Do not overpay for your home loan

You have selected you dream house, identified your lender, documents are in order and you are ready to apply for a loan. But before committing to a long term loan such as a home loan, you must understand how to calculate home loan EMI that you will be paying for years to come.

What is an EMI?

Equated Monthly Installment (EMI) is an amount which is paid monthly in order to pay off the loan in full.It has two components: (a) part of the principal amount and (b) interest on the principal.

How is an EMI calculated?

EMI is simply calculated as the sum of the entire interest and principal which is then divided by the tenure of the loan (in the form of number of months). As the name suggests, this amount is an installment which is paid monthly.

Although your monthly EMI payment never changes, what is interesting to note is that, the proportion of the two components, interest and principal varies with time. Towards the beginning of the of the loan period, interest proportion is higher than the principal.

Many lenders provide an easy to use home loan calculator on their websites. You can calculate EMIs for any number of combinations of interest rates, loan amount and tenor of the loan. There are several websites other than those of the lenders, where this tool is available free of cost.

In a matter of seconds, the EMI calculator displays a table of payments and easy to understand charts. The payment schedule breaks up the payment into the interest and principal components of the EMI. It also indicates the loan balance after every payment.

How do I use the home loan calculator?

For the online calculator tool to compute your EMI, you need to enter the following values:

• The amount of loan you want (principal)
• The rate of interest available to you (interest)
• Term of the loan (in years or months)
• The method of computation
• Annual reducing method: the principal amount and the rate of interest is made at the end of the year.

Or

• Monthly reducing method: monthly reduction in principal as the EMI is paid monthly and the interest is calculated on the outstanding balance.

The annual reducing method is disadvantageous to the borrower and therefore the monthly reducing method is commonly used in EMI calculation.

The payment schedule and the chart are easy to understand and will help in getting a better idea of the financial commitment you will need to make. Thus, it is highly recommended that you use the readily available and easy to use tools online to calculate home loan EMI.