 # How do Interest Rates Decide the Home Loan EMI?

Are you looking to buy a new home?  The first thing that comes to our mind is the interest rate and the EMI of the Home Loan. EMI calculators are easily available online.

One can find an EMI calculator on a bank’s site and also on sites providing comparative data. So let us try and understand a few things which are important to know before taking a Home Loan.

What is an EMI?

EMI is nothing but equated monthly installments. Suppose you take Rs.10 from your friend and you have to pay it back in 10 months, then each month you will pay an amount of Re.1. This is nothing but EMI. The rate of interest is the rate at which the lender loans you the money to buy home. In case of housing loan, it is applied as the compound rate of interest, thus it is easier for one to use the EMI calculator to know EMIs beforehand.

EMI Calculator:

EMI calculator consists of 3 factors – loan amount, rate of interest and loan tenor. All these 3 factors come together to play an important role in the calculation of the EMI. The rate of interest is an important factor in deciding about Home Loan. This is simply because when you take a Home Loan, your loan amount will more or less remain same for all banks, your tenor will also remain same, and so the factor which will actually decide your EMI is Rate of interest. Depending upon the Rate of interest provided by the respective financial institution, the quantum of the EMI is calculated.

Most Important Factor While Taking Home Loan:

As discussed above, the most important factor here becomes the rate of interest. Thus, compare all the banks and other financial institution and check the rate of interest that they offer.

Also, check for various schemes for Home Loan such as women’s scheme for Home Loan under which special rate of interest is provided. The lower the interest rate, the lower your EMI.

Don’t forget to check the type of Home Loan interest rates which can either be fixed rate of interest or floating rate of interest.

Fixed Rate of Interest:

In a fixed rate of interest, the rate of interest remains constant during the entire tenor of the loan irrespective of the general increase or reduction in the rate of interest offered by the bank.

So for example, if you have taken a Home Loan at the rate of interest of 10%, then it will remain at 10% even if the bank, later on, reduces its rate of interest to 8.50 percent.

Floating Rate of Interest:

In a floating rate of interest, it will vary accordingly. Suppose the Home Loan is linked with MCLR and the bank decides to reduce the MCLR and hence reduce the Home Loan rate of interest.

In that case, the benefit will be passed on to the customer with a reduction in the rate of interest. The same will be the case in case of the increase of rate of interest. But given the trend of reducing rate of interest for Home Loans in India, it is advisable to opt for floating Rate of interest for Home Loans.

How to Operate EMI Calculator:

Step 1: Select the amount of loan that we wish to avail from the bank. Ideally, consider 90 percent of the loan amount as the banks may not provide the entire amount as loan.

Step 2: Select the Rate of interest. Now input the lowest Rate of interest or Rate of interest as offered by the bank of your choice.

Step 3: Last but not the least, select the tenor of your Home Loan. Depending upon the choice of your bank, the minimum and maximum tenor of Home Loan will differ. But for calculation purposes, one can try by setting up the tenor for the desired period. Say for example, for 30 years. Then click on compute.

This will now calculate the EMI of your Home Loan. So do not wait, check the sites for lowest Rate of interest for Home Loans, check your Home Loan eligibility and calculate your EMI. Buy a home and make your dream come true.