How is Home Loan Amortization Calculated?

The amortization schedule for a loan shows the amount of interest and principal that is assigned to each periodic loan payment, In most cases, these instalments occur on a monthly basis. A loan amortization table help you keep track of how much you need to pay each month. 

Therefore, it is advisable to get an amortization schedule before you apply for the housing loan. Drawing the amortization schedule by yourself helps you get a proper break-up of your EMIs.  

How to calculate your EMI

EMI is one of the most important parts of the amortization schedule. If you know your EMI, you can easily calculate the schedule. And if you don’t know the exact EMI amount, you can calculate by using a housing loan online EMI calculator.

When using an EMI calculator, enter the requested housing loan details: borrowed amount, tenure of repayment, and the interest rate. The EMI calculator will automatically generate your EMI amount. The best part, it is free and can be used as many times as you want. This makes it a great tool for first-time borrowers who do not have much idea about the process of calculating EMIs.

Some calculators provide an amortization schedule that adjusts according to your inputs. It will also tell you the individual amounts of your interest and principal components. This saves you a lot of time and energy. However, you too can do the maths.

Once you get the EMI amount, you move to the next step.

Calculating for your home loan amortization schedule

Calculate separate amounts for interest and principal. Here’s how:

1. Interest Component

To calculate your estimated monthly payment, multiply the loan amount by the interest rate. This amount will be the interest component and when you divide the amount by 12, you will get the monthly interest. 

Monthly Interest = [Total loan repayment amount x Rate of interest]/12

2. Principal Component

From the EMI amount, subtract interest (as calculated above). This is your principal component’s amount. 

Principal payment = EMI – [Total loan repayment amount x Monthly interest payment]

You need to repeat the process for other months as well. Just use the principal balance from the prior month instead of the complete housing loan amount. Follow the same process till the tenure date and your housing loan amortization is created. 

Why Calculate An Amortization Schedule?

It is important to understand your amortization schedule in order to assess your loan repayment situation.

If you are aware of the interest component and its effect on your repayment schedule, you can switch to a lender with a better interest rate at any time during your loan term. Furthermore, it allows you to weigh the benefits and drawbacks of various planning options. For example, you may want to pay it off sooner or continue according to schedule if it is beneficial to you.

Occasionally, even if your lender provides you with a loan amortization schedule, it’s easy to disregard it among all the other paperwork you need to handle. An amortization schedule gives you crucial information about how your loan works. The more you understand how debt repayment is calculated, the more likely you are to find out exactly what the benefits are of paying down your debts as quickly as possible.