How to Calculate the Best Home Loan EMI for Your Needs

Owning a home is a dream for many individuals. With the right planning and execution, it's possible to make that dream a reality.

Securing a home loan through a bank, non-banking financial company (NBFC), or neobank is a popular route to homeownership. However, with numerous lenders offering home loans, finding the right one can be overwhelming.

A home loan calculator can provide an accurate estimate of the total cost involved, empowering individuals to make informed decisions.

Let's explore how to use a home loan calculator to find the best loan for your residential needs.

Understanding EMI (Equated Monthly Installment)

Let's delve into the concept of EMI and its significance in a borrower's decision-making process.

An EMI is a fundamental component of a home loan. It represents the fixed monthly payment that a borrower makes to the lender. This payment continues until the completion of the loan tenure.

The EMI comprises two parts - principal amount and interest. Initially, the interest portion is higher, while the principal amount is lower. However, with each successive EMI payment, the interest portion decreases, and the principal amount increases, gradually leading to loan repayment.

Home loan seekers always seek the most cost-effective option. However, manually calculating the optimal EMI and tenure to minimize the overall loan cost can be a daunting task.

Flexible vs. Fixed vs. Floating Home Loan EMIs

When obtaining a home loan, borrowers have the option to choose between flexible, fixed, or floating EMIs. Let's explore the distinctions among these alternatives:

1. Flexible Home Loan: This type of EMI varies during the loan tenure. In a step-up loan, the EMI gradually increases, while in a step-down loan, it decreases. A flexible EMI ensures that the loan's progression aligns with your predicted monthly cash flow to prevent defaulting on payments.




2. Fixed Home Loan: With a fixed EMI home loan, the EMI remains constant throughout the loan tenure.




3. Floating Home Loan: In this type of loan, the interest rate fluctuates with changes in the repo rate. The repo rate is the rate at which a country's central banking authority, such as the Reserve Bank of India, lends money to commercial banks. Consequently, your interest rate may decrease when the repo rate falls and vice versa. The lender may adjust the loan tenure to maintain a consistent interest rate.

While a floating interest rate offers the benefit of potential interest rate reductions, it also entails the risk of rate hikes.

Benefits of Using a Home Loan Calculator

With various home loan EMI options, interest rates, and tenures available, borrowers often encounter numerous questions. Should you opt for a lower EMI and extend the loan term? Or should you choose a higher EMI to repay the loan quickly? Additionally, borrowers may face multiple interest rate options from different lenders.

A home loan calculator simplifies this process and eliminates calculation errors. It's an online tool that allows potential borrowers to estimate their Equated Monthly Installments (EMIs) for a specified tenure. This tool plays a vital role in helping borrowers plan effectively for this significant financial milestone.

By leveraging a home loan calculator, borrowers can determine the optimal principal amount-EMI-tenure combination that aligns with their budget and monthly cash flow. This tool is free to use and can be utilized multiple times to ensure accurate planning.

Factors Involved in Home Loan Calculation

Prior to utilizing a home loan calculator, it's essential to understand the various factors involved and their respective roles in determining the loan value. These factors include:

• Equated Monthly Installment (EMI): The monthly payment made by the borrower to the lender until the loan is fully repaid.

• Principal Amount: The initial loan amount borrowed to fund the home purchase.

• Interest Rate: The percentage charged by the lender on the principal amount. Interest rates may vary among lenders.

• Tenure: The duration, in years and months, within which the borrower must repay the loan.

Note: Some lenders may also charge a home loan processing fee, which varies and is not included in the calculator.

The formula used by home loan calculators

Here is a snapshot of the formula used by home loan calculators to arrive at the exact EMI to be paid for the loan at a monthly frequency.

• E refers to EMI

• P is the principal amount

• R is the rate of interest per month

• T is the loan tenure in months

Formula: E = [P x R x (1+R) ^T] / [(1+R) ^T-1]

Here's an example of the calculation. Let's apply the formula assuming that you avail a home loan of INR 50 lakhs for a tenure of 10 years at an interest rate of 8.5 % p.a.

R = Annual Rate of interest/12/100
R = 8.5/12/100 = 0.007
E = [50,00,000 x 0.007 x (1+0.007) ^ 10] / [(1+0.007) ^ 10-1] = 61,993

According to the home loan calculator, the EMI that must be paid for a 10-year tenure is INR 61,993.

Factors Affecting Home Loan EMI

Various factors influence the overall cost of your home loan. Understanding each variable's significance is crucial:

• Calculate the principal amount accurately. A higher principal amount results in a higher EMI. Exercise prudence when determining this amount.

• Opt for credible lenders offering lower interest rates. However, prioritize credibility over low interest rates to avoid potential risks.

• Select the loan tenure carefully. Longer tenures lead to higher overall interest costs. Ensure the tenure aligns with your monthly payment capability.

• Be aware of one-time processing fees charged by lenders. Understand the processing fee's value and any associated charges, as it's typically non-refundable.

Home Loan Tax Benefits

Home loan borrowers can leverage tax benefits under the Income Tax Act of 1961:

• Claim tax deduction up to INR 1.5 lakhs per annum on the principal amount under Section 80C.

• Avail tax deduction up to INR 2 lakhs on the interest component paid during the financial year under Section 24.

• Claim an additional deduction of INR 50,000 on the interest component over and above Sections 80C and 24 under Section 80EE.

Advantages of a Home Loan Calculator

A home loan calculator empowers borrowers to make informed decisions with long-term financial implications. Here's how it simplifies your finances:

• No prior financial knowledge or mathematical skills are required to use the calculator. It's a user-friendly tool to identify the best variables for a cost-effective home loan.

• Experiment with various variables to find the most affordable loan. Adjust principal amounts, interest rates, and tenures to discover the optimal combination.

• Compare interest rates from different lenders to minimize interest costs. Negotiate for lower rates based on your findings.

• Validate information provided by lenders and ensure accuracy. Prevent potential errors or misinformation.

• Recalibrate your loan terms to pay it off faster if desired. Use the calculator to adjust variables and accelerate your repayment.

Using the Swipe's Home Loan Calculator

The Swipe home loan calculator simplifies EMI calculations for potential borrowers:

Enter your principal amount, interest rate, and loan tenure in years to receive instant results. The calculator is free to use and can be utilized multiple times.