With the growing popularity of home loans in the country there have been several variations made to these products to suit the requirements of different customers. There are various options available for deciding the type and amount of the EMIs which shall suit the income and repayment capacity of different borrowers. It is important to categorically understand the various types of EMIs available today and the basis of calculation of the basic EMI in order to be able to choose the right one for your specific requirement.
Understanding the EMI Calculations
EMI is a Equated Monthly Installment that has to be repaid to lending institution within specified number of months based on the rate of interest, total loan amount and the tenure of repayment that is agreed upon by both the parties. The EMI comprises of two basic elements – The Principal and the Interest. The basic calculation is done by finding the total loan amount plus the interest accrued on it and dividing the same by the repayment period.
Types of EMIs
There are 3 basic types of EMIs that are prevalent for home loans in India.
The Pre EMI: This applicable in cases where the entire loan amount is not disbursed at a time and rather given to the borrower in installments depending on the stage of construction of the house. This type of EMI comes into play when one buys a house in an underdevelopment project or constructs own house on a piece of land. Here the time gap between the first installment and the complete disbursal of the loan may be up to a couple of years, thus the Pre EMIs are designed to fill in that gap.
The Tranche based EMI: This is a special variant of the EMI where the borrower starts paying the full EMI even the project is under construction and the entire amount of the loan ahs not been disbursed. For the tranche based EMIs the borrower has to pay an EMI which covers the minimum amount of interest that is applicable for this period. However it is a smart idea to start repaying the entire EMI from the beginning because the amount that is over and above the interest element will immediately be counted towards the principal thereby reducing a significant portion of the outstanding principal and ultimately reducing the loan tenure.
The Accelerated EMI Repayment: This is a provision available with a few financial institutions wherein the borrower starts accelerating the repayment based on his calculations of higher income in the future during the period of repayment. This is a good tool to repay the loan earlier thereby saving on the total interest paid towards the loan. At times when there is any amount of surplus cash or one receives a bonus this provision can be employed for reducing the burden of the loan.
One can opt for any of these EMI variants apart from the standard calculated EMI at the time of taking the loan. The amount of EMI may undergo drastic changes whenever there is a change in the applicable interest rate especially in case of floating rate home loans.