A Process to Calculate Interest Rate on Home Loan

Home Loan is a very popular way to finance the purchase of your home. Getting a Home Loan is easy but you often find it difficult to calculate the interest paid on it.

When you take a Home Loan, it is very important to know about the calculation of your interest so that you do not get fooled.

  • What is the Interest Rate on your Home Loan

The interest that you pay on your Home Loan is a part of your monthly instalment or EMI i.e. Equated Monthly Instalment. There are two types of interest rates that lenders offer on your Home Loan.

  1. i) Fixed Rate: This interest rate is fixed during the entire tenure of the loan which means that you will pay a fixed amount as interest and EMI every month. This rate of interest helps you in planning your financial budget.
  2. ii) Floating Rate: In floating interest rate, the rate of interest fluctuates according to the market lending rate. So the amount of interest and EMI also keeps changing every month. This rate is cheaper than fixed interest rate because of the risk of fluctuation.

Once you have decided about the type of Housing Loan interest rate you want to avail, you can calculate the EMI payable on your loan.

  • What is EMI

EMI or Equated Monthly Instalment is the monthly instalment that you pay to the lender for the repayment of your loan. This monthly repayment includes both your principal amount and the interest portion.

EMI is paid on a fixed date every month till the entire loan is repaid. The tenure of your loan is being determined by the amount of your EMI. If you pay a higher EMI, your loan gets repaid in a shorter period of time, and vice-versa.

  • How is EMI Calculated

Since interest forms a part of your EMI, it is very important to understand how your EMI is being calculated.

The formula for computing Home Loan EMIs is:

EMI = [ P x R x (1+R)^N] / [(1+R)^N-1], where P stands for the loan amount or principal, R is the interest rate per month and N is the number of monthly instalments.

You can use this formula to calculate EMI on your own. Alternatively, you can use Home Loan EMI calculator available online on different websites for EMI calculation. If you know the amount of your EMI, your lender can never charge you excess interest.

A loan amortization table can help you further about your repayment outflow. It is a data table that provides details about your loan balance, principal paid and interest paid for every month. You can compare different loan options by using this table.

The Bottom Line

Now that you know how to calculate your Home Loan interest, you can evaluate different loan proposals before making a selection. By doing that, it can help you in taking the right decision.

Post Author: Jennifer Slegg

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