So, you Applied for a Home Loan to purchase your own house. You have received the sanction letter of your Home Loan for 30 Lakhs. The terms of repayment are as follows:
Sanctioned amount – 30 Lakhs
Rate of interest – 9% per annum on a floating rate basis
Loan tenure – 20 years
EMI (Equated Monthly Instalment) – 26,992
You start wondering as to how the bank has calculated the EMI amount. You do a rough calculation of the interest payable by you over the entire tenure. It comes to around 34.78 Lakhs. It roughly translates to 5.79% (simple interest) on the amount of 30 Lakhs for 20 years. However, your sanction letter states that the rate of interest applicable is 9%.
Is it a confusing matter? No, in fact, it is not. You should be aware of the following factors that influence the calculation of the EMI:
Consider the same situation listed out at the beginning of this article. This table should make things clear.
|Instalment No.||EMI||Principal Component||Interest Component||Outstanding Balance|
You notice that the principal component increases gradually while the interest component goes on decreasing. It is because the banks charge interest on a daily reducing balance.
This example will help you understand the EMI concept.
Do you want to verify whether you bank has done the correct calculation of the EMI? You can confirm the same in two ways. We shall discuss both the methods to make it clear to you.
Now, everyone is conversant with MS Excel. You can perform a variety of mathematical calculations using Excel. The EMI calculation is also one of them. It is a straightforward calculation that will not take you even a minute to do.
You might not have access to MS Excel every time. The manual method of calculating EMI should prove handy on such occasions.
The formula is as follows.
EMI = [P x R x (1+R)^N]/ [(1+R)^N-1]
P = the principal amount of the loan (in the present case30 Lakhs)
R = Rate of interest per month (0.09/12 = 0.0075)
N = Number of instalments (240)
Insert the variables at the appropriate places,and you get the answer 26,992 (after rounding off the decimals).
Now, we suppose the EMI Calculation Process is clear to you.
Using these two verification methods, you can confirm that the bank has projected the correct amount as EMI.
Yes, Home Loans usually come with a moratorium period of 18 months to allow the construction to be complete before the commencement of the EMI. Under such circumstances, banks follow either of the following two methods of EMI calculations:
The EMI process is not that complicated at all. Our Experts at MyMoneyMantra will guide you through the entire process.
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