With financial institutions reducing home loan rates, there has been a rising demand for affordable housing among the general populace. Last year, the RBI slashed its repo rates to 4%, leading to a reduction of home loan interest rates across financial lenders. Nonetheless, experts suggest that loan applicants should broaden their search and look for the best offers to reduce the overall repayment burden.
One of the easiest ways of doing this is by evaluating monthly instalments using an EMI calculator. Before applying for a home loan, one can calculate home loan EMI to reduce the risks of default and assess their repayment capability. Apart from this, lenders take note of many factors such as borrowers’ credit history, monthly budget, and more before granting a loan.
Thus, it is crucial for borrowers to pay heed to these factors, alongside the EMI calculation process, to ensure that their loan application is complete without hassle.
How do financial institutions calculate the EMI amount?
Before going into details, one must understand that EMI constitutes two components.
- Principal
- Interest
In the initial years of a home loan, the principal component is much less than the interest, which is calculated on the outstanding balance of the principal.
Furthermore, financial institutions charge interests in three ways: monthly reducing, annual reducing, and daily reducing methods. Commercial lenders generally use the daily reducing balance for a home loan.
Lenders utilise the following formula to calculate home loan EMI –
EMI = P × r × (1 + r)n/((1 + r)n – 1)
Where P is the principal amount, r is the rate of interest, and n is the repayment tenor opted for.
Manual calculations using the formula can leave room for errors. Which is why it is advised for borrowers to make use of home loan EMI calculators to compute their repayment liability.
Here is a guide on how to use an EMI calculator.
Steps to use a home loan calculator
- After visiting the online page for EMI calculation, one needs to enter the loan amount he/she wishes to borrow.
- Comparing the latest rates, a borrower needs to enter the applicable home loan interest rate
- The last step would be to enter the tenor, during which one chooses to repay the home loan.
- After entering the above details, you will get the EMI amount alongside other repayment details.
Along with instant results using this online tool, there are several other benefits of calculating the EMIs before taking a home loan.
Benefits of a housing loan calculator
- Borrowers can estimate how much to borrow by evaluating the monthly instalments beforehand. As a loan amount is directly proportional to an applicant’s monthly budget, this is a convenient method to secure finances.
- To sort out the loan tenor, borrowers need to calculate home loan EMI. Depending on EMI amounts, one can either opt for a longer or a shorter tenor.
- One can get an idea about how much to contribute as a down payment by calculating EMIs.
Furthermore, after checking eligibility for loan application with an eligibility calculator, borrowers can reduce their EMI by making a substantial down payment. This will help in reducing the financial strain.
On the other hand, existing borrowers looking to lower their repayment burden can reduce EMIs with a home loan balance transfer. This facility is offered by select financial institutions free of charge.
Apart from this, various financial lenders provide pre-approved offers to make the loan application process hassle-free. These offers are applicable on various financial products, including home loan, loan against property, etc. You can check your pre-approved offer by entering basic details such as name and phone number.
A home loan EMI calculator is, therefore, a nifty tool that can be utilised to gauge one’s repayment liability before applying for the loan. This reduces the risks of default to quite an extent.
