As an Indian, it is quite understandable if buying a home is your top priority, and more importantly your prime dream. To be honest, this dream was much more realisable 10 years ago, than it is now, all thanks to the soaring prices of real estate. Thankfully, there are numerous Home Loan Offers that you can count on. Not only do these loans help you buy and live in that picture-perfect home, but also helps you enjoy a better quality of life, right from the very beginning. While there are numerous benefits of availing a home loan, some borrowers start feeling the financial burden that the EMIs brings along, thereby ending up suppressing their other goals. However, there is a simple way to deal with this issue. All you need to do is figure out an equated monthly instalment (EMI) that works best in accordance with your income, and choose a loan accordingly.
Equated Monthly Instalment (EMI) it is a fixed amount of payment including both, the principal loan amount as well as applicable interest that a borrower has to make to the lender at monthly intervals. The EMI is a meticulously calculated figure, which is agreed to by both parties involved. Repayment of a loan through EMI is a continuous process which lasts the entire period of that loan until the whole amount, along with interest is paid off. Here, it is essential for one to understand that that as the loan period advances and the principal amount reduces, the interest decreases.
As a rule of thumb, EMIs for all your loans combined should not exceed 50% of your total household income, as this may affect the quality of your life, and leave little room for you to deal with emergency expenses.
When it comes to the EMI for your Home Loan, the ideal range is 35 to 40% of your monthly income. Hence, if you earn Rs. 1 Lakh per month, your Home Loan EMI should not exceed Rs. 40,000.
A monthly instalment essentially comprises two components – Principal and Interest. From the very beginning of your repayment cycle, the interest forms the more substantial part of your EMI. However, as time progresses, the interest reduces. Eventually, the principal becomes the more significant part of the monthly instalment.
A Home Loan EMI depends on three aspects:
Principal denotes the actual amount borrowed by the applicant and has a direct impact on the EMI. The higher the principal, the larger the EMI.
The Interest Rate refers to the cost of borrowing the money. More often than not, the rate is determined by the borrower’s credit history, income levels as well as their ability to repay the amount. The rate may be fixed or floating, depending on the terms of the loan. Regardless of the type of interest, the higher the rate, the more is the EMI.
Tenure is the period over which the borrower agrees to settle the loan. It is inversely proportional to the EMI. Hence, a borrower looking for smaller EMIs should opt for a longer tenure.
The EMI for any amount of loan can be calculated using a simple math formula:
EMI = [P x R x (1+R)n] / [(1+R)n – 1]
P denotes Principal
R denotes the Monthly Rate of Interest
N denotes Loan Tenure (no. of months)
The lender usually mentions an annual rate of interest. For the purpose of the above formula, you can easily convert the yearly rate to monthly, by dividing it by 12.
Since most Home Loans are offered for a tenure of 10-20 years, the manual calculation of EMI can prove to be cumbersome. Hence, it is best if these calculations are carried out using a dedicated EMI Calculator.
An EMI Calculator is a perfect tool, which uses the total amount to be borrowed, the duration of the loan, the applicable interest rates and the processing fee levied by the financial institution to help you determine the EMI that you will be required to pay to service your loan.
Once you key in the parameters, the calculator will exhibit your EMI. If this amount exceeds 40% of your income, you can simply try reducing the loan amount to the extent that you reach the ideal range of instalments. Of course, this would either imply that you have to look for a home that fits the recommended amount of loan that you can avail, or that you have to arrange for a bigger down payment to reduce the chunk of your loan amount. While this may look like a daunting task to begin with, it will significantly lower your financial burden in the coming times, and help you lead a more relaxed life.
We hope that you now know what will be the ideal EMI amount for you as well as the nuances of Home Loan EMI calculation process. So go ahead, and find out your ideal EMI range, and start looking for a Home Loan at the earliest. After all, your dreams deserve to be fulfilled at the earliest!
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