Institutions providing home loans intermittently come up
with new forms of loans that are devised to meet the needs of house buyers from
every section of the society. However, before choosing a particular loan, it is
very important to have a comprehension about the most important constituent of
the loan - the EMIs.
An EMI, or equated monthly instalment, is a certain amount
of money that is payable by you to the bank (in case you have taken a home
loan) in order to obtain legal possession of the house.
What is an EMI?
In plain financial terms, an EMI is the amount of money paid
by borrowers, each calendar month, to the lender, for clearing their
outstanding loan. This also means that a sum of money gets deducted from your
particular account irrespective of any sudden untoward financial stringency
faced by you. EMI payments are made every month, generally on a fixed date, for
the entire tenure of the loan, till the outstanding amount has been completely
repaid.
Emi Calculator
When it comes to segregating the sum that is payable towards
the loan, EMI is actually deduced based on an unequal combination of principal
and interest. In the initial years of the loan, a major portion of the EMI
comprises the interest payable by the borrower. As the loan matures, and as the
principal gradually gets paid, the outstanding loan amount reduces. The
interest component thus becomes lower than the principal, and finally minimal.
The EMI, though, stays as a constant amount each month, except in the following
cases:
Instances when the borrower paid a lump sum amount of the
outstanding loan, then this amount gets duly adjusted against the remaining
balance, thereby reducing the EMI. Now, in this particular case, the borrower
gets an option where he/she can maintain the EMI while reducing the loan
tenure.
In case the borrower has opted for floating rate of
interest, then the EMI varies according to market fluctuations.
The Emi Calculator
of your home loan is determined by four major factors
Principal amount: The principal amount refers to the actual
sum of money that is borrowed by the lender. Beyond question, the principal
amount is a major determining factor towards the EMI that is to be paid by you.
Rate of interest: The rate of interest is the rate at which
the borrower has taken money from an organization or market. This is the most
important factor when it comes to determining your EMI. The higher the rate of
interest, the greater is the EMI payable by you. It is always advisable to do a
market study of various interest rates offered by lending bodies and then
decide upon a particular product.
Loan tenure: The tenure of the loan refers to the duration
for which the loan has been taken. The longer the duration of the loan, the
lesser the monthly EMI burden on the borrower.
Method of computation: The method that is adopted to
calculate the EMI is a crucial factor when it comes to determining the EMI
payable by you. The various methods adopted are:
a. Annual reducing method: In this method of EMI
calculation, although the EMI is paid by the borrower at the end of every
month, the principal amount and the rate of interest is made at the end of the
year. This type of EMI calculation has a huge disadvantage attached to it, as
the borrowers continue to pay interest on a portion of the principal that has
already been paid back to the lender.
b. Monthly reducing loans: This is a better and
easy-to-understand method of EMI calculation and is usually the most common
calculation method adopted. In this calculation methodology there is a
reduction in principal with EMI being paid every month. The interest is
calculated on the outstanding balance.
c. Daily reducing loans: As the name implies, in this method
the principal reduces every day, with daily loan repayments. The interest is
charged on the outstanding balance. However, daily EMI payment is not a very
feasible option; hence this method is not a very popular method.
Loan amortization schedules
A loan amortization schedule is a product that contains home
loan information such as period of scheduled payments, amount borrowed and
amount outstanding. It also gives a detailed breakup of every EMI towards
repayment of interest and the outstanding principal of the loan. The
amortization table is prepared with the use of financial mathematics by
financial institutions. It helps borrowers make vital decisions about their
loan, on prepayment or refinance. It also provides details of interest for tax
related benefits.
Step up and step down Emi
Calculator
EMIs are at times planned according to the expected increase
and decrease in the salary of the borrower.
In step up EMI, the EMI is gradually increased on the
premise that the salary of the borrower will increase in the future. In this
system, the initial EMI charged is less, and it increases as the expected
income of the borrower increases. The change in EMI would be done twice during
the entire loan tenure.
Similarly, in the case of step down EMI, the initial EMI
charged is substantially higher and it gradually reduces with the number of
payments done.
Pre-EMI and advance disbursements
There are instances where the borrower may opt for a partial
disbursement of their home loan on the basis of the stages of construction of
their house. In such cases, a pre-EMI is to be paid every month till the final
loan is disbursed. The real loan repayment would commence only after the entire
loan is disbursed. This pre-EMI would, therefore, comprise only the interest
accrued on the disbursed money.
Also, there are cases when the entire loan may be disbursed
by lenders before the completion of house construction. This is known as an
advance disbursement and is undertaken by the lender when it is requested by
the borrower and the lender is convinced of the capabilities of the builder to
complete the construction work in time.
In these cases, the EMI payment starts immediately from the
date of disbursement.
Fixed and floating rate of interest
Emi Calculator can
be calculated either on a fixed or a floating rate of interest.
Fixed rate of interest: A fixed rate of interest is charged
throughout the loan tenure, thereby making the EMI payable a constant sum. It
is generally better to opt for a fixed rate only when the prevailing interest
rates have reached rock bottom levels and if an upward trend is anticipated.
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