What Is EMI And How Is It Computed?

EMI is an oft repeated term that is associated with any loan taken. Let us understand how EMI works and what are the different aspects associated with EMI. The EMI facility helps the borrower plan his budget. The EMI is calculated taking into account the loan amount, the time frame for repaying the loan and the interest rate on the borrowed sum.

An Equated Monthly Installment (EMI) is usually a fixed amount of money that you need to pay your bank or lender every month as repayment of a loan taken, until your loan is totally repaid. It is essentially made up of two parts, the principal amount and the interest on the principal amount, divided across each month of the loan tenure. The EMI is always paid to the bank or lender on a fixed date each month. This could be done though post-dated cheques issued in favors of the lender or by providing auto debit instructions to your bank for the same.

Here’s the formula to calculate an EMI:

EMI = [P x I x (1+I)^N]/[(1+I)^N-1], where P is the loan amount or Principal, I is the Interest rate per month. [To calculate rate per month: if the interest rate per annum is 14%, the per month rate would be 14/(12 x 100)], and N is the number of installments.

Now, you might assume that the equal parts of the principal and interest are repaid to the financial institution every month. However, this not the case. During the initial years of repayment, the interest component repaid is higher while in later years, the principal component is higher. So, you cannot assume that you will have repaid half of the loan amount once half of the loan tenure is over. A more likely scenario us that you’ve reduced the total interest component that was due by a considerable amount while the principal amount remains to be paid.

Here is a simple example that explains how the repayment of your EMI reduces your loan amount during the repayment period leading up to the end of the loan tenure.

Here the loan amount is Rs. 1, 00, 000, which is lent at an interest rate of 12% with loan tenure of 12 months.

The monthly EMI is calculated at an annualized rate of 12% and amounts to Rs.8, 885 per month with the total interest component amounting to Rs.6, 619.

You will notice that the interest repaid decreases with each passing month while the principal repaid increases at the same time. This means that with a larger loan amount of say Rs.5 lakh and a longer tenure of 20 years, the interest component will form a greater portion of the EMI. This interest portion will reduce leading up to the loan tenure, while the reverse is true for the principal component.

Will the EMI change during the loan tenure?

There are three reasons why your EMI might change during the tenure of your loan.

Interest rate on your loan changes – If you have opted for a floating interest rate, the interest rate on your loan will change whenever the floating rate is reset by the lender. This, in turn, will result in a change in your EMIs. However, note that you can instruct your lender to not to change the EMI and instead request for change in the tenure of the loan.

You prepay the loan – In case you prepay the loan amount during the tenure of the loan, your EMI will change. This is because the principal of the loan will have gone down and the interest due will be based on this new principal. Here too, you can ask your bank to change your tenure instead of the EMI. This will help you repay the loan quickly.

You opt for progressive EMIs – Some lenders offer the option of repaying the loan through staggered EMIs. Here, you pay a fixed EMI for a specific number of years initially and after that term, you start paying larger EMIs. This is generally chosen by young earners who have just started their career and cannot afford to pay large EMIs initially and hope to pay larger EMIs as they grow in their profession.

At the end of the day, loans are liabilities and it is best to close them as quickly as possible, unless you are getting other benefits such as tax exemptions. It is best not to reduce your home loan interest calculation even if interest rates fall.

Source: https://blog.bankbazaar.com/what-is-emi-and-how-is-it-computed/

What are Home Loan process and its phases?

An Applicant approaches Bank with documents supporting their Employment, Income, Residence and Age Proofs.

The Bank then conducts a scrutiny of applicant’s submitted documents. After positive verification, the applicant is issued loan sanction letter. The loan sanction letter contains Bank offer to Applicant. This is Sanction process. If, applicant agrees through a mutual acceptance letter; he is given loan amount as part of disbursement process.

Ground Zero:

Each applicant is required to find out different home loan products and then compare them. Take your time and ask around as to how to go about home loan. Home Loan is a complex bank product and it is alright to little lost, as there are many factors to consider. If you have spent months finding the best nest for you, then you should spend the same time in Home Loan.

Sticking to Home Loan process, let’s assume you have decided upon a Bank X to apply.

1). Do your Home Loan Documents

The most frustrating part of taking a home is documentation. There is nothing smart about the documentation process. Here is a list of documents to prepare. Once you have ALL the documents, before calling Bank X, You have saved almost 2 weeks. (In typical scenario, Bank Agents take 3 documents, and then call 4 days later for 3 more and 2 weeks later for 4 more documents.)

2). Home Loan Application

Bank X will provide you a form to fill and submit. While you are at the bank, show them your documents and ask for GFE (Good Faith Estimate) of your Home Loan interest and processing Fee. Please take the form back home and take your time reading it. This will also give you time to compare bank X offer with Bank Y.

