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How to Calculate Home Loan EMI

Introduction

Rising real estate prices in India make purchasing a house without an external source of finance challenging. As a result, most prospective homebuyers seek home loans to fulfill this lifetime goal. 

The amount of home loan entitled to a borrower depends on the amount of equated monthly installment (EMI) he/she will be able to pay. Calculating the EMI for a home loan allows borrowers to determine their monthly financial obligation. The calculation is essential while taking a fresh loan and switching or transferring the loan to another lender. 

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EMI combines the principal amount and the interest levied on the loan. Learning how to calculate EMI makes it easier for borrowers to plan their budgets effectively and make informed decisions. Plan your loan repayment with ease using Motilal Oswals EMI calculator.

Different factors influence the calculation of home loan EMI. These include:

1. Loan amount

The loan amount is the total amount of money one can borrow from a bank or financial institution to purchase a home. The amount you are eligible for depends on your total income, the nature of the profession, overall repayment capacity, and property value, among others. Typically, banks offer five times your net annual income and 90% of the property value. You cannot calculate home loan EMI without accurately determining the home loan amount. 

2. Interest rate

Interest rate refers to a percentage the lender charges on the loan amount. Factors like the loan tenure, current market conditions, and borrower’s credit history influence the interest rate. All borrowers would like to get the lowest interest rate possible on their home loans, but this is not feasible due to several reasons. Banks and financial institutions mention interest rates on an annual basis. 

3. Loan tenure

The duration for which a loan is taken is known as loan tenure. Home loans are usually long-term loans, with the duration going up to even 30 years. But please remember that a longer home loan tenure entails a higher interest amount to pay on the loan. Decide on a home loan tenure based on your financial capabilities and long-term goals. 

How to calculate home loan EMI?

When the above details are available to you, calculate the EMI using an online home loan calculator or manual calculations. 

The formula to calculate EMI is as follows:

EMI = [PXRX(1+R)^N]/[(1+R)^N-1] 

Where,

P refers to the principal amount or loan amount

R is the monthly rate of interest, and 

N is the loan tenure, represented in months

1. Using an online home loan EMI calculator

Many online calculators estimate home loan EMI easily. These tools are available for free on the websites of lenders like housing finance companies, banks, and NBFCs. All you need to do is enter the loan amount, interest rate, and loan tenure and click ‘Submit.’ Within seconds, you will see the home loan EMI you need to pay. 

2. Using an MS Excel sheet or manual calculations

Suppose you want to calculate the EMI for a housing loan without an online tool. You can enter the above formula in an Excel sheet. Let’s illustrate the calculation with the help of an example, assuming P is INR 40 lakhs, R is 9 percent per annum, and N is 120 months. 

EMI = [40,00,000*.75/100(1+.75/100)^120]/[(1+.75/100)^120-1] = INR 50,670

Thus, the above formula calculates the EMI as Rs. 50,670 per month for a loan of INR 40 lakhs with a 9 percent annual interest rate over 10 years. 

It is worth noting that this EMI calculation is based on a fixed interest rate for the entire loan tenure. Home loans can have a floating interest rate, which can fluctuate depending on market conditions. Thus, always consult a professional financial advisor or lender to gather accurate and the latest information regarding the interest rate and any other specific terms and conditions. 

Conclusion

Calculating EMI for a housing loan helps borrowers understand their monthly financial commitment. Once borrowers know the loan amount, interest rate, and loan tenure, they can apply the EMI calculation formula to arrive at the monthly repayment amount. It is possible to use an online calculator or an Excel sheet for accurate calculations. Discuss your specific circumstances with financial institutions or professionals to acquire accurate and personalised information. 

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