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How is EMI for Housing Loans Calculated?

How is EMI for Housing Loans Calculated?

With an amazing array of schemes for housing loans in the lenders market, there are different kinds to meet the needs and expectations of a borrower. Be it any scheme, the important part of the loan is called as Equated Monthly Instalment, which is EMI. It is the repayment of the loan provided by the borrower to the lender on a monthly basis.

What is EMI?

The Equated Monthly Instalment is the monthly repayment amount given by the borrower to the banks to clear the credit received as a loan. This amount is decided beforehand and the same in debited from a specific account of the borrower every month. It is debited on a fixed date of the month until the end of the loan tenure post complete repayment. Mr. Farooq, who recently bought one of the flats for sale in Tambaram, says that it is important as a borrower to know the components of the housing loan to plan the finances accordingly.

How is EMI for Housing Loans calculated?

The EMI is unequally disintegrated as principal amount and the interest for the principal amount. In the initial stages of repayment, the interest of the loan amount makes the most of the EMI. Over time, the principal amount is also repaid and that is when the loan attains maturity. Even after the outstanding balance of the loan comes down, the EMI stays invariable.

EMIs can also change at times. If the borrower pays a major part of the loan amount at a time, the repaying amount is readjusted with the outstanding balance resulting in a decreased EMI. In the same case, the borrower can also keep the EMI unchanged and decrease the loan term instead. Likewise, in a loan borrowed with floating interest rates, the EMI changes based on the market variations. Mrs. Sashi, who recently purchased one of the flats for sale in Pallavaram says that the knowledge about the factors determining the EMI is necessary to plan the future.

Mathematical Estimation:

EMI = P*R *(1+R) N divided by ((1+R)*(N-1)) Where EMI is the Equated Monthly Instalment P is the principal amount of the loan N is the decided tenure of the loan in months And R is the rate of interest levied on the principal amount

What are the factors that contribute to the EMI?
  1. The principal amount, which is the actual loan borrowed from the lender is one of the vital factors that determine the EMI.
  2. Then, the next vital factor is the rate of interest at which the borrower gets the loan from the bank. EMI that should be paid is directly dependant on the interest rate for which the loan is offered.
  3. The third factor that determines the EMI is the tenure of the loan. Tenure is the decided timeframe that is chosen to completely repay the borrowed loan amount along with the interests of the principal. Longer tenures incur lower EMIs and vice versa.

There are various ways in which the EMI for Housing Loans is evaluated for a borrowed loan amount and they are:

Annually reducing system:

The borrower of the loan pays the EMI every month but the rate of interest and the remaining principal to be paid is re-evaluated at the end of the year. This system is not good for the borrowers because they have to the pay the interest on the same principal amount for the whole year even if they have paid for the most of it.

Monthly reducing system:

In this type, the EMI is re-evaluated on a monthly basis and the interest rates come down as per the monthly repayments. The rate of interest is only based on the remaining loan amount, which is beneficial for the borrower.

Daily reducing system:

When EMI is paid back on an everyday basis, there is a decrease in the principal every single day. Remaining amount to be repaid is considered for evaluation of the upcoming EMIs.

Also read: The Tips to Decrease Rate of Interests on Housing Loans