How to calculate your Home Loan EMI

A big part of getting a home loan is the EMIs that you have to pay for years and years afterwards. Equated Monthly Installment, also known as EMI is the part payment that you have to make to your lender bank every month. Your EMI consists of a part of the principal amount, plus the agreed rate of interest on your loan. The bank gives you a statement, stating the amount to be paid as your EMI; a lot of people do not know how to calculate EMI on their loans. There is no special home loan EMI calculator that tells you how much you have to pay every month. As a result they often feel that their banks are overcharging them.

If you’re one of those people then don’t worry, we’re here to tell you how to calculate your EMI with ease. Let’s take the example of Mr.X, who took a house loan for Rs. 5 lacs for a period of ten years, at the rate of 10.5%. He pays a monthly EMI of Rs 6,747. The bank calculates this EMI for him, and he feels he’s cheated. Here is an easy way for Mr.X to calculate his EMI.

The easiest way is to use a mathematical formula that has been derived to calculate EMIs. The formula reads, EMI = [P x R x (1+R)^N]/[(1+R)^N-1]. The P stands for the principal amount of your loan, R is the interest rate per month and N is the number of monthly installments to be paid.

Another way to calculate home loan EMI is with the help of Microsoft Excel Sheets. The formula used here is called the PMT. For this formula you need three variables, the rate of interest, the number of periods (nper) and the value of the loan. This formula is used universally for this purpose and when in doubt you can use it to calculate your own EMI. There isn’t any scope for error since it’s all done by a computer, which acts as your home loan EMI calculator.

So the next time you have to make an EMI payment, just use these formulas and you should be sorted.  

Fixed Interest Rates v/s Floating Interest Rates

Buying a new home can be a tedious process. You have to first select your dream home, put your finances in order, and then approach a bank or NBFC for a housing loan. If you’re lucky and your CIBIL score is good enough your loan can get sanctioned within days, but before that happens you need to agree upon an interest rate for your loan. Home loan interest rates are of two types, fixed rates and floating rates. Since home loan is usually a long term commitment, choosing between fixed and floating interest rates is usually a tough decision for most applicants.

Let us simplify this process for you, by explaining what both these interest rates actually mean and what they entail.

Banks and non banking financial companies offer both fixed and floating interest rates. Since interest rates are the most important aspect of any loan, getting it right is the key to repay without any financial stress or default over time.

Fixed rate of interest on a loan would mean that the equated monthly instalments or EMIs would remain constant over the tenure of the loan. On the other hand for floating interest rates, the EMIs would fluctuate as per the market dynamics as interest rate increases or decreases.

Fixed interest rates are always set higher than floating interest rates, by 1 to 2.5% at the time of the sanction of the loan. This is can be both and advantage and a disadvantage. Since these rates remain constant you don’t have to worry if there is a hike in the housing loan interest rates due to the passing of a bill or implementation of a new rule, but at the same time if the rates see a dip, there is no benefit to you.

Floating interest rates are usually lower than fixed interest rates although parameters like inflation and current account deficit are used in calculation of base rate by RBI which can mean an uncertainty and different EMI for each repayment or installment for the home loan. This can be difficult to keep track of as each installment may be different.

Both these rates have their own advantages and disadvantages.  Before choosing one, a borrower needs to do proper research as to which one best suits him. 

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