Financial

Home Loan EMIs: All you need to know

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The dream of buying your own home can be realised easily with the help of a Home Loan. With major banks and NBFCs offering reasonable Home Loan rates and flexible payment options, a Home Loan serves as the ideal solution to most finance woes, in regard to buying a property.

While a loan may seem like the best option to generate funds to buy a home, signing on the dotted line without knowing all the facts could lead to a less than desirable situation later on. To address that, here’s a quick look at the most important factors that entail a home loan.

What is a Home Loan?

Since buying a home requires a fair amount of money, a Home Loan is the preferred way for most people, who lack the funds, to purchase property. However, while it greatly cuts down the pressure on your immediate finances, it also places you in debt for the entire tenure of the loan. EMIs for a home loan can drain almost 40% of an individual’s salary each month, leaving little to no room for new investments during the repayment period.

To make sure that you don’t place unnecessary stress on your finances, it’s best for you to use a Home Loan EMI calculator. This calculator lets you figure out how much money you’re capable of borrowing and how much you’ll spend on EMIs each month.

The Home Loan EMI

The repayment period begins as soon as your loan gets sanctioned. Loans are repaid in the form of EMIs, or equated monthly instalments, which are pre-determined chunks of money that you have to pay each month for a specified tenure. The EMIs you pay account for the principal amount that you’ve borrowed, and the interest that has been charged by the bank.

The factors that affect EMI

There are three distinct factors that affect how much a loan EMI amounts to.

  • The principal amount:Principal refers to the loan amount you have borrowed from the bank or NBFC. This sum is, beyond a doubt, one of the most prominent factors when calculating your EMI.
  • The rate of interest:Your EMI amount is directly proportional to the rate of interest on your loan. However, your tenure also drastically affects the amount you pay as EMI; we’ll go into more detail about that in the next section. As a general rule of thumb, scour the market for low Home Loan rates to ensure that you end up paying as little interest as possible.
  • The tenure: The amount of time you have to repay the loan is referred to as the tenure of your loan. For a Home Loan, the tenure can span from anywhere between a couple of years to a few decades, depending on the amount of money you’ve borrowed. Unlike the rate of interest, the interaction between EMI and tenure is inversely proportional. So, if you opt for a shorter tenure, your EMI amount will go up and the amount you pay as interest will go down. And if you choose a longer tenure, your EMI amount will go down but you’ll end up paying a lot more as interest to the bank.

Why should you use an EMI calculator?

There are numerous benefits to using an EMI calculator when you’re looking to avail of a Home Loan. For instance –

  1. Carry out fast and accurate mathematical calculations

An EMI calculator saves you the trouble of dealing with complex equations and large numbers associated with Home Loans. All you have to do is enter the required values and the calculator will show you the results instantly.

  1. You can check if your finances can take the expense of EMI

Any loan places a considerable amount of financial stress on an individual till it gets repaid. Without a solid financial plan in place, dealing with recurring expenses on top of your EMIs can turn out to be quite a hassle. With a calculator, you can accurately predict how much you’ll be spending each month on your EMIs. This will allow you to come up with a good financial plan to follow during your repayment tenure.

Factors affecting your EMI

Change in interest rate

If you’ve opted for a floating interest rate, you’ll only come to know the EMI amount at the beginning of each month. Depending on the market, the rates will either increase or decrease with each passing month. If you’re lucky, the rates will not fluctuate much during your tenure, and you’ll pay a lot less interest as compared to people with fixed interest rates. That being said, if you opt for this type of rate, be prepared for periods of high interest rates where you might have to dig deep into your savings to avoid defaulting on your loan.

Change in principal

Some lenders will allow you to prepay a large chunk of your loan, much before the close of your loan. When you do this, the tenure and/or interest rates are revised according to the new principal, which is essentially the amount that still needs to be repaid. In a situation like this, your EMI will most probably be altered considerably.

Flexibility of repayment

Some banks and NBFCs come with flexible repayment options, which may include unequal EMIs over the course of the loan tenure. For example, if you take a step-up loan, the EMI amount gradually increases over the years. And in case of step-down loans, the EMI reduce progressively over the course of the loan.

In an ideal situation, you should choose the highest EMI you can afford so that you can clear off your debt as fast as possible. Always try to strike a deal that helps you cut down the amount you pay to the bank as interest. Taking up high EMIs and shorter tenures is the best way to ensure that you pay less in the form of interest. Before availing of a Home Loan, make use of a Home Loan EMI calculator to figure out how much you can comfortably borrow and how long you’ll need to repay your lender.

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