Attending a house party, Ravi heard his friends talk about home loans. His friends discussed how easily they could buy a house with a home loan and that too at affordable EMIs. He also heard them say that repayment was convenient as they could calculate their home loan EMI before even initiating the application process. Once he was back home, Ravi tried calculating his EMI but was unsure about the process. Thankfully, his wife, who was a loan officer in a leading private sector bank, helped him understand the role of the EMI calculator and the process to use it.
Knowing how to calculate your home loan EMI can be a great help. Here are some values that you need to input into the calculator to calculate the EMI.
- Decide the loan amount
Before applying for a loan, the first thing you need to do is to set a budget. Decide on a loan amount that you need and can afford. Typically, you can get a home loan five times your net annual income. However, it might not be a wise decision to do so unless you have robust financial stability. The loan amount would also depend on the value of your property. Though factors like tenure and interest rate also matter in EMI calculation, estimating the loan amount would help you get a rough idea.
- Choose the optimal loan tenure
To get a comfortable EMI, choose an optimal tenure. Too long tenure would increase the cost of borrowing, and a short tenure can put pressure on your finances. Your tenure would also depend on your retirement. Assuming retirement age as 60, you could get a tenure of 30 years if you are 30 years old and shorter tenure if you are in your 40s. In addition, if your debt to income ratio is higher, the lender can reduce your loan amount or increase the tenure.
- Strive for the best interest rates
Research well before you apply for a loan. Look for lenders that offer competitive interest rates. Your interest rates can depend on your gender, profession, or the location of the property.
- Substitute the values
Now, when you have all the essential values, you can calculate the EMI manually through a formula or by using an EMI calculator. A home loan EMI calculator is available on all lender’s websites. All you need to do is to input values for loan tenure, loan amount and interest rates.
Similarly, you would need to substitute value in the following formula for manual calculation –
EMI = [P x (R/100) x (1+R/100) ^n] / [(1+R/100)^ n-1]
P- principal amount
R – monthly interest rate
N- number of instalments
For example – if you wish to take a loan for Rs 30 lakh at 8% interest for a tenure of 20 years. Your EMI would be Rs 25,093.
Before applying for a home loan, it is always better to check your affordability by calculating your EMI. It helps you choose a suitable tenure and make informed decisions.