It is imperative to have a clear knowledge of the Home Loan EMI concept before you start the process of getting a Home Loan. Home Loan EMI is the Equated Monthly Instalment you pay to the lender each month until your loan is repaid. It includes the principal amount and the interest charged by the lender. This blog will discuss the top four things you must understand about your Home Loan EMI to make informed decisions.
1: Factors That Impact Your Home Loan EMI
Several factors impact your Home Loan EMI, and it is important to understand them to plan your finances accordingly.
- Loan Amount: The loan amount is the principal amount you borrow from the lender. A higher loan amount generally means a higher EMI.
- Interest Rate: The interest rate term is the rate at which the loan provider charges you for borrowing money. It is a crucial factor that affects your Home Loan EMI. Interest rates are of two types: fixed and floating. Your EMI remains the same for fixed interest rates throughout the loan tenure. In contrast, floating interest rates are subject to change depending on market conditions. Therefore, your EMI may fluctuate if you opt for a floating interest rate.
- Loan Tenure: The loan tenure is the period for which you take the loan. It is an essential factor that affects your Home Loan EMI. A longer tenure means a lower EMI, but more interest is paid over the loan’s tenure.
- Processing Fees: Lenders charge processing fees for processing your loan application. It is a one-time fee ranging from 0.5% to 1% of the loan amount. Processing fees can also impact your Home Loan EMI.
- Prepayment Charges: If you decide to prepay your Home Loan, the lender may charge you a prepayment penalty. Prepayment charges can also impact your Home Loan EMI.
- Taxes: Two types of taxes can impact your Home Loan EMI – Goods and Services Tax (GST) and Stamp Duty. GST is levied on the processing fees and interest charged by the lender. Stamp Duty is a state-specific tax levied on the loan agreement’s value.
2: Types of Home Loan EMI
There can be three types of Home Loan EMIs; fixed, floating, and hybrid.
- Fixed EMI: In the case of a fixed EMI, your EMI remains the same throughout the loan tenure, regardless of changes in market conditions. It provides stability to your monthly budget.
- Floating EMI: In the case of a floating EMI, your EMI is subject to change depending on market conditions. It is linked to a benchmark rate like the Marginal Cost of Funds based Lending Rate (MCLR), Repo Rate Linked Lending Rate (RLLR), or External Benchmark Rate (EBR). If the benchmark rate changes, your EMI may also change.
- Mixed EMI: A mixed EMI combines fixed and floating EMI. You pay a fixed EMI for a certain period, after which your EMI becomes floating for the rest of the loan tenure.
3: The Effect of Prepayments on Home Loan EMI
Prepayments are payments made by borrowers in addition to their regular EMI. As a result, prepayments can reduce your outstanding loan amount and interest liability. Therefore, knowing the impact of prepayments on your Home Loan EMI is important.
- Definition of Prepayment: Prepayment is a lump sum payment made by the borrower to reduce their outstanding loan amount.
- Impact of Prepayment on EMI: Prepayment can impact your EMI in two ways. First, it can reduce your EMI if you maintain the same loan tenure and only reduce the outstanding loan amount. In this case, your EMI will decrease as the outstanding loan amount reduces. Alternatively, you can maintain the same EMI and reduce the loan tenure. Your EMI will remain the same in this case, but you will pay off your loan faster.
- Benefits of Prepayment: Prepayment has several benefits. It reduces your interest liability, which means you pay less interest over the loan tenure. It also reduces your loan tenure, which means you become debt-free sooner. Additionally, prepayments can improve your credit score as it indicates your credit worthiness and financial discipline.
- Prepayment Charges: Lenders may charge borrowers for making prepayments. These charges are a percentage of the outstanding loan amount and vary from lender to lender. Therefore, it is important to check the charges before making prepayments.
4: Tips to Manage Your Home Loan EMI
In managing your Home Loan, EMI is crucial to ensure you do not default on your loan payments. Here are some tips for managing your Home Loan EMI effectively:
1. Plan Your Finances: Plan your finances before getting a Home Loan. Analyse your income, expenses, and other financial commitments to determine your EMI affordability.
2. Choose the Right EMI: Choose the EMI that suits your financial goals and budget. A higher EMI may mean paying off your loan faster but can also impact your monthly budget. A lower EMI may provide more financial stability but can also increase your overall interest liability.
3. Pay Your EMI on Time: Make sure you pay your EMI on time to prevent late payment fees and loan default. Late payment charges can increase your overall interest liability and impact your credit score.
Bonus Thing: Additional Costs Associated with Home Loan EMI
Apart from the loan amount, interest rate, and processing fees, there are other costs associated with Home Loan EMI that borrowers should be aware of. These costs can impact your overall loan amount and EMI.
- Insurance: Many lenders require homeowners to take home loan insurance. The insurance premium can be a one-time payment or a part of the EMI. In addition, insurance protects the borrower’s family from financial burden in case of unforeseen events.
- Property Tax: Property tax can impact your Home Loan EMI as it is a recurring cost that needs to be paid annually. Based on the value and location of the property, different states have different property tax rates.
- Maintenance Charges: Maintaining a property comes with additional costs like repairs and utilities. These costs can impact your EMI affordability and should be considered while planning your finances.