A home loan is offered to individuals that want to buy a new property or house. Home loans are also provided for constructing a new house/apartment. Home loans are high secured loans offered by all financial institutions.

For acquiring a house loan, an individual must pledge collateral. People can buy or construct their dream house with the help of a home loan. They have to return the home loan amount to their respective financial institutions. Once someone has fully paid the home loan amount, the ownership of the property is transferred to their name.

Some people are often confused about interest rates on home loans. Read on to know ways to calculate the interest on home loans.

Understanding Home Loan EMIs

House loans are repaid via pocket-friendly EMIs. People who don’t have ample money to buy a house opt for loans. Since the loan amount is significant, people cannot repay the lender at once. For the same reason, lenders break down the repayment into EMIs. Usually, EMIs are paid on a fixed date every month.

Some financial institutions may also offer quarterly or half-yearly EMIs. An individual pays EMIs until the entire loan amount is returned to the respective financial institution.

EMI is calculated by the respective lender while approving the home loan application. An individual will get to know about the number of EMIs and their amount beforehand. EMIs are calculated based on a standard formula by financial institutions. EMIs depend on the principal amount, interest rate, and other factors. You can calculate EMIs for a home loan via an online tool.

Many financial institutions extend digital platforms for consumers to check EMIs. With an EMI calculator online, one can know the number of EMIs for a given home loan amount.

Many believe that home loan EMIs are an easy breakup of the home loan amount. Well, a financial institution will need some extra money apart from the amount given in the form of a home loan. One can call it the earnings made by financial institutions by offering home loans. Financial institutions earn their profits by taking interest charges from individuals.

Every EMI paid to the lender will constitute some portion of the principal amount and the interest charge. The interest rate is a percentage of the remaining principal amount.

Understanding Home Loan Interest Rates

Home loan interest rates are dynamic and can change from one financial institution to another. Also, there are different types of interest rates applied to house loans. Interest rates applied on home loans are as follows:

Fixed Rate

The first type of home loan interest is the fixed rate. Financial institutions that apply fixed rates charge the same interest rate for each EMI.

Throughout the home loan tenure, the interest rate remains the same. In the future, if the market interest rates go down, the fixed rate won’t change.

With a fixed rate, an individual knows the exact amount to be paid monthly. With fixed interest rates, it is easy to create a budget.

Floating Rate

The second type of home loan interest rate is the floating rate. Floating rates are dynamic and depend on the market lending rate. If the market lending rate goes high, the home loan interest rate will also go up.

People cannot predict their home loan interest charges with floating rates.

Also, the EMI amount can change from one month to another due to fluctuation in the market lending rates. Some financial institutions allow consumers to switch to a fixed rate from a floating rate after a charge.

How Do I Know the Home Loan Interest Rate?

The lender will notify you about the interest rate before approving the home loan amount. One can also use an online home loan interest calculator to understand the total interest charges during the loan tenure.

Usually, financial institutions use the loan amortization schedule to inform the interest charged to the applicant.

After each EMI, a loan amortization table will include the starting and closing balance. The loan amortization table will also mention the interest charge and principal amount paid in each EMI.

Let’s understand the home loan interest charge with an example.

Consider an individual who has taken a home loan of INR 30,00,000. Let’s say the interest charge is 9% throughout the home loan tenure. Let’s say the EMI paid in the first month was INR 3,00,000.

Since the interest charge was 9% of the principal amount, INR 2,70,000 was paid as interest charges in the first EMI. The remaining INR 30,000 will be deducted from the principal amount. The new principal amount after the first EMI will be 29,70,000.

Also, the interest charge will now be applied to the revised principal amount for the next EMI. The same goes throughout the tenure of the home loan until the principal amount is entirely returned.

Conclusion

It is important to understand the different types of interest rates and the methods to calculate them on your loan. You can make wise and feasible decisions when you understand how they work, leading to less burden and more stability.

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