There is a lot of thought that goes into choosing a home. From scouring the real estate market to weighing the pros and cons to deciding the payment procedures for your new home, it can be a lengthy process. This process demands intricate planning and smart choices.
You may have your eye on a beautiful apartment in the heart of the city or a quaint little bungalow in the countryside. But as soon as you ask for a quote, the feared problem sets in—it’s out of your price range. This is where home loans come into play. Home loans are like every other loan that is borrowed from the bank, and it’s paid back with interest and EMI. A home loan need not necessarily be to purchase a house, and may also be borrowed for the extension, construction, or improvements of houses.
How do home loans work?
A major factor that plays a role in the decision-making process of seeking loans is the interest rate. Since it impacts the affordability and ease with which you can pay off the debt, individuals must be updated with the process of taking a Home Loan and the calculation of interest. Home loans are available in two types of interest rates in India, namely, floating and fixed.
- Floating – A floating interest is variable and does not have a fixed value. It can rise or fall and may fluctuate over the tenure of the loan.
- Fixed – Fixed interest rates signify that the rate of interest remains constant throughout the loan, and individuals are required to pay a fixed amount every month.
Factors determining interest rates
Several factors can influence the interest rates on home loans. This includes the following:
- RBI policies – Updates in the RBI policies can directly impact interest rates. MCLR (Marginal Cost of Funds based Lending Rate) is the minimal rate banks charge, and individuals are allowed to annually reset their interest rates according to the MCLR rate. Any variation in the MCLR rate will also affect the rate of interest.
- Property Location – The location of a property affects interest rates since the better the locality and amenities provided, the higher is the resale value. When a property boasts a high resale value, the interest calculated on it is lower, whereas a property with less resale value comes with a higher interest rate.
- Income – Individual income also plays a role in determining interest rates. Low-risk borrowers such as those with a stable income are charged lesser interest rates, whereas those with an irregular income are considered high-risk borrowers and consequently charged higher rates.
- Credit score – The credit score of an individual determines their creditworthiness. The greater the score, the better is the creditworthiness and vice versa. Individuals with high scores are therefore deemed as low-risk borrowers and charged lower rates of interest as compared to individuals with lesser credit scores.
How are interest rates calculated?
The formula used for the calculation of interest rates is EMI = [P x R x (1+R) ^n] / [(1+R)^ n-1] wherein P is the principal loan amount, R is nothing but the rate of interest, and n denotes the number of monthly installments.
To avoid errors, most banks and financial institutions provide a home loan interest calculator. By utilizing these, individuals can find out the equated monthly installments they are required to pay. Besides displaying the EMI, these calculators also provide the following benefits:
- Individuals can see the amount of interest charged
- They can choose the correct tenor
- The results signify whether a particular loan is affordable
- It assists individuals in deciding a budget
- It is completely error-free and 100% accurate
Check: Home Loan Interest Rates
To come up with an effective plan, it’s essential to determine the affordability of the purchase as well as the loan and seek necessary services from a credible source. PNB Housing is one of the leading housing finance companies in India, providing convenient and reliable home loans for various purposes, including purchase, construction, and extension of homes. The institution also offers Loans for NRIs and comes equipped with a loan interest calculator to enable users to calculate their EMI with zero errors and hassles.