Building a new house or acquiring one creates an immense financial strain. Among the most efficient ways to deal with that strain is to take out an adequate amount of money as a loan and then pay it back in periodic installments. It eases the pressure of having to pay the total amount in one bulk payment.
However, before jumping straight into a loan scheme, you must carefully calculate the EMI amount you would be required to pay on a monthly basis.
Not only will this determine the amount of loan one may pragmatically apply for, but it also helps in long-term budgeting and planning.
This calculation should be done not only when applying for a new loan but also when transferring the loan to another lender.
This article provides a detailed guide on correctly calculating the EMI to be paid for your home loan. Read more Life Insurance Companies Plans.
Things to be well aware of before starting the EMI calculation:
Step 1: Estimate the amount to be taken as a loan
In order to approximate the amount which you might get as a loan, you must take a look at your income scale. The sum total of your annual income is significant while making this calculation, as the maximum home loan allowed to a person is about 5 times this gross yearly income.
However, this estimation may vary from lender to lender. It depends on various factors like occupational status. The net repayment capacity of the borrower is also taken into consideration.
While calculating the amount of loan eligibility, the property’s market value also plays a significant role. In general, most lenders award about 90% of the net worth of the property as the maximum amount available as a loan.
However, many banks and institutions can pay 80% or even a lower percentage of the value as a loan. Typically, as the net worth of the property gets higher, companies offer a lower percentage of it as a loan.
Although these different factors may make the available loans differ, it is still essential and advisable to make the plan keeping in mind an estimated value of the loan to be taken.
Step 2: Find a proper tenure for the loan repayment
Home loans are generally meant to be paid back over a long period. Many home loans can even last up to 30 years. Keep in mind that the more you elongate the tenure period, the institution or bank will expect a more significant sum of money as interest from you.
In most cases, the lender would not allow a loan taker to extend the tenure period up to a point where they are above the age of 60.
For example, if one is 30 years old or younger, a tenure period of 30 years may be applied for, but a 40 years old person may avail of a tenure period of 20 years at most.
Step 3: Be aware of EMI limiters
In most cases, the lenders limit the EMIs so that the total of all the EMIs on all the loans availed by a borrower does not become more than 50% of their monthly income.
If one is paying a different EMI on another loan when applying for the home loan, then that data will need to be factored in, accounting for that 50% limit while calculating the possible EMI rate of the home loan.
Thus, when and if the EMI on an applied loan amount goes above this limit, the lending institution must compensate by reducing the eligible loan amount.
In other cases, the loan tenure may be extended, too, given that the borrower passes the eligibility test for a longer tenure. The lender may also choose to offer some respite on this 50% limit if the monthly income of the person applying for the loan increases up to an adequate amount.
Step 4: Understand and apply for the most compatible interest rate
When applying for a loan, it might seem like an obvious, no-brainer idea to opt for the lowest interest rates on offer. However, the matter is not always so simple in the case of home loans. Each bank has its distinct and unique systems regarding the kinds of properties and customer bases it would cater to.
It is crucial to note that many banks give the best possible interest rates to customers with fixed, regular, salaried incomes. In contrast, other banks provide the same facilities regarding interest to customers with better long-term credit scores. Many lending institutions also give special rates of interest to female borrowers.
Calculating the EMI amount for the loan:
Method 1: Using online calculators
Today, in this internet age, many official procedures have shifted to online platforms. Different sites, portals, and much more have cropped up to help people navigate these digital procedures smoothly and efficiently at convenience.
In order to calculate the home loan EMI, one may avail of the help of online home loan EMI calculators. These sites are found on aggregator portals, official sites of lending institutions like banks, NBFCs, and housing finance companies.
Simply follow the instructions provided on the concerned page and navigate to the appropriate tabs. Put in the relevant data such as address proof, identity proof, and last three months statement with salary credit to check eligibility.
Then open the EMI calculator to enter the loan amount, interest rate, and tenure. Readily a chart showing the possible EMI schemes will be displayed.
Method 2: Using MS Excel formula
There are some individuals who prefer a more direct, involved, and hands-on approach to things. If you want to be actively a part of the calculation process, down to every minute step, you may use the calculation formula present in the MS Excel application.
The standard formula is presented like this,
EMI = [P x (R/100) x (1+R/100) ^n] / [(1+R/100)^n-1]
In the above formula,
P denotes the principal loan amount,
R is referring to the rate of interest per month,
N denotes the number of monthly installments.
Now we will illustrate the working of the formula with an example:
P= Rs 50 lakh,
Let the rate of interest be 9 percent per annum= 9/12=0.75 percent per month,
N= 180 (if the loan amount is to be paid in 15 years, then there will be 180 monthly installments),
EMI is calculated to be:
((500000*0.75 /100*(1+0.75 /100) ^180/((1+0.75 /100)^180-1))) = Rs 35,062.
Taking a housing loan is undoubtedly a tremendous financial burden that can be under constant pressure for years. However, when looking at the entire scenario from a distance, it becomes apparent that there are significant benefits to availing of a compatible loan plan in the long run.
Taking a loan can result in reduced taxes, financial insurance, and many more things. Keeping all of this in mind, it is still essential to make appropriate calculations and thorough, deliberate plans before taking on a daunting burden like a home loan.
It will ensure smooth financial situations and optimum monetary savings for the future.
Now that you know all about what to keep in mind while opting for a home loan and how best to tackle the calculation woes that come with the said home loan, it is time to be smart with your money and pragmatic with your investments.
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