Home loans have eased the process of owning a dream home. An individual can purchase a home without may a voluminous payment at once. A home loan helps the borrower to repay the sanctioned loan amount as Equated Monthly Instalments or home loan EMIs for certain tenure. The lender, in return, charges an interest, which is paid along with the principal loan amount. All these lessen the burden and allows to reimburse the loan easily. Apart from making dreams true, home loans are also playing a significant role in boosting the real estate business.
When you apply for a home loan and it gets approved, the lender then explains the amortization schedule. To be specific, an amortization schedule contains the detail of each of the payments you would be making during the reimbursement tenure. It helps you to plan your finances better and manage expenses efficiently. Having complete knowledge of amortization will also enable you to save a hefty sum of money if you can afford prepayment and close the loan in a shorter period. To understand all these, let us know how EMIs are calculated and what should we do during the closure of the loan.
A home loan EMI calculator uses a mathematical formula for the calculation of EMI. The formula used is:
EMI = [P x R x (1+R)^N]/[(1+R)^ (N-1)]
EMI: Equated Monthly Instalment
P means the principal loan amount
R stand for the interest rate charged by the lender
N is the loan reimbursement tenure or the number of EMIs you would be paying.
Let us understand this with a case study. Suppose you took a home loan of Rs 40 lakhs from a lender. The loan comes with an interest rate of 10 percent per annum and the reimbursement tenure is of 20 years. Doing the calculations, the resulting EMI turns out to be Rs 38,600. This means that you will have to pay a net interest of Rs 52,64,208.
Now suppose, you get an income appraisal or your business shine out and you want to close the loan as soon as possible by making more payments. You always have the option of prepayment. Prepaying your loan not only reduces the payment tenure but also saves a fair lump of money, which would have gone otherwise as interest. Let us dig further and know how the amortization will look like in the case of prepayments.
Consider the same case of yours, in which you took a loan of Rs 40 lakhs with 10 percent interest for 20 years but now you chose for prepayment. Suppose you will pay Rs 50,000 per year as prepayments. This reduces the tenures to 15 years and the net interest is also reduced to 37,08,133.
- Make sure to take all the receipts
- Don’t forget to take back all the documents from the lender and ensure that they are in good condition
- Take NOC certificate from the lender, which serve as a proof that the property is now completely yours
- Terminate the Lien that enables the bank to auction/sell the property in the case failed reimbursement. The loan closure procedure is not complete without the termination of Lien.
That is all you need to know about home loan EMI calculations. We have also learned how prepayment helps you in multiple ways and the things you should keep in mind during the closure of the loan. Planning an efficient amortization schedule is one of the most important parts of availing a home loan. It will assist in better budgeting so that you won’t miss out on payments.
Read: How to claim interest on Home Loan deduction?