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How Home Loan EMI Is Calculated?


Today interest rates,whether depsoits or home loans,going up.Do not get surprised if your banker send you a letter about your installment period  goes above your retirement age.This happens as normal practice is EMI remains fix and with increase in interest rates on floating loans tenor increses.

How this EMI is calculated???

Mathematical formula for EMI calculation is:

(P*\frac{R}{12})*\frac{(1+R/12)^n}{(1+R/12)^{n-1}}

Where:P is principal or loan amount,R is the interest rate  and n number of monthly installments.

Formula is very simple and calculator can also be used to calculate the EMI.

If we take an example for loan amount of Rs.10 lakh with interest rate of 10% and total number of monthly installments 120 then calculation looks like below.Assumptions made are that no loan processing charges have charged and interest rate remain fixed for the complete tenor.

EMI comes to be : Rs.13,215.

EMI payment schedule will be:Only selected 4 installments choosen.

Installment No EMI Amount Interest Principal Loan balance
1 13,215 8,333.33 4,881.75 9,95,118.25
10 13,215 7,954.76 5260.32 949310.66
42 13,215 6354.76 6860.31 755711.27
120 13,215 109.22 13105.86 0.00

 

One can calculate Monthly payment schedule (amortization schedule) using following calculator:

 

For first few installments,interest component is much more than principal component.In above example shown above calculator,principal overtake interest on 42nd installment and principal will deducted more from that point,,till last installment where interest component is very negligible and loan balance gets zero,What a relief!!!

 


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2 Responses

  1. Amazing information on the home loan emi topic

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