Owning a home is one of the most important aspects of life for many people. But high real estate prices and the unavailability of funds becomes a hindrance in buying a house. Access to finance in the form of home loans has come as a boon for the common man. However, home loans, or any kind of credit, comes with a lot of responsibilities attached to it. One has to have a clear idea of his/her finances before borrowing a hefty amount. Availing a home loan requires prior planning as it has a relatively long tenure and will weigh on household finances for a long time.
Advanced knowledge of the monthly outgo helps you avoid financial pitfalls. A home loan EMI calculator is precisely made to help potential customers make an informed decision. It is a free tool that requires a few inputs and helps you accurately calculate the monthly instalments. Monthly instalments can also be calculated manually, but the process is slightly tedious. Let us start with the online home loan EMI calculator and move to manual calculations later.
Inputs for a home loan EMI calculator
The interface of home loan calculators offered by all the banks and NBFCs are broadly the same, with slight differences. All home loan EMI calculators ask for the following inputs.
Principal Amount: The principal amount is the money that you borrow to finance your house. The interest that the lender charges is added to the principal amount, also known as the loan amount and the entire amount is divided into equal amounts to calculate monthly instalments. The principal amount depends on the value of the property and the paying capacity of the borrower.
Interest Rate: Like all borrowings, lenders levy interest on the principal amount lent for a home loan. It is important to choose the right lender as different financial institutions offer different interest rates. Interest rates on home loans are either fixed or floating. The monthly instalments can vary in case of home loans with floating interest rates as rates fluctuate according to the base rate. The EMI remains the same for the entire tenure of the loan in case of loans with a fixed interest rate.
Tenure: Every loan comes with a pre-decided duration for repayment. The borrower decides the tenure of the home loan in consultation with the lender. Home loans are long term loans with repayment schedules stretching to 20 years or 30 years. Home loans with longer tenures have smaller instalments, but borrowers end up paying a higher amount of interest.
These are the essential inputs for a home loan calculator. When you search for a home loan calculator, most websites will offer two optionsa home loan EMI calculator and a home loan interest calculator. The interest calculator will provide the monthly interest or the total interest you will end up paying on the home loan. The EMI calculator will give the total amount of the monthly payments, which consists of the principal amount and the interest charged every month. It gives a clearer picture of the monthly cost associated with a home loan. As a thumb rule, do not opt for a loan amount that results in an outgo of over 40% of your monthly salary.
How to calculate home loan EMI manually?
The mathematical formula to calculate home loan instalments is:
EMI = P x R x [{(1 + R)^N} / {1 (1+R)^N}]
Let us understand the mentioned terms.
P stands for the principal amount or the loan amount.
R stands for your interest rate. The annual rate has to be converted into the monthly rate for the formula.
Monthly interest rate = [(annual rate/12)/100]
N denotes the total number of months during the loan tenure.
For instance, you avail a home loan of Rs 40 lakhs for 20 years at an interest rate of 9%. Let us try to calculate your EMIs.
R = [(annual rate /12)/100] = (9/12)/100 = 0.75/100 = 0.0075
N = 240
EMI = P x R x [{(1 + R)^N}/{1 (1+R)^N}]
= 40,00,000 x 0.0075 x [{(1 + 0.0075)^240}/{1-(1 + 0.0075^240)}]
= 40,00,000 x 0.0075 x [{6.009}/{5.009}]
= 40,00,000 x 0.0075 x [1.199]
EMI = Rs 35,970.
You will have to pay Rs 35, 970 every month, if you take a loan of Rs 40 lakhs for 20 years at an interest rate of 9% per annum. The example cited above is not exact to the last decimal point.
Conclusion
Calculating home loan instalments manually is a complex process and is prone to errors. On the other hand, home loan EMI calculators give the exact amount and help you understand your eligibility and plan your monthly expenses accordingly. Home loan calculators also help in getting a better deal as you can compare the instalments and interest rate of different financial institutions and make an informed decision.