A home loan EMI has two components – a principal component and an interest component. In the initial years of your home loan tenure, the interest component in the EMI payment will demand a larger portion of the borrowing cost. However, as the home loan tenure reduces, a significant part of the borrowing cost is used towards the repayment of the principal amount.
Besides, several factors determine your home loan EMI payments. They include:
The amount of principal borrowed is a critical factor in determining the housing loan EMI. The payable EMI amount is directly proportional to the total amount borrowed. Such that, the higher the amount of home loan borrowed, the higher is the amount of EMI payments and vice-versa.
You can also use a home loan EMI calculator to check the EMI payments for your home loan, online.
Types of home loan interest rate
There are two types of home loan interest rates, namely – fixed ROI and floating ROI. In the case of floating interest rates, EMI amount changes with change in the base rate as they depend on the lending rates prevailing in the market. On the contrary, the EMI amount remains constant for the fixed home loan rates throughout the loan tenure.
Changes in the loan tenure
Generally, as home loan interest rates reduce throughout your loan tenure, either or both of these things can happen:
- Subsequent EMI payments are reduced
- Tenure of the home loan is reduced
However, if the interest rates increase during the home loan tenure, the result will be the opposite.
A home loan transfer
Your home loan EMI amount can change if you choose to go for a home loan balance transfer; also called refinancing. Since different lenders offer different home loan interest rates, the payable EMI changes as well. Most borrowers switch to lenders providing a lower interest rate to benefit from the lowered EMIs.
Revision in interest rates
This factor is only applicable to floating home loan interest rates. The interest charged on the outstanding principal balance is based on the prevailing lending rates in the market. If the lending rate is high, the interest charged will be higher and consequently, the payable easy home loan EMI will surge and vice-versa.
Home loan prepayments or part-payments
Repayments have a direct impact on your housing loan EMI. For instance, after buying a house, if you prepay or part-pay the principal amount, you can significantly bring down the payable EMI amount. This is because when the principal amount reduces, the interest levied on the outstanding balance also comes down. However, lenders often charge a fine for availing the prepayment facility.
When you apply for a home loan, bear in mind that your housing loan EMI can vary throughout the tenure, owing to the factors mentioned above.
Therefore, to make the most of your housing loan, always use a home loan calculator to estimate the EMI amount and the home loan interest, before you finalize the lender.
Furthermore, you must maintain a good credit score as that improves your home loan eligibility.