Buying a home is often one of the largest purchases a person will make in their lifetime, and most people do not have enough money saved to purchase a home outright.
If someone wants to build their home, they may take out a home loan to finance the construction costs.
Homeowners may choose to refinance their existing home loan in order to take advantage of lower interest rates, reduce their monthly payments, or switch to a different type of loan.
Real estate can be a good investment opportunity, and some people may take out a home loan to purchase investment properties or rental homes.
Overall, a home loan can be a useful tool to help people achieve their homeownership goals, manage their finances, or invest in real estate.
Also Read: Income Tax Benefits On Home Loan That You Must Know
There are several components in a home loan. Below is an elaboration on the Equated Monthly Installment (EMI) component of it.
What is an EMI?
You repay the loan in EMIs comprising both principal and interest. Repayment by way of EMI starts from the month following the month in which you take full disbursement.
Flexibility in EMI:
Some banks also offer their customers flexible repayment options. Here the EMIs are unequal. In step-up loans, the EMI is low initially and increases as years roll by (balloon repayment). In step-down loans, EMI is high initially and decreases as years roll by.
Step-up option is convenient for borrowers who are in the beginning of their careers. Step-down loan option is useful for borrowers who are close to their retirement years and currently make good money.
What is pre-EMI interest?
Sometimes loan is disbursed in installments, depending on the stages of completion of the housing project. Pending final disbursement, you may be required to pay interest only on the portion of the loan disbursed.
This interest is called pre-EMI interest. It is payable every month from the date of each disbursement up to the date of commencement of EMI.
However, many banks offer a special facility whereby customers can choose the installments they wish to pay for under construction properties till the time the property is ready for possession.
Anything paid over and above the interest by the customer goes towards principal repayment. The customer benefits by starting EMI payment earlier and hence repays the loan faster.
Pre-EMI is a term commonly used in the context of home loans or other types of long-term loans, particularly in India.
For example, when someone takes out a home loan, the loan amount may not be disbursed all at once, but in installments based on the construction progress of the property. During this period, the borrower is required to pay the interest on the amount disbursed by the bank, which is known as pre-EMI.
The pre-EMI payments are typically lower than the regular EMI payments, which include both the interest and principal components of the loan. Once the full loan amount is disbursed, the regular EMI payments begin, which include both the principal and interest components.
How does tenure affect the cost of a loan?
The longer the tenure of the loan, the lesser will be your monthly EMI outflow. Shorter tenures mean greater EMI burden, but your loan is repaid faster. If you have a short-term cash flow mismatch, your bank may increase the tenure of the loan, and your EMI burden comes down. But longer tenures mean payment of larger interest towards the loan and make it more expensive.
Find out how much of a down payment you are required to pay, and find out all the costs involved in the loan (including processing fees, administrative charges and prepayment charges levied by banks).
Knowing just the amount of the EMI or the interest rate is not good enough. Similarly, ask for information on loan amount, loan term, and type of loan (fixed or floating) so that you can compare the information and make an informed decision.
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