Note: Your home loan documents submitted are used for credit risk rating. Your Home Loan Interest Rates are only committed, after Home Loan Sanction process.

3). Submit Application

Fill out all details in home loan application form and take all your documents to bank X. Submit the form and documents to Bank official and take acknowledgement of all documents submitted. Ask the bank about the time they will take for Sanction process.

Note: Once you apply, the processing fee is non refundable, even on loan rejection.

4). Applicant Verification

(Address, Age, Income source, credit history, assets, liabilities etc.)

5). Condition Sanction Letter

If the Bank finds you credit worthy, they will lend you. An offer letter is sent to you by Bank. Or they are required to tell you the rejection reason.

6). Property Documents

Let the Bank now about decision. Good time to negotiate on the offer with Bank X. If you accept, Bank X now needs all documents for legal verification of yours (to be) property.

7). Property Legal Verification & valuation

8). Property Registration and Signing

9). loan for home

Source: https://loaneasy.in/home-loan-process/

Use an efficient way to calculate home loan EMI’s

The market of home loan in India is quite geared up due to aggressive advertising by banks & financial firms. From hoarding to bus backs, TV commercials to radio jingle, banks & finance companies are willing to display how home loans are offered at a competitive lower rate of interest, nominal processing fee, easy online documentation process and flexible repayment options. Besides, friends and relatives are always there to advice for the best home loan deals in India. But admist all this, it is important you stay alert to do sufficient research on all aspects of your housing finances.

Banks & institutions keep on introducing innovative home loan solutions to  meet the needs of house buyer from every section of the society. However, before choosing a particular loan, it is important you understand the parameters associated to loan structure such as the home loan eligibility amount, interest rate applicable, type of interest rate such as floating or fixed, processing & other charges like administrative or service charge, repayment options, etc.

If you personally sit down to do all these complex calculations on your own, you may find it extremely difficult to come up to the right consensus. Resultant would be, you may end up paying extra money on elements like the interest rate on total tenure, processing fee or pre-closure charges, etc. Therefore, leading banks and finance companies in India have introduced home loan EMI calculator under which you can fill in all the relevant factors and come to know the exact EMI that you should continue paying the banks or finance companies to repay your loan on time. When using home EMI calculators there are various elements like income source, employment status, tenure of  the loan, etc. taken into consideration. With the few relevant inputs it makes your decision careful and thorough. They  help individual mentally and financially prepare themselves for the requisite amount to clear off the loans on time. It helps them understand the nitty-gritty of the entire loan structure.

These calculators are available on websites and is provided for your convenience. While using you can enter the amount you wish to borrow along with the interest rate and tenure to determine your EMI to pay towards debt clearance.  Interest rates offered by different banks vary and using such calculator help you quickly determine your monthly payment under all scenarios.

Factors that will influence your home Loan while using home loan EMI calculators:

Income: The income plays one of the decisive role for loan amount and EMI you can pay to the bank. Usually 40 to 45% of your monthly gross income can be utilized for paying EMI, which again decides the amount of loan that you can borrow.

Expenses: Your monthly expenditure determines the amount of money you have in hand which to divert towards for loan repayment. So current expenses and future inflation will also count.

Lifestyle: It is advisable, always try to take a loan that should not let you compromise at least on the basic lifestyle needs. It should mean that you can continue to go for family outings, or eat in a restaurant, or meet other financial goals while repaying your loan.

Risk Appetite: An individual’s risk appetite and the attitude towards debt also matters a lot. You may opt for co-applicant for higher EMI deductible, quicker clearance of the loan. If you expect to get cash benefits in the near future, you might opt for foreclosure after some years of loan repayment. 

Planning for dream home needs very focused approach. Home loan EMI calculators are great step ahead towards easy solutions on house loan calculations and measured approach towards it.

What Happens after Your Home Loan is approved?

You’ve searched for your dream home. Now you’re looking for a Home Loan? If you’re wondering what happens after your Home Loan is approved, this is your quick guide to the post-application process.

Property assessment

First things first, property assessment! The property that you want to buy, as well as any property that you provide as collateral security will be inspected by a technical officer. If it is an under-construction property, the stage of construction and quality of construction is noted. If it is a completed property, the age of the property, internal and external maintenance, and development of the surrounding area will be noted by the officer.

Scrutiny of documents

The documents pertaining to the property will also be scrutinized by a lawyer. Generally, only the original documents for the property are accepted by the bank. The No Objection Certificates (NOC) need to be submitted to the bank.

Property Registration

You need to go to the sub registrar office for the registration of your property. You also need to pay your stamp duty and registration charges. After this process is complete, you will receive a copy of the Sale Deed and another copy will go to the bank.

