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HOW TO FINANCE YOUR DREAM HOME-How To Calculate Your Home Loan EMI For Repayment

Updated on January 8, 2011

Architect Designed Modern House

How To Finance Your Dream Home

Want to own your dream home? Complete with landscaped gardens! Well, most people pine for a home of their own, but not all can afford to go in for one, or so they think ! Banks and financial institutions offer home loans to people who have a good financial standing and are able to show their credit worthiness.

Modern Architect-designed Home With Swimming Pool

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Agreed, you have a great career going and probably your spouse does too. And you want to own your dream home someday. Does this sound like you ? Sure, you do not have money enough to buy a home outright, but you can sit down and work out your finances to see if you can opt for a home loan from your local bank. If you have been saving enough for a down payment towards securing a home loan, there is no reason why you should postpone your ownership of a comfortable dream home. And did you know that a home loan helps save on Income tax ?

It makes sound financial sense to include realty in your portfolio. A home can be use to provide you comfortable and tension free living, while the value of the property increases over time, giving you excellent returns. You could also be a home owner wanting to invest in a second home. A second home is being increasingly seen as an investment option, where you earn rentals while the property value keeps escalating. Some choose to diversify their realty portfolio that includes a commercial space instead of a second home, where rentals increase and the value of property keeps spiraling upwards.

Any bank or financial institution can be approached for a home loan. Seeking a home loan is definitely not easy, but if you have the necessary documentation ready, showing your income details and that of your spouse, it would take a few days for approval, after all the mandatory checks. Where both husband and wife are earning members, it would be wise to club the incomes in order to secure a bigger loan amount. But, make doubly sure that repayment will not eat into your monthly budget. Both spouses would then be classified as co-borrowers of the home loan. The property to be invested in will then also have both names as property owners. Both can claim exemption from income tax showing repayment of the said home loan.

Repayment of a home loan can take a long tenure which you can choose. The longer you take, the smaller is your EMI, but you will be paying a larger sum eventually as the interest on the remaining balance keeps mounting. So, it is wise to sit down and take charge of your finances before actually seeking a home loan. Since it would eat into a sizable chunk of your income to repay every month for the next 10 years or more, it would be wise to take into other factors into account as well. Such as incidental expenses, a wedding, education, foreign travel, etc.

It is definitely worth investing in property, as it is an asset gained.

How To Calculate Your Home Loan EMI

EMI or Equated Monthly Instalments are the preferred way to repay a home loan on a reducing balance. EMI is the monthly payment towards the principal and interest made by a borrower to a lender. This EMI is calculated using a particular formula that is given alongside,

where

L= loan amount

l = interest rate per annum divided by 12

^ = to the power of

N = loan period in months

Let us assume that you have a loan of 1 lakh at 9 % per annum, repayable in 15 years, then the EMI calculation using the formula is as follows :

EMI = (1,00,000 x 0.0075 ) x  (1 + 0.0075 ) ^ 180   /  [( 1 + 0.0075 ) ^ 180] -1

       = 750 x 3.838 / 2.838

EMI = 1,014

My Second Home Under Construction

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    • Om Paramapoonya profile image

      Om Paramapoonya 7 years ago

      Right now I'm not ready to buy a home but hopefully I'll be able to do that in a few years. Bookmarking this hub for future reference. Thanks so much for sharing. :)

    • Simone Smith profile image

      Simone Haruko Smith 7 years ago from San Francisco

      Great Hub! I really appreciate your explanation of home loan EMIs, and hope people find it to be helpful!

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