A home loan has various components like the loan amount, loan tenure, interest rate, and most importantly, the EMIs. Therefore, before you apply for a home loan, it is wise to inform yourself about the key elements of an EMI.
Here are some of the most frequently asked questions about home loan EMIs:
What is an EMI?
An Equated Monthly Instalment or EMI is a fixed payment made by the borrower to the lender every month until the entire outstanding loan amount is repaid. It comprises of two components – interest and principal.
How is an EMI Calculated?
Your EMI payments are directly proportional to your home loan amount and interest rates and inversely proportional to the home loan tenure. The mathematical formula used to compute EMIs is:
EMI = P x r x (1 + r) n/ ((1 + r) n -1), where P = loan amount, r = interest rate, and n = tenure in months
To illustrate: if you borrow a loan of Rs. 1 lakh at 10% interest rate for 12 months, then your estimated EMI is Rs. 8792.
What Factors Affect the Home loan EMI?
Primarily, three factors that affect the EMI amount:
- Home loan interest rates – the rate at which the interest is charged on the outstanding loan amount
- loan amount – the total amount of loan borrowed
- Home loan tenure – the period for the loan repayment as agreed on by the borrower and the lender.
Can EMI change During the Home loan Tenure?
For fixed interest rates, the EMI amount remains the same, throughout the home loan tenure. However, there are some reasons why your EMI can change during the home loan tenure, such as –
- Floating interest rate – If you opt for a floating interest rate, then your EMI payment will depend on the market trends. If the base interest rates fall, then the EMI amount will be reduced, and vice-versa.
- Progressive EMIs – If you opt for progressive EMIs, your EMI payments can increase over the home loan tenure. In a progressive EMI repayment schedule, you pay a lower EMI amount for a specific term. After that, the EMI amount increase as your income does.
Can You Pre-Pay the EMI?
Yes, some lenders do allow you to make prepayments or lump sum payments towards your outstanding home loan amount. However, some lenders charge a penalty on EMI prepayments so it is wiser to check with your lender before prepaying your home loan EMIs.
Can I Get Tax Benefits On EMIs?
Yes, borrowers paying regular EMIs are eligible for home loan tax benefits. They can secure tax exemptions on both the interest and the principal component of the EMIs. As per the ITA, you get:
- A deduction of up to Rs. 1.5 lakhs on the repayment of the principal amount
- A deduction of up to Rs. 2 lakhs on the repayment of interest
Overall, EMIs are a crucial part of a loan. So, before you apply for a home loan, estimate the EMIs by using a home loan EMI calculator, and make an informed choice.