A home loan is a sizable amount that may require payment over a long period. The lending bank or financial institution determines the EMIs to be paid for the loan repayment. An EMI is an equated monthly instalment that is to be paid monthly for a predetermined duration of time to pay off the loan. A housing loan EMI calculator is useful in gauging the EMIs you would have to pay for the required loan amount.
Many factors impact the EMI amount. The top 3 factors are explained below:
· Interest rate
A home loan interest rate is of two types- fixed and floating rates. The fixed interest rate stays the same throughout the loan’s tenure. Changes in the financial markets do not affect it. However, when the interest rate falls, the fixed interest rate will still stay the same, and you will pay higher interest than the prevailing rate. The other one is the floating interest rate that fluctuates with the market. If your income is flexible, this rate can be beneficial. Changes in the international market and those implemented by the RBI affect the interest rates positively and negatively.
The essential point is that an EMI constitutes the remaining loan amount's interest and principal. Usually, the principal component of the first EMI is the lowest, while the interest component is the highest. Then, with each successive EMI, the principal portion keeps increasing, and the interest portion keeps decreasing. Knowing about these changes can help you plan better for the home loan.
· Down Payment
A down payment is an amount a borrower pays in a lump sum to the lending institution as part of the home loan. A minimum of 20% of the house’s value needs to be paid as a down payment. The lending institution can give at most 80% of the house’s value as a home loan. Additionally, the property registration and other costs are not included in the down payment.
The minimum down payment percentage is different in the case of an old house. For a property older than 15 years, the lending institution can give at most 50% of the house’s value as a loan. Consequently, the down payment, in this case, is 50% of the house’s value.
The down payment on a loan brings down the interest rate and the EMI amount to some extent. As there is no upper limit on the down payment, the borrower should try to pay as much as possible. You can check a Housing Loan EMI calculator to see how much your EMI reduces after increasing the down payment. A higher downpayment will ultimately reduce the payable loan amount and lessen the financial burden.
· Loan tenure
Aside from the home loan interest rate and the down payment, loan tenure impacts the EMIs. A home loan’s tenure is the duration in which the borrower has to repay their loan through EMIs. The tenure affects the EMI and the interest rate. Longer tenure for your home loan will lead to lower EMIs. However, it has a higher interest payment, raising the amount of loan you effectively pay by the end of the tenure. Conversely, a shorter tenure will secure a higher EMI amount, but the total interest you pay on the loan will be lower. In this case, the overall loan amount ends up being lower than a loan with a longer tenure.
While lower EMIs may seem comfortable in the long run, the financial burden of paying back the loan will be considerably higher. With home loans already high in value, stretching out the payments more will only increase the burden. With life’s uncertainties, the sooner you pay off the loan, the better it is. However, keep your financial resources in mind while deciding the duration. You should not shorten the tenure for a lesser burden only to face difficulty paying a higher EMI later. You need to have a balanced approach where you can manage the loan with the decided duration, the EMIs, and the interest rate.
Taking a home loan is a big financial decision that requires weighing all the available options. To decide the appropriate loan amount, you can use a housing loan EMI calculator to get an estimate.
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