Why Is It Important to Calculate EMI Before Taking a Home Loan?

By | September 29, 2018

Most people aspire to buy their dream home. And if we were living in an ideal world, everyone would have enough money to fulfill their dreams. In real life, however, most of us have to rely on a home loan to turn our dreams into reality.

While applying for a loan isn’t too difficult, it is important that you carefully select your lender and calculate the equated monthly instalment (EMI) to make the entire process hassle-free.

Once you determine your monthly outgoings in EMIs, you can plan your monthly budget and expenses. Some of the other inherent benefits are as follows:

It Helps You Decide How Much to Borrow:

Before applying for your home loan, it would be wise to calculate the EMIs in advance by simply using a home loan EMI calculator. Here you can input different figures until you finally get the results you’re most comfortable with.

It Helps You Plan Repayment:

After you’ve decided on the loan amount, now it’s time to divert your attention towards paying off the loan. Knowing your EMI amount will allow you to better plan your finances and avoid any default on the loan.

It Helps You Figure Out Prepayment:

A home loan calculator will help you determine if you can pay off the loan beforehand, i.e., before the completion of the tenure. This can help reduce the total interest outgo on your loan. However, some financial institutions and banks charge a penalty on prepayment, so be sure to check the terms before taking the loan.

Now that you know the importance of calculating your EMIs before applying for a home loan, let’s take a look at the components that determine your EMI amount on a loan:

Income:

The net income of an individual plays a crucial role when it comes to applying for a loan. As a rule of thumb, your EMI amount shouldn’t exceed 40% of your monthly income. This way you can ensure that you don’t default on the loan. Other factors like increase in income, job security or financial emergencies aren’t usually considered while deciding your loan amount or EMI.

Rate of Interest:

When choosing a home loan, an individual will also be given the option to choose between a fixed and floating interest rate. If you choose a floating interest rate, your EMIs will fluctuate based on the prevailing market lending rates. On the other hand, if you choose the fixed option, your interest rate will remain unchanged, and you will have to pay a fixed EMI amount throughout the loan term.

Expenditure:

When using a home loan EMI calculator, you may want to calculate your anticipated future expenses too. For example, if you have children, it is wise to consider medical expenses, education, wedding and even vacation expenses. You must also be prepared for inflation and the resultant increase in the price of basic commodities.

Home loan calculators are extremely handy when it comes to financial planning. So, before you apply for a home loan, use this effective and efficient tool to determine an EMI and loan amount you can pay off comfortably.

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