Financial institutions utilize the process of amortization to spread out the repayment of a loan over its tenor. An amortization schedule, therefore, consists of such
- EMI amounts.
- Principal and interest components of each EMI.
- Outstanding balance post-deduction of EMIs.
An amortization schedule allows borrowers to be aware of their loan obligation along with a detailed numeric description of how much they are paying towards principal and interest and what their outstanding balances stand at after each EMI payment.
In the case of home loan EMIs, the principal component is considerably lower than its interest component at the beginning of repayment tenor. This ratio changes over time within a constant EMI construct.
To support customers in understanding the loan repayment procedure and help them with the calculation of estimated monthly installments, financial companies provide financial tools like a home loan interest calculator.
This calculator can be utilized by individuals easily as they only have to input the required value without acquiring a profound knowledge of the associated financial formula.
The input variables associated with the computation of home loan EMI is –
- The tenor of a loan.
- Rate of interest applied on a home loan.
- Loan amount.
Financial institutions utilize these three variables to compute estimated monthly installments that borrowers have to pay each month.
The formula for calculation of EMIs
Financial companies make use of the following formula in calculation of EMIs and implement the same in a home loan calculator, which they provide to customers.
EMI = [P x R x (1 + R) ^ n] / [(1 + R) ^ n – 1]
- P represents the principal amount.
- R represents the rate of interest.
- n represents the number of installments or tenor (in months).
This calculation made by financial companies is made transparent to the borrowers so that they are well aware of the process. Knowing how much home loan EMI one can afford is likely to help them plan monthly financial obligations better and boost their repayment capability.
How different variables affect home loan EMIs?
Before applying for a home loan, individuals should duly consider how such different variables mentioned above interact with the EMIs on your home loan.
- Rate of interest
The interest rate for home loan is one of the primary determinants of EMIs. Interest rates and EMIs are directly proportional to each other, i.e. a higher interest rate would imply a higher EMI, keeping other variables constant, and vice versa.
- Loan amount
It is the amount that an individual seeks from a financial institution to meet the expenses in the purchase or construction of a home or property. It is directly proportional to the EMI amount.
A home loan interest calculator uses this loan amount as an integral variable in the calculation of EMI.
- Tenor of loan
The repayment tenor for home loans is inversely proportional to the EMI amount, i.e. a longer tenor lowers the EMI amount and vice versa. On the other hand, a longer tenor also implies a higher cost of the loan.
However, by knowing how to trim home loan tenor, borrowers can reduce the cost of the loan as the total interest incurred on the loan amount is reduced.
Individuals that meet home loan eligibility criteria and apply for home loans can put these values in the above formula and calculate loan EMI beforehand.
Nevertheless, borrowers are provided with a home loan interest calculator so that they do not have to go through the intricate formula and calculation. Individuals can learn the value of these integral variables and easily calculate the equated monthly installments.