Negosentro | How To Reduce Your Home Loan EMI Burden | A house of their own is a dream for many and housing loans help this dream come true. Not to forget, this home loan could become the biggest liability in their life. The EMI they have to pay each month could become a burden in future if not checked earlier. It is advised to use a home loan EMI calculator to know the EMI amount before finalising on a home loan.
You can reduce your home loan EMI burden if you act wisely. Here are some innovative ways to do so.
Higher Down Payment
A down payment is the first amount you invest in purchasing a home. If you pay a higher down payment, this will ensure your financial stability for the lender. As a result, the lender could provide you with a lower interest rate, reducing the EMI you have to pay.
Shorter Loan Tenure
It is a known fact that a longer loan tenure invites a higher interest payout. Even if the EMI amount is less, you may have to pay more. Generally, a higher EMI due to a shorter loan tenure could be ill at ease but would become easier over time. Plus, you don’t have to suffer the burden of EMI for years.
Regular Loan Prepayments
EMIs you pay towards housing loan are made up of two parts; the amount you pay as interest on the borrowed amount and the repayment towards the principal amount. At first, a major share of the EMIs you pay go into paying interest amount and less towards the principal.
An amount paid over and above the EMI due is called prepayment. When you make a prepayment, that amount is deducted from the outstanding principal amount when you make a prepayment. This will result in saving a huge amount from the future interest payouts. So, the loan tenure will decrease than the one in the initial agreement.
If you give your bank a standing instruction for the auto prepayment towards your existing home loan, it will ensure a small and regular prepayment every month. Auto prepayment is a voluntary option, which means it can be cancelled anytime. It helps repay the loan amount much earlier than the tenure decided initially. As a result, your savings will increase considerably.
Let us see how it works:
For example, Arun takes a loan of Rs. 10,00,000 at 10 percent interest for 20 years.
The formula for calculating EMI is P × r × (1 +r)n/((1 + r)n – 1).
Using this, we get the EMI for Arun as Rs. 9,650. When he pays the first EMI of Rs. 9,650 towards the home loan, Rs. 1,317 goes towards paying the principal amount, and the remaining Rs. 8,333 towards interest.
|Months||Opening Principal Amount (Rs.)||EMI (Rs.)||EMI (Rs.)||Prepayment (Rs.)||Closing Principal Amount (Rs.)|
You can use a home loan EMI calculator to understand this better without being confused about the calculations.
As time passes, the EMI payment remains the same every month, but the interest component decreases due to the repayment of your principal amount. So, if Arun pays Rs. 1,000 as prepayment every month, he will be able to close his loan in 184 months. He will save 56 months of EMIs and an amount of Rs. 3,58,494 towards interest payments by doing so.
So, if Arun acts smartly, he can save more than Rs. 3 lakh by just a prepaying a small amount every month. The auto prepayment option ensures the handling of financial planning efficiently.