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Understanding Home Loan EMI
EMI stands for Equated Monthly Installment. It's the amount you pay to the lender each month, which includes both principal and interest components. The EMI remains constant throughout the loan tenure, but the proportion of principal and interest changes over time.
How is EMI calculated?
The EMI is calculated using the following formula:
EMI = P × r × (1 + r)^n / [(1 + r)^n - 1]
Where:
- P = Principal loan amount
- r = Monthly interest rate (Annual rate ÷ 12 ÷ 100)
- n = Loan tenure in months
Benefits of Prepayment
Making prepayments on your home loan can significantly reduce the total interest paid over the loan tenure.
Benefits include:
- Reduced total interest outgo
- Shorter loan tenure
- Improved debt-to-income ratio
- Financial freedom sooner
Factors Affecting EMI
Several factors can affect your home loan EMI:
- Loan Amount: Higher loan amounts result in higher EMIs.
- Interest Rate: Higher interest rates increase the EMI amount.
- Loan Tenure: Longer tenures reduce the EMI amount but increase the total interest paid.
- Credit Score: A good credit score can help you secure a lower interest rate.
- Type of Interest Rate: Fixed or floating interest rates can affect your EMI over time.
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