How to Calculate EMI on Home Loan? Home Loan EMI is the Equated Monthly Installment that people have to pay. It includes the repayment of the principal amount and the interest payment on the amount outstanding of the home loan. The more extended loan tenure period is up to thirty years, and you can reduce the EMI in half in this way.
EMI is the money you have borrowed from the bank that you can pay back to the lender every month and clear off the outstanding amount. It also implies that there is a specific sum that the bank will automatically deduct from your account. Since the borrower knows about it, they have to centre their budgeting around it to make it easier.
How to Understand the EMI Breakup
If you wish to calculate the sum that you have to pay at the end of the month or in total, you have to calculate the EMI according to the combination of the main principal and the interest on it. In the beginning, you have to be paying a significant amount of your EMI that consists of the claim.
After that, when your loan has matured, then you can gradually pay off the interest. The outstanding amount will hence decrease as it goes on. In the end, however, the EMI remains the same for each month. If you pay a significant chunk of your loan at first, then the amount will get adjusted against the remaining loan, and the EMI will also reduce.
If, however, you have an option to reduce the loan tenure, you can take it. You can also opt for the floating rate of interest. In that case, the EMI will depend on the market conditions.
Significant Factors Determining the EMI
The major factors the come into play for your EMI are as follows.
Principal Amount: It is the actual sum that you have borrowed. It is one of the major factors; the higher the principal amount, the greater the EMI.
Rate of Interest: When you take a loan, it is crucial to know the interest rate. It is the rate that the banks or the organization profits from you depending on the principal. It is vital to remember that the higher the interest rate, the higher the EMI will be. You can preferably do some research on the different banks that give the loan and pick one with the lowest interest rate.
Loan Tenure: It is the duration for which you take the loan. If the tenure is longer, the EMI will be lesser. But in the end, you will have to pay more money if it is for a longer duration since the bank will get some percentage of your principal interest.
Types of EMI
- Annual Reducing: In this method, you calculate the interest rate at the end of each year though you pay the interest monthly. The considerable disadvantage here is that you have to continue paying the interest on the part of the principal for the amount you have paid already till the end of the year. Hence, you end up paying more.
- Monthly Reducing: It is one of the more accessible methods for EMI calculation. There will be a slight reduction in the principal amount you pay each month. The bonus is that the interest will depend on the outstanding balance and not on the initial principal amount.
- Daily Reducing: It is an uncommon EMI option where the principal amount reduces every day, and you have to make the payments daily. Here also, you pay the interest on the outstanding balance. It becomes difficult to calculate since you have to figure it based on the number of days.
How to Calculate Home Loan EMI?
By Using Excel: You can easily calculate the EMI using the Excel spreadsheet on your computer. The function for calculating the EMI on Excel is PMT and not EMI. The three variables you need to know to calculate it are the rate of interest, the number of payment periods, and the present value of the loan. If the rate of interest is rate, the number of periods is NPER, and the current loan value is PV, then the formula you will use in Excel is = Rate X NPER X PV.
You will get the result is negative, meaning that it is the cash outflow of the borrower.
Using Mathematical Formula: If you cannot use Excel presently, you can use the basic mathematical formula and a calculator to know the total amount of EMI. The procedure is as follows.
EMI = [P X R X (1 + R) ^ n] / [(1+ R)^N -1]
Here P= loan amount or the principal
R= rate of interest per month (R% = R X 12/100)
N= number of monthly installments
With this formula, you will get the same result as the spreadsheet in Excel.