Home loan EMI calculator – how it works

When you set out to make any huge investment on debt, planning is extremely crucial. This is especially true if you intend to take out a loan that lasts for several years, like in the case of a home loan. Taking out a home loan and purchasing property are two of the biggest co-related life decisions that one can take. As such, you need to examine all aspects of the finance you intend to take on loan. You need to be sure that you can afford the Equated Monthly Instalments or EMIs that are to be paid for 10-20 years, each month, without fail. In such situations, a home loan EMI calculator can come to your rescue.

What is a home loan EMI calculator?
A home loan EMI calculator is an online tool that helps you compute the amount of EMI you must pay, for a stipulated tenure at a given rate of interest. You can input various permutations and combinations of interest rates and tenures to arrive at an EMI you are comfortable with. This quick and easy to use tool is available on the website of all lending institutions and saves you from wasting time on tedious, manual EMI calculations. Simply input the loan amount, tenure (in months) and interest rates and find out the monthly EMI you would have to pay. The EMI calculator uses the following formula:

EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
Where
EMI = equated monthly instalment
P = principal or amount borrowed as loan
R = monthly rate of interest levied on loan amount
N = repayment tenure or the number of monthly instalments to be paid (in months)

How it works
Here is how the home loan EMI calculator works

Principal loan amount: This refers to the sum of money borrowed by you for purchasing the house. The amount borrowed depends on the property cost and the borrower’s repayment capacity. Most lenders provide 80%-85% of the property value as loan. The interest rate is applied to this principal amount. After the interest rate is levied, the final amount is equally divided by the loan tenure.

Interest Rate: This refers to the interest rate levied on the loan amount. Different lenders offer different interest rates. For instance, a Bank of Baroda home loan is available at an interest rate of 8.55%, whereas Yes bank offers this loan at 9.35% and IDFC bank offers it as 9.50%. You must check the interest rates before applying for the loan and choose a lender who offers the most competitive rates. You can also choose between a fixed and a floating interest rate.

Tenure: This refers to the time chosen by you or allotted by the lender to repay the loan. Housing loans typically come with long repayment tenures lasting up to 20 years. You can also choose a tenure that suits you. However, you need to remember that if you choose a higher tenure, you have to pay a higher rate of interest.