Know How EMI is Calculated
Dec 26, 2018 Home Loan
Getting your dream home is not impossible anymore as you have an option of home loans. This has opened opportunities for many to own a house even if the bank balance does not permit to do so. However, as it seems easy, it is equally a crucial decision to make. One must take utmost care while taking a home loan because it comes with a commitment of paying equated monthly instalment (EMI) every month.
Therefore, there are a few things you should know about EMI calculation.
Therefore, there are a few things you should know about EMI calculation.
Understanding EMI
Remember that your eligibility to avail loan depends on the capacity of repayment that you can make. For that, your lender performs various checks before loan sanction. Then the lender fixes a tenure of repayment of the principal as well as interest amount, in the form of EMIs.
Of course, your lender calculates the EMI for you and all you need to do is to make your monthly payment. However, it is wiser to calculate home loan EMIs beforehand so that it matches your lender’s calculation. This will be a heads up to your monthly expenses that you might have to adjust to accommodate the EMI. Roughly, you should spend around 40 percent of your in-hand salary at max towards home loan EMI payment. Besides, if there is a mismatch in the calculation, you can verify the calculation done by your lender and ask for correction if required.
Of course, your lender calculates the EMI for you and all you need to do is to make your monthly payment. However, it is wiser to calculate home loan EMIs beforehand so that it matches your lender’s calculation. This will be a heads up to your monthly expenses that you might have to adjust to accommodate the EMI. Roughly, you should spend around 40 percent of your in-hand salary at max towards home loan EMI payment. Besides, if there is a mismatch in the calculation, you can verify the calculation done by your lender and ask for correction if required.
Know about the actual calculation of EMI
You can do it in three ways:
- Calculate by using a simple mathematical formula.
- Do it by using an excel sheet.
- Use online EMI calculators for the calculation.
Here is the mathematical formula and its application:
EMI = P x R x [{(1 + R)^N} / {1 – (1+R)^N}]
Where,
P stands for the principal loan;
R stands for your monthly interest rate [(annual rate/12)/100]; and
N stands the total number of months during the loan tenure.
Understand the PMT formula
The present value of payments (PMT) is an Excel function that allows you to calculate your EMI. To calculate EMI with PMT formula,
PMT (R, NPER, PV)
Where R here stands for rate of interest (8.50 percent);
NPER stands for the number of months over which the amount is to be paid. (240 months); and
PV stands for the present value of the loan, with the principal amount (INR 50,00,000).
Following is the stepwise process to reach the calculation:
EMI = P x R x [{(1 + R)^N} / {1 – (1+R)^N}]
Where,
P stands for the principal loan;
R stands for your monthly interest rate [(annual rate/12)/100]; and
N stands the total number of months during the loan tenure.
Understand the PMT formula
The present value of payments (PMT) is an Excel function that allows you to calculate your EMI. To calculate EMI with PMT formula,
PMT (R, NPER, PV)
Where R here stands for rate of interest (8.50 percent);
NPER stands for the number of months over which the amount is to be paid. (240 months); and
PV stands for the present value of the loan, with the principal amount (INR 50,00,000).
Following is the stepwise process to reach the calculation:
- Firstly, key in your loan amount, in a sheet. Mention the currency while keying the amount for an accurate result.
- Mention the interest rate with percentage sign while keying o key. Her
- Mention the number of years for tenure.
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