Friday, May 6, 2011

Understanding Housing Loan EMI, Principal & Interest

HOUSING LOAN :-

This is a must read article, if you already have a housing loan or you are planning to take a housing loan


Breakup for EMI (Principal & Interest Explained here)

EMI BASIC CALCULATION:-

Loan is opted from a bank say for example (Rs. 35 Lacs for 20 Years of Term) you have to pay an EMI (Equated Monthly Installment) & when you pay your EMI, it consists of 2 major part, one is Interest on your EMI & second is Principal amount you have paid. By paying an emi, every month it reduces the loan by some amount as it goes towards payment of your principal out standing. With passing each installment every month, your loan amount decreses by some extent. You pay More Interest when the loan /Emi starts and pay less when you come closer to pay off your loan. The longer the period of loan….the component of interest is high. So one thing is pretty clear from the above sentence, your initial EMI goes majorly towards INTEREST on your housing loan, PRINCIPAL amount is just too low.

This example will be more useful to understand the breakup towards your EMI on Housing Loan.

If you take a Housing Loan of 35 Lacs, for a period of 20 Years @ 10% Interest Rate, Emi Would be Rs. 33,776 per month.

· 1st month - 33,776 emi , 29167 - Interest & 4609 - Principal

· 2nd month- 33,776 emi , 29128 – Interest & 4648 - Principal


· 3rd month- 33,776 emi , 29029 - Interest & 4686 - Principal


· 24th month- 33,776 emi , 28197- Interest & 5578 – Principal, outstanding loan = 33,78,104


· 60th month- 33,776 emi , 26255- Interest & 7521 – Principal, outstanding loan = 31,43,085


Scenario – ONE – If you pay off your entire loan after 5 years.

Total payment done by you after 5 years will be 20,25,545 out of that INTEREST Component is 16,69,631 & rest 2,70,657 is your loan PRINCIPAL,



Just in 5 Years , you are paying an interest of Rs. 16,69,631, on your total loan of 35,00,000, which comes to almost 50% of the Loan Amount & you still have to pay Principal outstanding of Rs. 31,43,085



So, if you foreclose the Loan at the end of 5th year, your total payment will be,


1. Interest Paid till date = Rs. 16,69,631
2. Principal Paid till date = Rs. 2,70,657
3. Outstanding on 60th month = Rs. 31,43,085


TOTAL PAYMENT TO BE DONE AFTER 6TH YEAR WILL BE (TOTAL OF 1+2+3) i.e Rs 50,83,373

AGAINST THE LOAN OF 35,00,000 YOU WILL PAY TOTAL AMOUNT OF Rs 50,83,373 + LOAN FORECLOSURE CHARGES *IF ANY


Scenario – TWO – If you pay off your entire loan after 10 years.

Total payment done by you after 10 years will be 40,53,091 out of that INTEREST Component is 31,08,942 & rest 9,44,149 is your loan PRINCIPAL, after paying this all…..outstanding on loan will be 25,55,851

So, if you Payoff the Loan at the end of 5th year, your total payment will be,


1. Interest Paid till date = Rs. 31,08,942
2. Principal Paid till date = Rs. 9,44,149
3. Outstanding on 60th month = Rs. 25,55,851



TOTAL PAYMENT TO BE DONE AFTER 6TH YEAR WILL BE (TOTAL OF 1+2+3) i.e Rs 66,08,942

AGAINST THE LOAN OF 35,00,000 YOU WILL PAY TOTAL AMOUNT OF Rs 66,08,942 + LOAN FORECLOSURE CHARGES *IF ANY


Next Week Article : - How 1% Interest Rate hike will effect on your Housing Loan