Home Loans have now become an integral part of our lives. The land rates have become so expensive that it is very difficult for any person to purchase real estate property without taking a home loan.
Banks give Home Loans to buyers and charge an interest on the loan amount given. The person taking the home loan is required to repay back the loan in equated monthly instalments which in short are called EMI’s.
It is this amount which the borrower has to repay every month to the bank. This amount includes both the Principal as well as the Interest repayment.
In the initial stages, the interest component constitutes a major portion of the Home Loan EMI amount. However, as we progress towards the loan tenure, the interest component starts to decrease and the principal component starts to increase.
Formula for Home Loan EMI Calculation
The mathematical formula to calculate EMI is
EMI = [P x r x (1+r)^n]/[(1+R)^n-1]
P = Principal Loan Amount
r = Rate of Interest
n = Tenure in number of months
For example, the EMI for Principal amount for Rs. 1 Lakhs, 10% interest rate and 12 months tenure using the above formula would be Rs. 8,792.
Applying the formula may get a bit complicated for most people and therefore they may alternatively use the Home Loan EMI Calculator.
Loan Amortisation Schedule
Loan Amortisation Schedule is a tabular presentation of the loan with the EMI Payment. It shows the break up of the interest component and the principal component included in each EMI Repayment.
This Loan Amortisation Schedule helps the investor to examine how the loan is being repaid and how much outstanding amount is pending to be paid.
It contains information like time period of payment, EMI, interest, principal repayment, outstanding loan etc.
Reasons for varied EMI payments
Although the word EMI stands for Equated Monthly instalments, these may not remain constant in all conditions and may change depending on the changes in the several factors like interest rate, principal loan amount etc.
Reason for Changes in Interest Rate
There are 2 types of loans:-
- Fixed Interest Rate Loans
- Floating Interest Rate Loans
In the 1st category of loans – the interest rates remain the same and don’t change and therefore the EMI amount also does not change.
However, in the 2nd category of loans i.e. Floating Interest Rate Loans – the interest rate may keep changing from time to time. And if the interest rate changes – it has a direct bearing on the EMI amount.
If the interest rate increases, the EMI amount will also increase. However, if the EMI amount decreases – the EMI amount will also decrease.
Reason for Changes in Principal Loan Amount
Sometimes, the borrower opts for part repayment of the home loan. In such cases, the principal outstanding decreases it also has a direct bearing on the EMI amount. If the principal amount decreases the EMI amount will also decrease.
Generally, when a person opts for making a partial payment – he would be given the following 2 options:-
- Reduce the EMI amount keeping the Loan Duration the same
- Reduce the Loan Duration keeping the interest amount the same
The borrower can choose any of the above 2 options as he deems fit.