The Best Ways to Calculate Your Loan EMI? Equated monthly installment or EMI is an important word related to any financial product, including home loan. EMI for housing finance includes both a certain portion of principal and interest on the total loan amount. Though there are several ways to assess the payable monthly EMIs, the user-friendly EMI calculator helps borrowers to calculate the EMI instantly.
Associated to the EMI calculator are three deciding factors, namely loan amount, loan tenor and home loan interest rate. Read on these three factors mentioned below to know the best ways to calculate home loan EMI.
- Know the home loan amount
To know how much housing loan amount a borrower would get approved of, he/she can start with assessing his/her annual income. Usually, an eligible borrower can get a home loan approximately five times his/her net annual income. This equation may vary from one lender to another and also depend on several factors, including employment status, repayment capacity etc.
The home loan amount also depends on the value of the property. Financial institutions offer LTV up to 90% of the property value. However, this percentage changes with each lending institution depending on their in-house policy.
- Figure out the interest rate
The home loan EMI calculator depends on the interest rate, which, in turn, is decided by evaluating several factors, including credit score, loan amount, etc. The rate of interest offered by financial institutions varies from one lender to another.
Borrowers can tally the housing loan interest rate of different lending institutions to make the best choice. However, the EMI also varies based on the type of interest (fixed or floating) levied on the home loan.
Moreover, borrowers can enjoy home loan tax benefits on both principal and interest amount under section 80C and section 24. These will not only help to reduce the total cost of borrowing but also lessen the pressure of monthly EMI burden.
- Decide the loan tenor
Home loans are offered for longer tenor, which can extend up to 30 years. In the case of long-term housing loans, borrowers need to pay a higher interest rate, whereas, in short-term home loans, they can pay off their debt efficiently by bearing higher EMIs. However, the tenor varies from one lender to another as several lending institutions offer home loan for up to 30 years.
Moreover, one would need to calculate home loan EMIs not only while applying for a fresh loan, but borrowers can also use an EMI calculator while opting for a home loan balance transfer as well.
Once a borrower gets to know these three factors, they can calculate the EMI using a home loan EMI calculator. There are several easy to use online calculators available on the website of lending institutions. Borrowers need to put the figures in the respective sections of the loan amount, tenor and interest rate, and the calculator will show how much EMI a borrower has to pay each month for the selected tenor.
The calculator follows a mathematical formula which is mentioned below.
EMI amount= [P X R X (1+R) ^N] / [(1+R) ^N -1]
Here, P= Principal amount
R= Interest rate per month
N= Number of years the loan amount is taken.
The EMI amount changes every time the figures get changed.
Let’s assume a borrower takes a home loan of 50 lakhs for a 12% interest rate for a tenor of 10 years.
Therefore, P= Rs 50 lakhs, R=12/12= 1% interest rate per month, N=120 months.
By using a home loan EMI calculator, borrowers can easily evaluate their monthly obligation beforehand and thereby plan a budget accordingly.
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