When you are thinking for a home loan, it is important that you understand how a home loan repayment calculator works.
What does Home Loan Repayment Consists of?
Home loan repayment is the Equated Monthly Installment (EMI) that you need to pay to the lender until the loan amount is fully paid off. As the name suggests, the payment is made on a monthly basis. It has two components: (a) part of the principal and (b) interest on the principal. Simply put, EMI is the sum of the principal amount and interest on the principal divided by the loan tenure (in months).
How does the Repayment Calculator Work?
To make things easier for borrowers, many lenders provide an easy to use home loan repayment calculator on their websites which computes EMI for different combinations of principal loan amount, interest rate and tenor of the loan.
All you need to do is enter the following information and the calculator will compute the monthly payment for you.
The amount of loan you want (principal)
The rate of interest available to you (interest)
Term of the loan (in years or months)
The method of computation (optional)
Annual reducing method: the principal amount and the rate of interest are made at the end of the year.
Monthly reducing method: monthly reduction in principal as the EMI is paid monthly and the interest is calculated on the outstanding balance.
The annual reducing method is disadvantageous to the borrower and therefore the monthly reducing method is commonly used in EMI calculation.
Is the Result Displayed by the Calculator Easy to Understand?
The home loan repayment calculator displays an easy to understand payment schedule and visual charts. A tabular breakdown of the two components of an EMI, principal and interest, is provided in the monthly payment schedule. It also indicates the loan balance after every payment. The colourful charts display what percentage of the total payment that you will make, consists of the principal and the interest. The longer the tenure of the loan, larger is the interest percentage.
When you have an idea about how much EMI you want to pay and the interest rate you can get for your home loan, you can calculate the time it will take for you to repay your loan by using some home loan repayment calculators which calculate the tenure of a loan.
With the help of the repayment calculator you can determine if you are comfortable with the EMI based on your current monthly income and other commitments you might have, thereby, determine your home loan eligibility. For a long term financial commitment such as this, you must gather all the information you can get so as to get the best deal available.
Author Bio: Arwind Sharma is a financial advisor with an experience of more than 7 years. He has worked for topmost financial firms in India and has been a visiting faculty at many reputed institutes in India. Currently based in Pune, Arwind Sharma is a name to reckon with when it comes to financial management for big brands. A post-graduate in business economics, he is an alumni of Princeton University, USA. During his free time, Arwind teaches children from marginalised sections of society and also work on his blog.