Home loan EMI calculation is a very tedious and time-consuming task if done manually. Hence, most banks provide EMI calculators on their websites to aid customers in making wise financial decisions.
A home loan EMI (equated monthly instalment) is the amount that is payable every month to a financial institution, from which the loan has been taken, from until the loan is repaid. It compromise of principal and the interest amount. That amount calculated by the tenure, the number of months, in which the loan to be repaid. This computed amount paid on monthly basis. Initially in the EMI, the interest amount is more and principal is less but gradually the visa -versa happens when getting close to repayment. The four major factors taken into consideration for an EMI are:
- Amount of the Principal: It is the amount that is borrowed by the customer and it forms the major part in determining the EMI of the loan.
- Interest Rate: The borrower has taken the loan from the market at that rate. It is most important factor in determining the EMI of the loan cause the more the interest the more will be the EMI and if lesser interest then less EMI.
- Tenure of Loan: It is the timeframe required to repay the loan to the organisation or the banks. The longer the timeframe the lesser the amount of EMI but that would also mean higher total interest outflow.
- Computation Method: The methods taken into consideration to calculate the EMI also becomes a crucial factor in paying the loan. The various Methods mentioned below:
- Annual Reducing Method: in this method, the EMI though paid by the borrower at the end of each month, but the principal amount and interest rate calculated at the end of the year. However, it not that beneficial for the lender as he keeps paying the interest amount of the principal paid already.
- Monthly Reducing Loan: It is very easy, simple and safe and most commonly used method to calculate EMI. The principal reduces with every EMI paid each month and the interest being calculated on the outstanding amount.
- Daily Reducing Loan: as obvious by its name, the principal reduced each day with the payment of EMI interest charged on outstanding balance but paying daily is not feasible so it is not that common method.
EMI Formula:
E = P x r x (1+r)^n/((1+r)^n – 1)
Where E = EMI
P=Principal Of Loan Amount
r=rate of interest paid on monthly basis. For example interest/12/100 if for suppose the rate of interest is 9.10% per annum then r=9.10/12/100 which is 0.00758 per month.
n=duration of loan or term or tenure.
For Example: if we take a loan of 1000000 Rs at 9.10% interest per annum for 10 years (120 months) from a bank.
EMI=1000000*0.00758*(1+0.00758)120/((1+0.00758)120-1)=Rs 12722. Thus, we pay 12722 rupees for 10 years. Therefore, amounting to Rs 1526640 in 10 years, which is 526640 Rupees of interest, paid on loan.
Thus, by the above formula, one can take out the EMI but for big loan amounts it becomes very tedious and hence major banks have home loan calculator on sites. Even they have different attributes like processing fee deduction and pre-payment closer charges.
Schedule of Home loan Amortization: It is a statement given by the financial institution stating about the elaborated details of future payments outstanding, amount that was borrowed and payment that is already received by the bank. . It gives comprehensive details about the EMI value, the balance of payment before the EMI starts, and the breakup of EMI showing the principal and interest repaid until the end. This schedule is obtainable on the sites by using the calculator, which they prepare from financial mathematics. It is vital for the borrower to make the decision of pre-closure or refinancing.
Step up and down EMI: sometimes the EMI set or designed as per the salary increase and decrease of borrower’s. In step up the EMI increases as per the apprehensions that the salary of borrower will increase in future. In such a case the EMI initially charged is less and then increased as per the salary but this can be done only twice in the entire loan tenure. In case of step down, the EMI is higher and it is reduced if the income decreases.
Advanced Disbursement and Pre EMI: In case of construction link, plan the disbursement done as per construction in that case the pre-EMI, mainly interest paid on the amount borrowed until the final disbursal takes place. Then in some cases when before construction completes the loan disbursed is called advanced disbursement that is done looking at the loyalty of the constructor that he has the capacity to deliver the project on time, in such case the EMI starts immediately as disbursement take place.
Floating and fixed rate of interest: Where EMI calculated on floating and fixed rates.
- Floating: When the rate that is left open for market fluctuations that can go up and done with increase and decrease it is called floating rate. Thus, the EMI can also increase and decrease as per the market flow.
- Fixed: When EMI paid at constant rate and the fluctuations of the rate is not take into consideration its fixed rate. In this case, the borrower should chose this type of rate when they have reached the lowest point and a increase in is expected in the future otherwise it becomes a fix for him to pay the same EMI even if market rates are too low.
So above are all the details how the EMI calculated for home loans. This is always an added advantage to do a market survey of leading organisation on sites. Still it is advisable to get the final say from where the loan to be taken.
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