Is taking a home loan on your mind? Certainly the most important answer you must be seeking would be “how much would be my EMI?” It is a shared concern. Each and every person we know wants to determine what would be the EMI if a loan is taken. This is so because it is the EMI that eventually gets paid from your pocket and directly impacts your planned expenses. To decode your EMI you must understand the factors that affect it.
EMI is a large chunk of unavoidable expense that shakes the root of your financial planning for future. If you are paying an EMI which is greater than what you can afford to pay, given your mandatory expenses, then it can severely impact your critical financials goals such as savings for retirement, child’s marriage and education etc. Therefore, without a doubt EMI is the single most important factor to be considered before you take on the responsibility of a debt.
But now that you have taken a loan how can you manage your EMI? Let us first look at the factors that work behind the calculation of an EMI.
How is my EMI calculated?
Equated Monthly Installment or more commonly called, EMI, is a function of three primary factors:
Interest Rate (goes without saying that the interest rate is impacted by the CIBIL score)
Depending on each of these factors, your EMI is determined. With a change in any of these, the EMI changes too. For example, if the amount of loan increases then EMI also increases, which means there is a direct positive relationship between the two. If the tenure increases, keeping the other two factors constant, the EMI reduces, as the same amount of money is spread over a larger period of time.
The primary factor that affects EMI remains to be the interest rate. You can choose the amount of the loan you want, you can pick the number of months or years you want the Loan on Property for but you have no control over interest rates. You can never choose the rate of interest that you shall pay. Since this factor is completely beyond your control, it becomes the one factor to watch out for.
Does that mean that home loan interest rates remain constant throughout the tenure and you can do nothing about them? No.
Interest rates are dynamic in nature. There are a number of macroeconomic and microeconomic factors that affect them. Due to this the market rate of lending keeps changing. However, whether your rate will change or not will depend on the terms of your loan agreement. Supposing you selected the fixed rate of interest so it will naturally remain constant throughout the tenure. But if it is floating rate or MCLR linked then it will change from time to time, when the bank revises their base rate.