Properties and houses are good investments as they offer both security and profit. Owing to the rising price of properties in the economic market, they can prove to be useful as an asset for profit generation in the future.
Thus, if you plan to invest in property, a home loan is just the right answer. The home loan EMI calculation can help you determine the amount you will be required to pay each month during the loan repayment process.
Knowing how to calculate the monthly EMI can help you compare loans of various fits with differing loan amounts, interest rates, and tenure so that you can finally choose a loan plan most suited to your financial condition.
This article will provide a detailed insight about how to calculate home loan EMI and about the automatic home loan EMI calculator that can help you instantly calculate the EMI amount upon entering just a few basic details.
What is a Home Loan?
A home loan is a loan designed for the purchase of a house or property. It is a secured type of loan. This means that the borrower can only take the loan against collateral that will act as security until the loan repayment has been made in full.
In the case of a home loan, the property itself acts as collateral and remains in possession of the lender until the end of the repayment tenure. The need for collateral also arises because home loan principal amounts are usually larger than the amounts in the case of most loans, owing to the high price of a property compared to other, less big investments.
You can take a home loan from any bank or financial corporation of your choice, provided you meet the concerned institution’s laid down eligibility criteria. If you have a good credit score with a track record of timely repayments, you are more likely to receive a loan at a lower interest rate. However, if you have a low credit score, the chances of obtaining a loan at a low-interest rate become substantially slim.
The formula for home loan EMI calculation
The formula for calculating the home loan EMI amount manually is:
EMI=[P x R x (1+R)^N]/[(1+R)^N-1]
P is the total principal loan amount borrowed from the lender
R is the monthly interest rate. Remember that the interest rate on the principal amount is usually expressed annually in the form of per annum. The annual interest rate should be divided by 12 to get the monthly interest rate, which should be used in the formula.
N is the total number of months for which the loan is borrowed, i.e., the tenure expressed in months or the number of monthly installments for loan repayment.
So suppose you have taken a loan of INR 2,00,00,000 at a 10% p.a. Rate of interest for 20 years. The EMI will then be:
R=(10/12)% = 0.833%
EMI= [2,00,00,000*0.833%*(1+0.833%)^240]/[(1+0.833%)^240-1] = INR 1,92,952
Thus, the monthly EMI for taking a loan on INR 20 lakhs for 20 years at 10% p.a. Interest rate is INR 1,92,952.
Similarly, the yearly EMI on the amount= 1,92,952*12 = INR 2,315,424
Calculating home loan EMI using an MS excel sheet
As you can see, the formula to calculate home loan EMI is complex and results in inaccuracies when performed manually. Thus, the home loan EMI can also be calculated through a more simple alternate method using an MS Excel spreadsheet. Inputting a simple excel formula can help calculate your home loan EMI instantly without hassle. The formula for calculating home loan EMI through excel is:
“=PMT(the monthly interest rate, loan tenure in months, loan amount)
Thus, to calculate EMI through excel, you have to first click on the “=” symbol, followed by “PMT,” and then enter the following details within parentheses-
- the monthly rate of interest
- loan period in months
- loan amount
- Then click enter
The sheet will generate a negative value indicative of the cash flow incurred by the borrower. This is the home loan EMI that the borrower would be required to pay.
For example, if you want to borrow a principal amount of INR 5 lakhs at a 12% p.a. interest rate for 2 years, the formula to calculate EMI in excel is:
=PMT(12%/12, 24, 500000)
Calculating home loan EMI using an online EMI calculator
An online EMI calculator is a tool or a digital device found on the home page of most banks and financial institutions. It is a special provision now offered by most banks and NBFCs, including digital leaders and money lending apps, that allows you to calculate your EMI instantly upon entering a few basic details.
One only needs to enter the principal amount, loan tenure, and interest rate, and the EMI calculator instantly flashes the EMI payable on the said amount. Some banks and NBFCs, such as Monye View, have an EMI calculator that functions through sliders. There are three sliders assigned to the three factors, and one only needs to slide over onto their chosen figure for the EMI amount to be revealed accordingly.
Moreover, the EMI calculator also shows the breakup between the principal amount repaid and the interest repaid. More importantly, this method is much less time-consuming and efficient than manually computing your EMI value, as performing the calculation manually can additionally contain errors and inaccuracies.
The online EMI calculator is accessible and easy to use, can help you manage your finances by getting an estimate of your EMI beforehand, and instantly dispense accurate results.
What are the factors that affect home loan EMI?
It is evident from the EMI calculator formula that the EMI amount depends on three main parameters: the principal, the interest rate, and the loan tenure. Let us see in what ways these factors influence the EMI amount.
The principal is the amount initially borrowed as a loan from the lender. The higher the principal amount, the more will be the repayment amount, and consequently, the higher the EMI.
● Interest rate:
The interest rate, calculated on the principal amount, is the price you pay for borrowing the money. In simple words, it is the cost of the loan. When you repay the loan, you repay not just the principal amount but also the interest, which is calculated on the principal amount.
The greater the interest rate, the higher will be the interest payable, resulting in higher EMI. If you have an impeccable credit score, it will be easier to get a home loan at a low-interest rate. Similarly, you should keep a watch out for lenders who offer loans at low-interest rates despite your credit score.
The time period taken for repayment is called the loan tenure. Tenure has an inversely proportional relationship with the EMI amount. In other words, the more the loan tenure, the less the EMI will be. If you stretch out your tenure over a long period, the EMI amount will be lower.
But, you will end up paying more interest effectively as interest will keep accumulating on the outstanding amount throughout the long tenure. Thus, it is always advisable to pay off the loan within a shorter tenure if one can afford it.
Besides these direct factors, there are other tertiary costs involved in taking a loan as well:
● Processing fee:
A certain amount of processing fee is charged on a loan, which is the amount required to process your loan application. This value is a certain percentage of your principal amount or a maximum or minimum fee determined by your lender. This fee that goes into the application processing might not be refunded even if the loan request gets turned down.
If you prepay a certain amount of your home loan, it will reduce the outstanding principal amount. This can, in turn, reduce the interest amount and can subsequently reduce the EMI value if the tenure remains constant.
What are the advantages of EMI calculation?
Before deciding on a loan plan, it is imperative that you calculate the EMI value beforehand. This is essential owing to the following reasons:
- It helps you get an idea about the amount you will have to set aside for loan repayment each month and helps you plan your finances and regulate your expenditures accordingly.
- It allows you to compare various loan plans and judge the resultant EMI value in each case to finally opt for the one best suited to your needs and condition.
- It ensures that you pay your EMIs promptly without delay and maintain a good credit score in turn.
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Thus, calculating the EMI value prior to taking a loan has many benefits. Whether or not you calculate it manually, knowing the formula can always come in handy. Additionally, we have also mentioned the alternate ways in which you can come to calculate the EMI amount on your loan plan.