Home Loan

How to separate EMI and Principal amount in Home Loan

Many people, nowadays, are going for a home loan to buy a house. A home loan is mainly financed for purchasing a ready apartment. While the amount of a home loan will depend on your requirement, it is essential to calculate the EMI structure before you borrow it.

The repayment of a home loan will mainly comprise of two parts such as the principal and the rate of interest. Along with the tenure of repayment, these together calculate your monthly installments. The monthly installment or EMI needs to be paid on a specific date of every month failing to which will result in a worse situation. Moreover, when you are borrowing a home loan, it is crucial to check how monthly home loan EMI is calculated and whether the amount you’re going to pay is according to the calculation or not.

To check your monthly installments, you can use a home loan EMI calculator. Here are a few steps following which you can check the structure of your EMI in detail.

How your monthly EMI is structured?

In general, people opt for a home loan to buy a house and from the upcoming month, start paying the monthly installments whatever comes to their repayment bill. However, your EMI calculation is done upon the principle you borrow, the rate of interest and tenure.

When you pay your monthly instalment, a part of it will go as your interest and the other part of it will be paid against your principal. So, with each month’s EMI that you pay to the bank, you are covering some part of your principal as well. As a result, the rate of interest in the upcoming month will be calculated on the remaining principal, the amount of which would be less than the last month’s payment. Thus, with every passing month, you will be paying a less amount of EMI, and your loan is covered in this manner.

How longer tenure results in a higher interest?

There are many confusions among borrowers regarding the adverse effect of the tenure on the interest rate. Generally, a more extended period of repayment results in a higher rate of interest and vice versa. This is because the bank is providing you with a home loan for a longer period, the rate of interest for which will also increase. On the other hand, if you opt for a lesser tenure, the rate of interest will also be less.

It is worth noting that the rate of interest that is applied in your EMI is fixed. Further, with the reduction in the principal amount, your monthly installment also reduces.

Most of the people go for a longer tenure, thinking that would make the fore-closure and thus save themselves from the headache of higher EMI. However, least do they know that in case of failure, they would end up paying a relatively higher amount of debt.

If you choose a shorter tenure, you will not have to pay less interest, but it will also benefit your credit score. The sooner your loan gets paid, the better your credit score will be. Hence, you can enjoy the benefit of better interest next time you apply for a home loans in India.

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