Why Calculate Home Loan EMI Before Signing the Agreement?

Updated on: 18 Jan 2024 // 4 min read // Home Loans
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If you are contemplating to avail of a Home Loan and wondering about the important factors that need to be taken into consideration, then the first point on that list should be calculating your Home Loan EMI.

A Loan EMI comprises two components, i.e., principal and interest. While the monthly repayment will remain the same for the complete repayment tenor, the percentage of interest and the principal keeps changing gradually. For instance, during the initial repayment phase, the interest cost dominates the principal, while during the last phase of repayment, the principal dominates the interest cost. 

Here are the various reasons that highlight the importance of calculating your Home Loan EMI accurately before signing the agreement:

Help you Assess Future Financial liabilities more Efficiently:

You can use an online EMI Calculator to determine your Home Loan EMI before signing a loan agreement. This will take a few minutes and present a true picture of your monthly financial commitment. You will quickly be able to understand the interest cost you will have to bear, i.e., how much money you would need to arrange for EMIs each month after taking care of other fixed liabilities.

As Home Loan is a long term financial commitment, EMI is an important parameter to consider.

Margin Money:

When you apply for an ICICI Home Loan, you can get up to 90% of the property value as the loan amount. This offers you enough scope to decide the loan amount you wish to avail of accurately and without stressing your finances.

Now calculating your Home Loan EMI, you can correctly assess the amount of margin money or down payment you require. Based on your down payment, your EMI would vary. If you decide to pay higher margin money, EMI will be lower & so on. It is important to make an informed decision according to your financial health.

Decide Repayment Tenor:

Your Home Loan EMI is directly related to the repayment tenor you opt for. Higher is the EMI; shorter is the repayment tenor and vice versa. In most cases, you can opt for a repayment tenor for up to 30 years for Home Loans. Yet, it is recommended to not opt for more than 10-15 years of tenor. The best way out is to calculate EMI you are comfortable paying and then pick the shortest possible repayment tenor.

Long term commitment:

As mentioned above, a Home Loan is along with term commitment that can extend for up to 30 years. During this period, you might face certain financial hardships or have new members added to the family, through marriage or childbirth, adding stress on your finances. Ultimately extended financial problems can make it challenging to serve the EMIs comfortably. Therefore, you must always have a back up for such happenings and calculate the EMI amount after setting aside some part of your income as a reserve fund.

Decide Interest Rate Structure:

To calculate EMI, all you would require is to fill your ICICI Home Loan Interest Rate, loan tenure, and loan amount on Online EMI Calculator. The calculation of Home Loan EMI correctly is important because it will help you decide on the interest rate structure you should opt for. Home Loans are available on the fixed-rate structure as well as on floating rate structure. The fixed-rate remains fixed during the entire repayment tenor, while the floating rate varies as per the external benchmarks. When you calculate your EMI, you can understand which interest rate structure offers you better benefits. Generally, floating interest rates have a lower interest rate as compared to the fixed-rate structure. However, a fixed EMI promise on fixed loans is what makes it attractive to some applicants.

Reduce Chances of Default:

When you have calculated your Home Loan EMI before signing on the loan agreement, you have an accurate idea regarding the EMI that you will have to pay every month. You would agree on a particular EMI amount only after taking into consideration your monthly expenses and other liabilities. Therefore, the chances of default during repayments are reduced significantly.

Pre-payment in Future:

You also need to calculate your EMI to understand the scope for pre-payment or foreclosure of the Home Loan in the future. As your income would increase with time, so would your repayment capacity. Therefore, you will want to use the surplus funds to pay off your Home Loan quickly. By calculating your Home Loan EMI before signing the agreement, you can opt for an EMI amount that you can easily manage. In the future, as you will have spare funds, you can make the pre-payment towards the Loan and save on your interest costs.

Income Tax Purpose:

 Under the Income Tax Act 1961, you can claim a deduction against the principal and interest component of the Home Loan repayment. For the principal part, the maximum deduction available is Rs. 1.50 lakhs under Sec 80C, and for interest component, the maximum deduction available is Rs. 2 Lakhs under Sec 24. By calculating your Home Loan EMI accurately, you can ensure the maximum utilisation of these available benefits.

Thus Home Loan EMI is the one single factor that can affect your final decision significantly and therefore, should be calculated accurately before signing the dotted lines.

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