Pay Your Part

The bank will ask for proof of your contribution to the loan. This is your down payment. You might need to give your bank statement, with a cheque or net banking details of transferring the money to the builder.

Disbursal of Home Loan

On your acceptance of the loan offer extended by your lender, the assessment is done and documents are scrutinized. The property also gets registered in your name. Once this is completed, you will need to submit the final processing fee to your lender by cheque.

When the processing fee is received by your lender, a cheque for the approved loan amount is prepared and given to you. Your Home Loan repayment schedule will begin one month after the loan is disbursed.

Funding Release

If you purchase an under construction apartment, your bank will release the funds in stages. This will be based on the construction progress. So, until the construction is totally completed, you needn’t pay EMIs for the whole Loan amount. Sounds fair? For a completed apartment or house, the funding will be released in one shot.

ECS Set Up

The Electronic Clearing Service (ECS) or the standing instructions need to be set up for your loan. Here, you need to sign ECS forms so that the EMI gets auto-debited every month. Earlier, this might not have been mandatory. Now, banks are making it mandatory to submit ECS forms for all Loans. This way, you don’t have to worry about forgetting the due date of your EMI.

Get Demand Letters

As and when the builder completes the construction of the house or apartment, funds will be released by the bank. You need to get a demand letter from the builder and give it to the bank whenever the funds need to be released. The builder needs to provide a receipt for the same. This receipt should be handed over to your bank

Additional Reading: home emi calculator

Getting a Home Loan is simple, really. If you’re ready to get one step closer to your dream home, why don’t you browse our offers on Home Loans?

Source: https://blog.bankbazaar.com/what-happens-after-your-home-loan-is-approved/

How Does A Home Loan Really Work?

Banks often publicize their housing loan interest rate, but they seldom explain the workings of a loan for home. While a housing loan is not very simple to understand, it isn’t rocket science either. In this article, we try to explain the workings of a housing loan, but first, you need to understand a few key terms:

Principal of a Housing Loan:

The principal of a housing loan is basically the amount borrowed and not yet repaid. For housing loans, interests are usually charged on this principal amount.

Housing Loan Interest Rate:

Interest rates for housing loans in Singapore are usually quoted as a fixed rates or SIBOR + a fixed value, in case of floating interest loans. For example, a floating rate loan could be quoted as SIBOR +1.25%.

Loan Tenure:

The loan tenure is simply the agreed length of a housing loan. In Singapore, homebuyers can take out housing loans with tenure of up to 35 years.

An Example:

Let’s assume you’re about to take out a home loan of SGD200,000 for 30 years, at an agreed interest rate of 1.75%. We also assume for the purpose of this example, that the rate is fixed for 5 years and then it’s estimated to be SIBOR +0.5% and SIBOR keeps stable at 1.25% for the whole duration. (Please note that in Singapore the fixed rate is fixed only for 1st few years and thereafter is pegged to Singapore Interbank Offer Rate (SIBOR)

Illustration:

Home Loan Amount: SGD200,000

Interest Rate: 1.75% per year

Loan Period: 30 years

Interest and Monthly Repayment Calculation:

The interest on all home loans in Singapore is calculated monthly. In this case, the 1.75% yearly would equate to a monthly installment of $714.49. However, out of 8473.88 dollars paid in the 1st year, the interest payment in the 1st year to be $3459.11.

This rest of the payment goes into bringing down the loan principal (what you owe on your home loan).

As your home loan interest is calculated based on what your principal, the interest on your loan from the second year onwards will be slightly lower.

In calculating the monthly amount you’re required to pay, banks use a formula called an “amortization formula”. This formula helps in calculating your monthly payment amount and works in such a way that by the time you get to your last payment (based on your agreed loan term); you would completely pay off your loan and all the due interest.

The monthly repayment amount usually remains the same for the entire term of your loan.

Love this post? Want to learn more about loan for home?

How EMI is calculated!!

I decided to purchase a house in Bangalore (an extremely tough task) and the first thing that struck me is equated monthly installment or EMI. This is the single most important parameter while taking any kind of loan. This is the amount outgo every month from your personal finances which will cover both the principle as well as interest.

I talked to few people and everyone is bit confused on how EMI is calculated. It is really simple and just few steps would enable you to calculate EMI at your end.

So here is a rather simply formula for calculating EMI.

You would wonder why EMI is called "equated", the reason is that EMI is nothing but loan amount plus total interest divided by loan tenure. If that is the case then why this complicated formula. The reason is because as you keep paying EMI, some portion of EMI goes as interest but some portion goes as principal repayment. So if you pay an EMI of Rs10,000 for a house loan, not the entire Rs 10,000 would go as interest payment, but some portion goes as principal repayment, which essentially reduces the principal on which further interest is calculated. It is extremely important to understand what goes for interest and what goes for principal repayment.

