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31-Aug-2024 | Home Loan
When a person takes a home loan, it is important to consider and understand basics like interest rate, EMI, loan tenure, and principal amount. These terms play a vital role in any home loan application as it can impact your overall finances and home loan journey. Understanding these terms strengthen the foundation of your home loan and helps you keep aware of how much loan amount you would be eligible while accomplishing your dream of home ownership.
In this blog, we will highlight what is principal amount in home loan, its significance, the way it impacts your home loan journey, and how you can manage it efficiently.
A principal amount can be understand as the initial amount of borrowings offered by the lender. It is the total or the core sum one agrees to pay back to the financial institution. The principal amount in home loan does not comprise of any sort of additional fees or interest, it is just the total amount which was lent to the borrower.
The importance of principal amount in home loan can be explained with the below-mentioned points:
Monthly Payment Calculation: The most significant role of principal amount is that it helps in determining or calculating the monthly payments i.e. EMI of the loan. If the borrower or the principal amount is higher in value, then usually it results in higher amount of EMIs, assuming the interest rate as well as the tenure of home loan is same.
Impact on the Loan Interest Paid: The interest which is paid on a home loan is calculated on the basis of the total outstanding principal. Therefore, if the principal amount is much high then there will be more interest to be charged during the loan tenure, on the other side, there is charged lower interest rate if the principal amount is lower.
Effect on Loan Tenure: The principal amount influences the loan tenure. Borrowers often choose longer tenures for larger principal amounts to keep monthly payments manageable. However, this can lead to paying more interest over time.
Understanding how the principal amount interacts with other elements of your home loan can help you manage your finances better.
Home loans are typically structured through an amortization process. This means that each EMI you pay is a combination of principal repayment and interest payment. Initially, a larger portion of the EMI goes towards paying interest, but over time, the principal repayment portion increases. This shifting balance is due to the declining principal on which the interest is calculated.
|
Payment Number |
Payment Amount (INR) |
Principal Payment (INR) |
Interest Payment (INR) |
Remaining Balance (INR) |
|
1 |
₹50,000 |
₹15,000 |
₹35,000 |
₹485,000 |
|
2 |
₹50,000 |
₹15,500 |
₹34,500 |
₹469,500 |
|
3 |
₹50,000 |
₹16,000 |
₹34,000 |
₹453,500 |
|
4 |
₹50,000 |
₹16,500 |
₹33,500 |
₹437,000 |
|
5 |
₹50,000 |
₹17,000 |
₹33,000 |
₹420,000 |
|
6 |
₹50,000 |
₹17,500 |
₹32,500 |
₹402,500 |
|
7 |
₹50,000 |
₹18,000 |
₹32,000 |
₹384,500 |
|
8 |
₹50,000 |
₹18,500 |
₹31,500 |
₹366,000 |
|
9 |
₹50,000 |
₹19,000 |
₹31,000 |
₹347,000 |
|
10 |
₹50,000 |
₹19,500 |
₹30,500 |
₹327,500 |
This table shows the payment amounts, principal and interest components, and the remaining balance for the first 10 payment periods of the loan.
Interest on home loans is generally calculated on a reducing balance method, which means it's charged on the outstanding principal. Therefore, as you repay your principal, the interest amount decreases. This emphasizes the importance of principal repayment in the early stages of the loan to reduce overall interest liability.
Prepayment refers to paying an extra amount towards your principal outside your regular EMI schedule. This can significantly reduce your outstanding principal, thereby lowering future interest payments and potentially shortening your loan tenure. Foreclosure, on the other hand, involves paying off the entire outstanding loan before the end of the tenure. Both strategies can save you a substantial amount in interest.
Effectively managing your principal amount can lead to substantial savings and quicker loan repayment.
Whenever you have surplus funds, consider making prepayments towards your home loan. Even small additional payments can reduce your principal significantly over time, leading to lower interest payments.
A larger down payment reduces the principal amount you need to borrow. This can make your EMIs more manageable and reduce the total interest paid over the loan tenure.
Choosing a shorter loan tenure increases your EMIs but decreases the total interest paid, as the principal is repaid faster. Assess your financial capability to ensure you can handle higher monthly payments without strain.
Understanding the principal amount in a home loan is vital for effective loan management. By focusing on reducing the principal through regular prepayments, opting for a larger down payment, shortening the loan tenure, and negotiating better interest rates, you can save on interest costs and repay your loan faster. Being proactive about managing your principal amount can lead to a more financially secure future.
