EMIs are preferably one of the most consequential outflows from your monthly income and it is always a better idea to try and minimize your burden! But let’s find out what exactly is your home loan EMI? EMI stands for Equated Monthly Installment which refers to a predefined amount you have to pay to your bank/lender on a fixed date, every month, for the full tenure of your loan period, until you have completely repaid the loan with the interest due.
Each EMI involves payment towards the principal amount and the interest for the entire duration of the loan. During initial years, a higher proportion of the EMI is generated by the interest payment on the principal amount. As the home loan matures, the interest component tends to decrease and the principal amount creates a higher percentage of the monthly payment.
Higher down payment : Once a loan is sanctioned, choose to make a large down payment so that the principal amount is reduced. The calculation of interest payment is done on the principal, so smaller the principal, the lower would be the interest payment and EMIs would be smaller. It might appear difficult to arrive at a large down payment, but it will be useful in the long run and result in considerable savings in EMI payments. This is applicable in the case with long-tenure loans like a home loan which includes EMI payments over decades.
Choose a longer tenure : In the case of a long tenure loans, the EMI tends to reduce proportionately as your principal and interest are divided over a maximum number of months. However, your actual monthly outflow will be smaller, you will be paying out your EMIs for a longer period of time along with payment of interest for a longer period. So while your monthly burden tends to be smaller, you might be paying extra throughout the tenure of the loan.
Making an early prepayment : While making early pre-payment, you will considerably reduce your EMI for the majority of your tenure. It is better to consider prepaying part of your loan during early months/years of the tenure so that your principal decreases, hence you save interest on further payments.
Negotiating with the bank : If you have a good reputation with your lender and have been disciplinary making your repayments on time, then you may seek permission from your lender for a reduction in the interest rate. If you have exhibited good repayment behavior, there might be chances for a reduction in the interest rate by your lender, therefore, reducing your EMI burden.
Shifting your loan to another lender : If you find a lender who’s providing you better terms and conditions on your loan, it might be a good alternative to change your lender. However, it is necessary to calculate the costs involved in prepayment of your loan with your current lender and to ensure that the costs do not exceed your savings you will benefit from your new lender.
Home Loan EMI Calculator Formula-
EMI Calculator uses the following formula to calculate your EMIs applicable on a home loan :
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
EMI= Equated Monthly Installment
P= Principal Loan Amount
R= Monthly Interest Rate
N= Number of Monthly Installments
For example : To calculate EMI for a principal value of ₹ 1 lakh, 10% interest rate and 12 months tenure; following will be the calculations:
Principal amount : ₹ 1,00,000
Rate of Interest : 10%
Tenure : 12 months
Calculated EMI : ₹ 8792
It is to be observed from the above example, there are three underlying factors behind EMI payments: principal amount, interest rate, and tenure. The EMI payment is directly proportional to the amount of loan and interest rates, and are inversely proportionate to the tenure of the loan. The higher the loan amount or interest rate, the EMI payments tend to become higher and vice versa. In the case of tenure of the loan, the total interest amount payable increases with the increase in tenure, hence, the EMI payments subsequently fall with an increasing tenure.
Home Loan EMI Calculator Excel-
The applicants of home loan can easily calculate their home loan EMI on MS Excel. They need to use the function PMT in order to calculate EMIs.
The following syntax needs to be used while calculating EMI in MS Excel.
Syntax : PMT (rate, nper, pv)
The variables used in the above formula are :
rate – Rate of Interest on the loan
nper- Total number of payments for the home loan
pv- Present value/principal