#home loan payment calculator
Prepayment calculator for home loan
This calculator will calculate the savings one can make by making prepayments. Prepayment of loan is the best way to reduce interest burden. Do you know what is the worse part of interest payments? Even it we continue paying interest for next 100 years, the burden of loan will not reduce. It is important to realize that we must pay-off principal portion of loan. There are two components of any loan. One part is principal & second part is interest. Until we pay-off principal, interest expense will continue to incur year after year. We can continue to pay interest all our life, but loan will never finish. Without clearing principal component of loan, loan never get paid. When we pay EMI, a portion of EMI is used to pay interest and a portion is used to pay principal. Our aim should be to finish paying principal in fastest time. Loan prepayment allows us to pay-off principal component early.
Concept of Loan Prepayment
What is a right time to prepay loan?
Purpose of loan prepayment is save on interest component. Interest load is maximum in initial months. Loan prepayment objective is to maximize savings of interest. In order to do this, loan prepayment must start in first months itself. Interest burden is maximum in initial months and minimum in later months. Below graphical representation will help us to visualize how load of interest vs principal varies with time. In initial years, principal component is maximum. Principal maximum means loan outstanding is maximum. Interest calculation depends on loan outstanding. Outstanding maximum means interest burden also maximum. This is why in initial years, majority of our EMI is consumed to pay interest.
Example of loan payment in initial years.
Already thinking how to reduce loan outstanding.
If we pay only EMI, we have no possibility to save interest.By loan prepayment we can pay principal component of loan faster. By making prepayment we pay additional sum of money above EMI. Prepayment allows us to pay principal faster. Each payment made, in addition to scheduled EMI, goes as prepayment. This will finish our principal amount earlier allowing us to save on interest. How effective it is to use a online home loan prepayment calculator? Calculator helps to visualize how much can we saved because of prepayment. This motivates people to practice loan prepayment. On internet there are good loan prepayment calculators launched recently. It is essential to understand benefits of loan prepayment. Loan calculators makes us aware of these benefits. Longer loan tenure means higher loan burden. Using home loan prepayment calculator highlights the negative effect of longer tenure.
Example: A home loan of Rs 30,00,000 taken at rate of 10.5% per annum for a period of 20 years. The proportion of principal payment verses interest payment during the tenure of 20 years is graphically represented below. In the first few years, interest load is maximum. In the graph one can see that, in a year, total EMI payment is Rs 350,000. In the first year, out of the total EMI only Rs 50,000 is paid as principal. Every year the principal component increases. But the growth is slow. In initial years, interest dominates the EMI. This makes home loan prepayment in initial years even more important. In this article we will learn about loan prepayment. Learning to calculate prepayment will help us to comprehend how prepayment helps us to save interest. But before that lets look at some basics.
How EMI’s on Home Loan is calculated?
The formula for EMI calculation is: E = EMI P = Principal r = monthly rate of interest (Interest is 10.5% it means r = 10.5/12/100 =0.00875) n = time in months Example: home loan of Rs 30,00,000 at rate of 10.5% per annum for a period of 20 years (240 months). EMI will be: E = 30,00,000 x 0.00875 x [(1+0.00875)^240 / <(1+0.00875)^240>-1> = Rs 29,951 per month for next 20 years.
Home loan prepayment is always better?
No not always. There are cases when prepayment cannot take top priority. If there are other investment opportunities that gives higher returns then priority changes. Confused whether to use your extra money for investment or for prepayment? Don’t worry here is a solution. Rule is to pay your costlier debt before making any investment. If you are investing in stocks, then probably your long term return will be close to 12% per annum (leave aside risk factors). Compare this return with your home loan interest rate. If home loan interest rate is higher than 12%, it means your should prepay your home loan first. If the home loan falls within the range of minus 3% of stock market returns, even them home loan shall be paid. But problem is, how many of us knows how to handle stocks? My personal suggestion to people like me and you will be always consider home loan prepayment as priority. The interest that we save on home loan is like a assured return. Interest saving in tune of 10% per annum is phenomenal. These days even stock market cannot assure such high returns in short term.
Home loan prepayment is common mans way to get rich.
Home loan is the biggest-loan an average middle class Indian avails in his life. As home loan amount is big, people often go for longer loan tenure like 20-25 years. In home loan, both loan amount tenure is big. These two factors makes the interest burden very huge. For example, a home loan of Rs 30 lakhs, for 20 years at rate of 10.5% per annum, interest burden is Rs 42 lakhs. But when home loan of Rs 30 lakhs, is availed only for 15 years at rate of 10.5% per annum, interest burden is only Rs 27 lakhs. When home loan of Rs 30 lakhs, is availed only for 10 years at rate of 10.5% per annum, interest burden is only Rs 19 lakhs. These type of permutations can be easily done using home loan prepayment calculators. The interest payment we make is over and above principal of Rs 30 lakhs. for 20 year tenure, the interest portion is even bigger than the principal. So it is a must for all home loan takers to evaluate the possibilities of reducing the interest burden. Home loan prepayment is one effective way of reducing the interest burden.
A Calculation we shall never forget.
As a rule of thumb, a real estate property which yields rental income of 4% per annum is considered a good investment. Property Value (our cost) = Rs 30 Lakhs Rental Income in first year = Rs 10,000/month (Rs 120,000/year) Rental Yield = 120,000/30,00,000 = 4% But the yield of 4% will happen when we we buy property without taking loan. In this case our our cost is only Rs 30 lakhs.
In case of home loan scenario Rs 30 lakhs is not only our cost. Out total cost is Interest+Principal. Cost will be equal to Rs 30+41.5=71.5 Lakhs. In this case our rental yield will be much lower: Property Cost (due to loan) = Rs 71 Lakhs Rental Income in first year = Rs 10,000/month (Rs 120,000/year) Rental Yield = 120,000/71,00,000 = 1.7%