If you are a new borrower of a house loan, EMI can be the most crucial phrase for you. When you apply for a house loan, you must make equal monthly payments, known as EMIs, toward the loan’s payback. It lets you stretch out the loan payment over a longer period of time and relieves you of the burden of making one large home loan payment. Did you know, though, that at the start of the loan’s lifetime, the interest component of your EMI is larger than the principle component? Continue reading to learn more.
EMI’s Component Parts
Principal and interest are the two parts of your EMI. The majority of the total amount of the EMI is made up of the interest component. You will have to pay a lesser EMI if the interest rate is low, and vice versa. To obtain the greatest home loan interest rates, it is advised that consumers make meticulous loan selections.
Why is the initial Interest Component higher?
The interest component is higher at the start of the loan term. The main component rises while the interest amount decreases when the debt is paid off. It’s because interest is calculated based on principle. The interest is computed on the total principle amount when loan repayment begins, making it greater.
The principle does, however, steadily shrink as you make loan payments since interest is computed on the principal amount that has decreased.
You may better comprehend the breakdown of the main and interest components of an EMI by using a loan amortisation schedule. When you need to foreclose or transfer the loan, this amortisation plan will help you choose the ideal timing to close the loan.
The tax advantage of the principle and interest components is also treated separately because they are both unequal. While section 24(b) of the Income Tax Act of 1961 allows you to claim a tax benefit on interest, section 80C of the same law allows you to claim a tax benefit on principal.
How are your EMIs calculated?
The loan amount, interest rate, and duration are taken into account when calculating your EMI. Your loan EMI remains consistent over the course of the loan if you take out a fixed interest rate loan. However, depending on the benchmark rate for house loans with fluctuating interest rates, your EMI may change.
There are two methods for calculating the EMI: a calculator or a mathematical calculation.
Following is the formula to determine the EMI value:
EMI = P × r × (1 + r)n/((1 + r)n – 1)
Where,
P – Principal
r – Rate of interest
N – Tenure
A home loan EMI calculator may be used as an alternative for a simpler approach to calculate your EMI. On the lender’s website, there is a house loan EMI calculator. Instantaneous results are provided after entering the loan amount, interest rate, and term. With the use of the EMI calculator, you may also establish your tenure and improve your financial planning.
You may now assess your affordability and obtain an appropriate home loan if you are aware of how your EMI is calculated.