It is very clear (for mathematically inclined) that when Loan Amount goes up, so does the EMI. Similarly if the interest goes up again so does the EMI, but if 'n' (loan tenure) goes up, EMI reduces. A note of caution, a low EMI for longer period does not necessary means a good bargain. A good bargain depends on your requirements as well as the total interest you pay over the entire loan tenure.

Another thing to keep in mind is whether the reduction in loan amount happens on monthly basis or yearly basis. Any loan which reduces the principal on monthly basis should be given preference. A monthly reduction implies less interest payment from next month onwards, definitely a huge savings.

Also usually interest rates come in flavors of fixed and floating rates. A floating rate changes based on market's prime lending rate (PLR). A fixed rate stays fixed for the tenure of the loan. For a longer period of loan, my personal preference is always fixed interest rate, even if it is 1-2% higher, at least the monthly outgo is fixed, so planning of your outflows can be planned pretty well. I personally think that similar to rupee averaging for mutual funds, the floating rate almost remains same as fixed rate over a long tenure of home loan interest calculation. [The floating rate will go up and down and hence your monthly outgo]. And for short tenure loan, in a high interest regime, go for floating rate, but in a low interest regime choose fixed rate.

Source: http://www.articles.howto-tips.com/HowTo-Article-Directory/how-emi-calculated

Some Things to Note When Making Housing Loan Comparison

There are numerous forms of housing loan packages available in the market. When you make housing loan comparison, it is imperative that a fair comparison is made. Being negligent to this can result in comparing mortgages that does not make sense. Sort of like comparing an apple to an orange.

For example, it cannot be realistic comparing a 15 year mortgage to a 30 year mortgage. It also does not make sense to compare housing loans with fixed interest rate to those with floating interest rates. Make comparison between different mortgage lenders with near similar structure on lock-in period and interest rates. This can also vary especially if the mortgage lender is one that is willing to be flexible on their housing loan packages. You might even get into a situation where you have to choose between favorable prepayment penalties and favorable interest rates and vice-versa.

Adding up the total fees and charges at closing will give you a good picture of which offers are the most attractive on signing up. There can be a varying number of charges and fees carrying different labels. Mortgage lenders may treat these fees differently. One may give subsidies but charge higher processing fees. Another may waive processing fees provided you take up their in-house home insurance package. So it is best that you figure out these details on closing costs before making your choice on an offer. Add up all the fees involved to make a fair and proper housing loan comparison.

Note that lower interest rates will not necessarily mean a better deal for you. Look carefully into the terms of the deal. It can be low rate for only an initial first year of the loan, and much higher rates after that. Remember to question the details of closing costs before giving your commitment to accept a House Loan offer from a lender.

When you are fully aware that you are going to switch mortgage lenders after the lock-in period, you should take greater care in your offer selection. This is because the redemption penalty will be of meticulous concern to you. However, if you are willing to pay higher interest rates and obtain favorable penalty terms, tell your mortgage lender. You wouldn't know how flexible they can be if you don't ask.

For example, when you are looking at housing loan offers with a floating rate in Singapore, it is most commonly bench-marked to the publicly available Singapore Interbank Offered Rate (SIBOR) or Swap Offered Rate (SOR). A margin is added on top of the available rates, and that becomes your interest rate.

Generally, SIBOR is more stable while the SOR is more volatile in fluctuation. So an individual with an appetite for calculated risk may choose a housing loan bench-marked to the SOR when it is low. Do ask questions on current outlooks when deciding offers between these 2 benchmark rates. Because rates can change daily, the lenders are in the best position to provide you timely information on interest rates.

The most widespread deciding factor that influences an individual on a housing loan decision is the loan-to-value ( LTV ). The LTV is the amount that a mortgage lender is willing to offer the borrower for the housing loan. The common practice is to finance an amount based on the market valuation or purchase price of the property in question, whichever is lower. It simply means that a house has a current market valuation of $ 400,000 and you bought it for $500,000, the mortgage lender will only be comfortable to finance a portion of the valuation price at the lower value of the 2 - $400,000.

Don't assume that a lender will finance 80% of a property purchase just because you heard of it from a friend. Be careful on this and check with a lender on how much they are willing to finance. This is because different properties in different categories can be treated differently by a lender. They may be willing to finance 80% of properties in category A while only 60% of properties deemed to be in category B. whereas; a different lender may have an internal policy that is the other way around.

Different mortgage lenders can have differing lending policies. Factors like proposed redevelopment, location, etc, can be determining factors. So be careful when comparing housing loans. Decisions from one lender do not necessarily serve as a reflection of the whole market.

[Source: http://ezinearticles.com/?Some-Things-To-Note-When-Making-Housing-Loan-Comparison&id=5654350]