How to Calculate Interest on a Home Loan – Valuable Tips

In India, most home loan applicants take their borrowing decision based on the interest rate. It has a significant impact on repayment. Read on to know more about how to calculate the interest on the home loan.

If you wish to you apply for a home loan, the interest rate is one of the most important things you must consider as it has a direct effect on how affordable the loan is and how easily you can repay it. Since you repay the loan in equated monthly instalments or EMIs, which consists of both the principal and the internet components, the lower the interest rate, the easier it would be to repay.

When you look for a lender, it is paramount that you do your research well about the prevailing interest rate in the market, and choose the lender that offers loan at a competitive interest rate. Also, it crucial that you calculate your home loan interest rate beforehand so that you have a fair idea about the amount you must repay during the loan tenure.

How is the home loan interest rate calculated?

In India, most home loan lenders offer loans with a fixed interest rate or floating rate. As the name suggests, if you opt for a fixed-rate loan, the interest remains the same throughout the loan tenure. However, if you choose for a floating rate loan, the interest may vary from time to time based on several factors. To determine the exact value of either type of interest, financial organisations consider various factors such as:

The Reserve Bank of India (RBI) guidelines

If there are any changes in the RBI guidelines, it will influence the interest rate. For instance, if the RBI revises the base interest rate, the lenders will change the interest rate accordingly, which in turn would affect your home loan.

Credit score

When you apply for a home loan, the lenders usually consider your credit score as one of the critical parameters to sanction the loan. Your credit score determines your creditworthiness, and if your score is high, the lender may offer you a home loan at a discounted interest rate. But, if your credit score is low, then lenders may consider you a high-risk borrower and may charge you high interest.

Supply of money

When the financial organisations have more money to lend, as it was the case after the demonetisation, they can offer home loan at lower interest. However, if the economy is dull, and there is a shortage of money, the lenders are likely to charge a high-interest rate.

How can you calculate the home loan interest using an online calculator?

The best way to determine the exact interest amount in your home loan EMI is to use the below formula:

EMI = [P x R x (1+R)/\N]/ [(1+R)/\N-1]

In the above formula,

P is the principal amount you apply

R is the interest rate

N is the loan tenure

Calculating the EMI using the above formula manually can be cumbersome, and there are chances that you may commit errors. To avoid the human mistake and accurately calculate the home loan interest rate using the home loan interest calculator.

Apart from being easy to use, and providing accurate results, the online interest calculator allows you to calculate the interest amount multiple times by adjusting the principal amount, interest rate and the loan tenure, and know the exact interest amount you must repay. By understanding the interest amount and the EMI amount, you can choose the right loan duration so that it is easy for you to repay without compromising on other home expenses. Also, by knowing the exact interest amount, you can plan your finances well and decide the budget for buying a home.

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