What is an EMI and how is it calculated?

Buying a home is a big step and one of the terms we keep hearing often throughout the loan process is EMI. So what is an EMI and do you really need to be intimidated by it?

EMI, which stands for Equivalent Monthly Instalments, is the monthly amount we make for the loan we have chosen. The amount of a mortgage that a borrower can afford is determined primarily by the Equated Monthly Instalment (EMI) that the borrower will have to pay. Though there are many EMIs available in the financial world, we will only be discussing home loan EMIs and how to calculate them here.

Online loan EMI calculator

When applying for a mortgage loan, the EMI of a home loan is calculated by the lender based on the loan amount, the authorised interest rate, and the loan term. On various websites that offer financial services, you may see a home loan EMI calculator that requires three details such as principal, loan term, and home loan interest rates. The user only needs to enter important fields such as principal, loan term, interest rate, etc., and the calculator will calculate the EMI amount based on the provided information. The free online tool will tell you the exact amount of EMI you need to set aside so you can plan a budget to keep other major monthly expenses the same. The advantage of EMIs for borrowers is that they know exactly how much they need to pay on the loan each month, which can make personal budgeting easier. EMIs help banks and finance companies assess borrowers’ eligibility and the loan amount that can be allocated to them. Women borrowers also receive special interest rates from many lenders. There are a number of online calculators available to help you easily calculate the EMI of your home loan.

How to calculate loan EMI?

The EMI amount on a mortgage loan must be calculated not only when a new loan is taken, but also when a loan is transferred or switched to another lender. Here’s how you can calculate the EMI you’ll have to pay on your mortgage. To get a rough idea of ​​mortgage eligibility, start with your total annual income. Knowing the actual cost of the loan and less applicable fees can help you determine the terms of the loan. The Home Loan EMI Calculator helps the borrower understand the EMI payable on an order entered into with an interest rate based on the loan amount and mandate. You can simply keep entering various amounts of principal (adjusting the down payment), interest rates, and securities and keep track of EMI payable based on these figures.

How to do the maths?

To calculate the monthly EMI for your mortgage, you can enter numbers or use the slider on the calculator to adjust the values ​​for the principal (P), tenure (N), and interest rate (A), depending on the type of calculator available on the website of lenders. The EMI fixed rate formula is calculated by adding the principal amount of the loan and the principal interest and dividing the result by the number of periods times the number of months. In the reduced balance method, each interest payment is calculated based on the principal amount, even if the outstanding loan balance is gradually repaid.

If you choose to keep the loan term constant, your EMI payments will be reduced. In the case of a loan mandate, while the total interest payable increases as the mandate increases, EMI payments decrease as the mandate increases. Another major factor that determines EMI payments is the type of interest on the loan. EMI usually remains fixed for the life of the loan and must be repaid monthly over the life of the loan. However, when it comes to loans, the word “EMI” will eventually appear because the amount we borrow must be paid back to the lender with interest.

If you want to start repaying the principal immediately, you can select a tranche of the loan and start paying EMI on the cumulative amounts repaid. Your repayment over the term is shown in the loan repayment schedule, a tabular representation of how much interest and principal you pay, as well as the remaining principal at the end of each month.

Though it may sound complicated, EMIs are now an everyday thing. Any bank employee or loan processing agent will help you understand EMIs and the finer details regarding it. But also make sure you ask the right questions like floating interest rate, the duration of the loan, and if you can change the EMI to suit your changing income. It’s time to be your own house owner!