Considering the fact that investing in a property might be the biggest investment you make in your life, taking some time to research the different features of a Home Loan makes complete sense. Keep in mind that factors like loan amount, tenure, fixed or floating rate of interest and additional fees would influence the EMIs you’d pay.
From understanding what an EMI entails to using a Home Loan interest calculator to estimate your payments, here’s a detailed analysis of some of the crucial factors of EMI and interest charges.
What’s an EMI?
EMI, or Equated Monthly Instalment, is the amount a borrower pays to their lender on a monthly basis. The EMI remains constant throughout the tenure unless you increase or decrease it yourself, by approaching the financier. The amount paid towards principal and interest charges throughout the tenure depend on how far you’re from repaying it. For instance, when your loan period is nearing closure, a major portion of your EMI would constitute the principal amount.
Parameters that influence EMI
Your EMIs are affected by the loan amount, tenure, interest rates, processing fees, and prepayment fees. Some banks would charge you a minimal processing fee to complete the loan application process. You should ask your lender about the charge or go through your contract to know how much you need to pay. A prepayment fee is charged when you pay off a portion of the loan before the specified time.
Also Read: How to Choose a Home Loan?
How to calculate fixed EMI?
If the Home Loan you’re opting for has a fixed rate of interest, then this is how you can go about calculating it.
Formula to Calculate House Loan EMI:
E = P x r x (1+r) ^n/ ((1+r) ^n – 1)
P is the principal amount to be borrowed
r is the rate of interest, provided on a monthly basis. The interest rate is generally provided annually. To input the rate on a monthly basis, use the formula, r= (annual interest/12) x 100.
How to calculate floating EMI?
When it comes to calculating floating rates of interest for EMIs, you need to take into consideration two scenarios, deflationary and inflationary rates. In this case, the loan amount and tenure are fixed.
To calculate the deflationary scenario, keep in mind that interest rates have dropped by 1-3% and calculate the EMI using the formula mentioned above. In the same way, if you assume that interest rates are hiked by 2-4%, then you can use the fixed EMI formula to get a fair estimate of the payments you’d need to make.
You can either use the above formula to estimate the EMI or use an online Home Loan interest calculator to get a convenient estimate.
How to get lower interest rates on your Home Loan?
To get lower interest rates on your Home Loan, you need to have a stable income, a good credit score, and a stellar repayment history. Even negotiating with your lender when they offer you an interest rate can help you lower your EMIs in the long run. Ensure that you research trending interest rates and compare them using an online calculator.
How to manage your payments?
Managing your money will help you handle your EMIs and save more to increase your financial stability in the future. In order to successfully manage your monthly payments, you need to take care of the following measures.
- Budget your expenses
Your EMI should ideally comprise of not more than 50% of your total income. Do the math to see how it’s going to affect your monthly expenses. For instance, if you decide on paying lower EMIs, then it will take longer for you to finish the tenure. This won’t stress you out as much as higher EMIs would, but you’d be bound to the loan for a couple more years. On the other hand, higher EMIs would help you close your loan in a shorter period. Therefore, gauge your repayment capability before you fix your EMIs.
- Choosing the payment modes
You can pay off your monthly instalments manually or opt for an automated payment alternative. Most lenders, today, have an online portal that lets you pay instalments in the same manner you pay off your credit card bills. Automated payments can be done if you prefer having the money deducted at the source and credited to the lender each month. This procedure would save you from the hassle of managing a bill every month.
- Take a contingency fund
A contingency fund is a backup savings account that lets you pool together 3-6 EMIs. In case you face a financial crunch, you can use the money from this fund to pay back the EMIs and prevent yourself from defaulting on the loan.
- Opt for an EMI holiday
EMI holiday is a vacation from periodic instalments and is something that only a select few lenders offer. If you have a good CIBIL score and repayment history, your chances of being granted this benefit are more.
How to switch from higher interest rates to lower ones?
Let’s assume that you have a Home Loan with a floating rate of interest. But, the recent inflation rates have directly increased your EMIs and you are finding it difficult to manage it. In this scenario, you can approach your current lender and ask them to transfer you to a fixed Home Loan. This procedure would help you convert from floating to fixed EMIs. However, remember that you’d be charged with processing fees and other additional charges for making this switch.
Also Read: Do not overpay for your home loan
Calculating your Home Loan interest rate before signing up for a loan and before switching to a better plan would help you get a fair estimate of where you stand. Keep yourself updated with the dynamics of the finance market before you take up a Home Loan. Apply online at any of the different financial institutions in the field, after you’ve compared the different rates they offer.