Last Updated on September 1, 2022 by Olivia Anderson
When you take out a mortgage, you borrow the principal and pay it back to the lender with interest. This amount is called a Mortgage Loan interest rate. It is the amount charged for borrowing from a lender, and it is expressed in a percentage of the principal amount. The interest you are going to pay on your mortgage is directly related to this value. Mortgage amounts are large, so even a 0.5% interest rate can make a big difference in your EMIs. Therefore, it’s essential to know how to calculate House Loan interest rates and how to lower the same, so you can make repayments more affordable. Below is a guide on how to calculate Home Loan interest in India:
What Is a Housing Loan Interest?
Home Loan interest is the amount that the borrower pays in addition to the borrowed amount. For example, if you loan an amount of ₹20,000, you will pay the lender nearly ₹23,000 in total over the life of the loan. That extra ₹3,,000 is the interest. As you pay off your loan over time, your each payment will be part of the amount you borrowed (principal), and part of it will be the interest cost. The amount of interest a lender charges on a loan depends on several factors, such as credit history, annual income, loan amount, loan terms, and current debt.
Factors Influencing Home Loan Interest Rates
You can’t calculate your Mortgage Loan interest rate by yourself, but you can learn about the factors that affect interest rates. These two factors determine the mortgage interest rate offered to you.
- RBI Policy: RBI now requires all banks to peg mortgage interest rates to external benchmarks such as repo rates. The mortgage lender and his NBFC set House Loan interest rates based on the Prime Lending Rate (PLR), which is determined by the repo rate. Many loan lenders offer their customers repo-linked interest rates following their internal underwriting policy. The opposite happens when money is scarce in the economy.
- Credit Score: Likewise, if the demand for credit is high, the calculated interest rate can be increased. A lower credit rating means higher risk and, therefore, higher interest rates charged in return.
How to Calculate Home Loan Interest?
You can find out how much interest on a Home Loan is charged by calculating the total cost of the loan and subtracting the principal amount from that.
The total cost of the loan (principal and interest) is governed by the below formula:
Total amount = P x R x N/ (1-(1+R)-N)
P = Principal or loan amount
R = Monthly interest rate
N = Number of months
How to Calculate Monthly Loan Interest?
To find out how much interest you’re paying each month, read your mortgage amortisation schedule or use any amortisation calculator. It means that the amount of EMI you pay is the same each month, but the amount of principal and interest per EMI changes over time. This is because, at the beginning of repayment, EMI consists primarily of interest and eventually pays more principal to ensure the best interest rate. Here are some tips:
- Boost Your Credit Score: People with good credit get chance of grabbing a lower interest rate.
- Ask for a Small Loan: This reduces risk by lowering your debt-to-income ratio.
- Add a Co-borrower: This reduces the chance of EMI default. In addition, lenders are relieved when the repayment responsibilities split between two borrowers. With this information, not only will you know how to calculate your Mortgage Loan interest rate, but you will also be able to understand the factors that affect your mortgage interest rate. So be prepared and fill out your mortgage application early to get fast approval.
To conclude, before you consider taking out a loan, it is essential to calculate the interest you will pay to understand the cost of borrowing. Ask your lender if interest is calculated using a simple interest formula or an amortisation schedule, and use the appropriate formula or online calculator to figure out the numbers. Also, be aware of the factors that affect the interest you pay. For example, reducing your debt or shortening your repayment terms may be worthwhile to keep your hard-earned money in your pocket.
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