How to calculate Home Loan EMI?

A home loan 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 one of the biggest loans ever taken, one must consider their finances and affordability before a home loan is taken. You need to be comfortable with the fact that a fixed portion of your income will go towards equated monthly instalments or EMI payments for years and years together. To aid you to 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 it 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 i.e.

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

The calculator helps the borrower understand the payable EMI over a stipulated tenure at an interest rate determined basis the loan amount and tenure. This tool is freely available on all lender websites. The borrower may input innumerable 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 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 instalment

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

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

N = Repayment tenure or the number of instalments 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 1 crore, you must factor in your down payment amount and only input the borrowed amount. For instance, if the property value is 1 crore, and you can afford to pay 25% as down payment, then 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 must 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. When you calculate the home loan EMI, you must consider minimum the interest rate offered by your chosen lender and input the figures accordingly. Most lenders offer home loans 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, you can either input the figures or use the slider provided in the calculator to adjust the values for the principal loan amount (P), tenure (N) and interest rate (R), 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.

Benefits of using a home loan EMI calculator

Now that we know how to calculate home loan EMI and formula let us find out why it is essential for you use this calculator before you apply for loan. Let us look at the benefits of using the home loan EMI calculator.

It gives you an accurate break-up of financial charges: An EMI calculator can help you understand the various financial charges which are associated with your home loan such as the total payable interest, the loan processing charges, the stamp duty fees etc. Since these amounts are also typically substantial, lenders tend to present them as a percentage of the principal loan amount you intend to borrow. Knowing the actual value of the loan, minus the charges associated with it, can help you determine the loan terms.

It saves you the trouble of manual calculations: Calculating EMIs manually is both complex and tedious. You are bound to make calculation errors while calculating EMIs that are meant to last for 20 years. Any mistake made in manual calculations can put you in a tough spot when you approach the lender. What’s worse, you have to go over your calculations several times to ensure that you have calculated the EMI amount correctly. With the home loan EMI calculator, you can get accurate results swiftly, in a matter of seconds. You can keep inputting different combinations of interest rates and tenures and rest assured that the calculation is 100% accurate.

You can compare various home loan rates: Every lender offers a different loan interest. Even if a loan amount differs by a mere 0.02%, it can reduce the EMIs and the above mentioned charges associated with the loan. The EMI calculator enables you to easily compare the various interest rates offered by various lenders.

You can plan your finances: Since the EMI calculator allows you to input different interest rates and tenures; you can get a general idea about the monthly payable EMIs towards the loan. As such, you can go about with planning your budget keeping your EMI amount in mind. The calculator tells you the accurate EMI amount you must put aside so that you can plan your budget in such a way that your other essential monthly expenses remain unaffected.

You can manage your other loans: Most people are paying EMIs for more than one loan at the same time. If you are also one of them, you would be aware that your financials will be affected when you add another loan to your already existing ones. However, the home loan EMI calculator enables you to take your other loans into consideration and helps you decide the tenure and interest rate, after calculating the other payable EMIs. You can also easily calculate the charges associated with foreclosure if you have the finance to close off your home loan (or other loans) before the stipulated loan tenure.