ^132] / [(1+0.01) ^132-1}.

Why should you use a Home Loan EMI Calculator?

An EMI calculator, which works similarly to a home loan interest calculator, is quite helpful for individuals willing to buy a home with a home loan. The benefits of using a home loan calculator are –

• Compare different loan offers from banks and financial housing companies– When you look for a home loan, you can see many advertisements of banks and financial housing companies offering home loans at varied interest rates. You can enter the details into the home loan EMI calculator and decide the best home loan offer suitable as per your requirements.

• Understanding the home loan cost and break-up– With the help of a home loan interest calculator, you not only calculate EMI but also know the break-up of the costs related to a home loan. With this, you can get to know that whether banks or financial housing companies have any hidden charges or not, and then make the right decision.

• Choose a reasonable tenure period– Choosing the right tenure is essential for a borrower to repay the loan smoothly. You can pick the right tenure by using the EMI home loan calculator and decide which tenure suits your requirements. If you have ample funds, you can pick a shorter tenure to repay the loan.

• Manage finances– As you have to pay EMIs monthly, borrowers need to manage their finances effectively to avoid defaults. Sometimes, borrowers do not understand the burden and take a higher amount of loan that they are unable to repay. You must follow financial discipline and pay your monthly EMIs regularly to avoid defaults. Defaults in repayments may hurt your credit score that impacts your profile as a borrower. EMIs help to keep your budget and expenses within the limit as you have to save money for monthly repayments.

How to Use the Home Loan EMI Calculator?

It’s pretty simple and straightforward to start using the home loan EMI calculator. Just follow the steps given below-

• The first step is to enter the loan amount you wish to borrow

• Now add the interest rate which is obtained from the lender

• Input the tenure of the loan that you want to opt for

As soon as you enter the details, the EMI amount is displayed with other details such as total amount payable, amortization schedule, and total interest payable. You can easily vary the parameters and get the desired EMI amount, which helps you decide on the ideal loan amount and tenure that you should opt for. However, the calculator works best for home loan fixed interest rates; in the case of floating interest rates, the EMI amount to be repaid may vary based on market conditions.

How to Reduce your Home Loan EMI?

Higher EMIs can hurt your monthly budget. If you are looking for options to lower the EMIs, you can consider these tips before starting the home loan application process –

• Extend your tenure– If you opt for a longer tenure, you can lower your EMIs. If you are unable to arrange higher EMIs, you can simply opt for a longer repayment period.

• Make part pre-payments– Another way to lower your EMIs is that you can make pre-payments to lower your EMIS. When you make a part prepayment, you can reduce the principal amount. As soon as you make a pre-payment, your EMI reduces.

• Refinance your home loan– If you have already taken a home loan at a higher rate of interest, you can still lower your EMIs by refinancing. You can conduct a cost-benefit analysis to check whether you can save your money by refinancing your home loan. You can use a home loan EMI calculator to conduct a cost-benefit analysis.

Can Housing Loan EMIs change during my loan tenure?

Yes, your EMIs can change during your tenure only under certain circumstances that are-

• When you have step-up or step-down loans– If you have opted for flexible EMIs such as step-up or step-down loans, your EMIs will change. In the case of step-up loans, EMIs increase over time, whereas for step-down loans, your EMIs will decrease.

• Partly disbursed loans– If your loan is partly disbursed, your EMIs will increase as soon as the full amount is disbursed.

• Loan repayment– As discussed above, you can lower your EMIs by making part pre-payments. Borrowers having adequate funds can pre-payment the loan amount to lower EMIs or close the loan account.

• Rise in interest rates– If you have opted for flexible home loans, your EMIs change with the increase or decrease in the rates of interest.