Home Loan EMI Calculator

How to calculate the best home loan EMI for your needs

Owning a home is a dream for many individuals. Well, with the right approach to planning and execution, it is possible to acquire one's dream home.

A popular route to owning one's residential property is to secure a home loan via a bank, non-financial banking company (NBFC), or neobank. Today, a large number of lenders offer home loans. However, shopping for the right one can be an overwhelming experience for consumers.

This is where a home loan calculator can paint an accurate picture of the actual cost required and enable one to make an informed decision.

Here, we understand how to use a home loan calculator to help secure the best loan for one's residential needs.

What is EMI?

Let's understand an EMI and its role in the borrower's decision.

An EMI is the key building block for a home loan. It is basically the amount a borrower pays the lender on a fixed date every month. Borrowers will need to continue paying the EMI until the completion of the home loan tenure.

An EMI comprises of two components - a principal amount and an interest. Initially, the interest component is higher, and the principal amount is lower. However, with every progressive EMI payment, the interest component reduces, while the principal amount increases. This is done until the loan is completely paid off.

Home loan borrowers are always looking for the most affordable option. In fact, it can be a complex process to manually calculate the ideal EMI and tenure to reduce the overall cost of the home loan.

Flexible vs fixed vs floating home loan EMIs

It is important to note that you may choose between a flexible, fixed or floating home loan EMI when taking a home loan. Let's understand the differences between these three options.

• Flexible home loan: A flexible home loan EMI, as the name suggests, is when the EMI varies during the loan tenure. In the case of a step-up loan, the EMI will gradually increase as the tenure progresses.
  
  In the case of step-down loans, the EMI value continues to decrease, as the tenure progresses. When going in for a flexible home loan, EMI ensures that the progression of the loan mirrors your predictive monthly cash flow to avoid defaulting on payments.


• Fixed home loan: In a fixed EMI home loan, the EMI will remain the same throughout the tenure of the home loan.


• Floating home loan: The third type of home loan comes with a floating interest rate. Here, the interest rate changes with the change in repo rate. The repo rate is the rate at which a country's centralised banking authority, such as the Reserve Bank of India, lends money to commercial banks.

The benefit here is that your interest rate also decreases when the repo rate goes down. On the flip side, if it goes up, your interest rate also goes up. Alternatively, the lender will adjust the tenure to keep the interest rate the same.

How can a home loan calculator help you?

With several different types of home loan EMIs, interest rates and tenures, you might have many questions. Should you pay a lower EMI and extend the term of the loan? Or should you pay a higher EMI and repay the loan as quickly as possible? You may also be grappling with multiple rates from various lenders.

A home loan calculator simplifies the process and leaves no scope for errors in the calculation. It is an online tool that potential borrowers can leverage to estimate the amount they will need to pay in the form of Equated Monthly Installments (EMI) for a fixed tenure.

This tool is instrumental in helping borrowers plan smartly for this major milestone in their financial journey. Since you will need to calculate the EMI multiple times before arriving at a convenient amount, it can be extremely cumbersome and lead to mistakes.

The best approach is to enable technology to do the work and enjoy the benefits of automation via a home loan calculator. This tool is free of cost and can be used any number of times to arrive at the right principal amount-EMI-tenure combination, which suits your budget and monthly cash flow.

Factors involved while calculating home loan

Before you use a home loan calculator, it is important to understand all the variables involved and their exact role in determining the value of the home loan. They are as follows:

• Equated Monthly Installment: The amount paid by the lender every month until the end of the tenure.
• Principal amount: The initial amount borrowed to make a payment to fund the cost of the home.
• Interest rate: This is the percentage of the principal amount charged by the lender giving the loan. The interest rate can vary from lender to lender.
• Tenure: This refers to the time frame in years and months for the borrower to finish paying off the loan

Note: The lender may also charge a home loan processing fee which is not included in the calculator as it can vary from lender to lender.

The formula used by home loan calculators

Here is a snapshot of the formula used by home loan calculators to arrive at the exact EMI to be paid for the loan at a monthly frequency.

• E refers to EMI
• P is the principal amount
• R is the rate of interest per month
• T is the loan tenure in months

Formula: E = [P x R x (1+R) ^T] / [(1+R) ^T-1]

Here's an example of the calculation. Let's apply the formula assuming that you avail a home loan of INR 50 lakhs for a tenure of 10 years at an interest rate of 8.5 % p.a.
The rate of interest (R) on your loan is calculated per month.
R = Annual Rate of interest/12/100
R = 8.5/12/100 = 0.007
E = [50,00,000 x 0.007 x (1+0.007) ^ 10] / [(1+0.007) ^ 10-1] = 61,993

According to the home loan calculator, the EMI that must be paid for a 10-year tenure is INR 61,993.

Key variables that impact home loan EMI

Several factors impact the overall cost of your home loan. It is important to understand each variable and its significance as follows:

• Make sure you calculate the principal amount required for the home loan accurately. The higher the principal amount, the higher the EMI. It is important to be prudent when identifying this amount.
• The higher the interest rate, the more the EMI will be. When purchasing home loans, go for credible lenders offering a lower interest rate. However, do not opt for a lender merely because the interest rate is low. It may turn out to be a fly-by-night operator with zero credibility.
• It is important to choose the tenure of the loan carefully. The longer you take to repay the principal amount and interest, the higher the value of the overall interest amount will be.
• However, it is also important to be realistic when deciding the tenure. It must be aligned with your ability to make payments every month.
• Your lender may charge a one-time processing fee required to complete the loan processing. Make sure you know the value of the processing fee or any other charges associated with the loan. Typically, the processing fee is non-refundable.

Home loan tax benefits

Home loan borrowers have the potential to save taxes by availing tax benefits under the Income Tax Act of 1961:

• Under Section 80C, you can claim a tax deduction of up to INR 1.5 lakhs per annum on the principal amount paid towards the home loan.
• Under Section 24, home loan borrowers can claim a tax deduction of up to INR 2 lakhs on the interest component paid during the financial year.
• Under Section 80EE, you can claim an additional INR 50,000 paid on the interest component during the financial year, over and above the tax deduction availed under Sections 80C and 24.

Advantages of a home loan calculator

This automated solution empowers borrowers to make informed decisions that have long-term financial consequences. Here's a peek at how using a home loan calculator can simplify your finances:

• You do not need prior financial knowledge or mathematical prowess to use the home loan calculator. It is a do-it-yourself solution to identify the best variables resulting in a cost-effective home loan.
• The home loan calculator enables you to experiment with various variables to identify the most affordable home loan. You can input varying principal amounts, interest rates, and tenures to arrive at the best combination for you.
• Different lenders offer deferring rates of interest. You can input varying interest rates to understand the actual interest amount that will be paid by the end of the loan, which is displayed in the results. The key is to reduce the interest amount paid as far as possible by reducing the tenure or principal amount. You can also negotiate with your lender for a lower rate of interest.
• The usage of a home loan calculator helps you validate the information. This is important, as fraudulent lenders in the market may feed you with incorrect information. At times, lenders may also make an error in communicating the right information.
• If you have already taken a home loan and wish to pay it off faster, your lender may help you by changing the terms. If that is the case, you can use a home loan calculator to help you recalibrate your loan with fresh variables to pay it off faster.

Using stable money's home loan calculator

If you are planning to take a home loan, the Stable Money home loan calculator will make it easy for you to calculate the EMI you need to pay monthly.

Simply enter your principal amount, interest rate, and loan tenure in years, and receive the answer in seconds. Using the Stable Money home loan calculator is completely free of cost and can be reused any number of times.