Housing: Understanding how the Home Loan EMI Calculator works

Housing: Understanding how the Home Loan EMI Calculator works

A home loan is the biggest loan an individual borrows. It is a high value loan. It often lasts for over two decades and keeps the borrower indebted until the principal loan amount and the interest is paid off in full. Since it is the biggest loan for most of you, it makes sense to consider your finances and affordability before a home loan is taken. You have to get used to the fact that a fixed portion of your income will go towards equated monthly installments or EMI payments for many, many years together.

In order to help you understand the nature of your EMIs, you can take help form a freely available online tool, known as the home loan EMI calculator. The calculator is typically available for free, unlimited usage on all lender websites. Let’s find out what a home loan EMI calculator is, how to calculate home loan EMI and the many benefits of using the home loan EMI calculator before you apply for a home loan.

What is a home loan EMI calculator?

A home loan EMI calculator is basically an online tool that can help a loan borrower compute the payable EMI amount against the home loan. There are three basic components of the home loan EMI calculator are as follows:

  1. The Principal amount field
  2. The loan tenure (in months) field and
  3. The interest rate field

The calculator helps the borrower understand how much  EMI he is to pay over a stipulated tenure at an interest rate determined on the basis of the loan amount and tenure. Most of the lender websites have this tool freely available. You can put in several permutations and combinations of tenures or interest rates to determine an affordable EMI. You can simply keep inputting different principal loan amounts (by adjusting your down payment), interest rates and tenures and keep a record of the payable EMIs based on these figures.

Home loan EMI calculation formula 

Your home loan EMI calculator works using the below formula

The EMI calculator uses the following formula:

EMI = [P x R x (1+R)^N]/[(1+R)^N-1]

As per the formula

EMI = equated monthly installment

P = principal loan amount i.e. amount borrowed as loan

= rate of interest (fixed or floating) levied on the home loan amount

= Repayment tenure or the number of installments to be paid on a in monthly basis

In the above;

Principal loan amount: The principal loan amount is the actual sum you wish to borrow. If you intend to purchase a home worth one crore, you must factor in your down payment amount and only input the borrowed amount. For instance, if the property value is one crore, and you can afford to pay 25% as down payment, then according to the home loan EMI calculator, the principal loan amount would be 75 lakhs. The lender will apply the interest rate to the 75 lakhs and the EMI amount is determined on the basis of the principal loan amount, interest rate and tenure.

Interest Rate: You are supposed to pay an interest rate on the loan amount sanctioned. Each lender offers a different interest rate and you can find the minimum interest rate offered by your chosen lender on their website. On the home loan EMI calculator, you must consider minimum the interest rate offered by your chosen lender and input the figures accordingly. Most lenders offer home loan  at an interest rate of 8.50% and above. Furthermore, the borrower can opt for a fixed or floating rate of interest as well.

Tenure: You must also input the loan tenure in months. Since home loans are high value loans, you can get them for tenures lasting anywhere between 15-20 years. However, keep in mind that a high tenured loan comes with high interest rates.

How does the home loan calculator work?

In order to calculate the monthly EMI on the home loan EMI calculator,  you can either input the figures or use the slider provided in the home loan EMI calculator to adjust the values for the principal loan amount, tenure and interest rate, depending upon the type of calculator available on the lender’s website. The slider can be moved easily from left to right, with the mouse and can be used to select the loan amount, tenure and interest rates. You can keep changing and adjusting the figures while the calculator computes instant and accurate EMI amounts in a matter of seconds.

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