How to Save Money on Home Loans?

Taking a Home Loan is one of the biggest financial decisions in life. It is often the first step towards building your own nest. It is very easy to get carried away and not take into consideration some of the important factors while taking a home loan. If you keep these things in mind then you can save money and also clear your home loan at the earliest possible.

Lets us understand how to pay off home loans faster:

• Re-examine your financial situation: Before taking any measures to pay off your home loan faster, first do a self check of all financial investments. Look at the short, long and medium term investments made and make sure that none of these are getting affected by the loan payment. The surplus amount of earnings left after meeting other financial goals should be directed towards payment of the home loan.

• Change EMI and save interest: Before choosing an Home Loan EMI option that is lower, think twice. Even if you increase your monthly EMIs by a slight amount, there is a chance that you will have to pay a lesser interest. This in the long run will put more liquid funds in the hand and will also help you pay the loan amount in a shorter span of time. You can choose Bankbazaar's Home Loan EMI Calculator to calculate Home Loan EMI for your loan amount.

• Consider partial payments: Whenever you have surplus funds in hands after receiving a bonus or increment, redirect those funds towards payment of the loan. Most banks and financial institutions allow this. This is one of the most convenient methods to clear loans in a speedy manner.

• Budget other expenses: When you have a loan in hand, make it the first priority to clear the debt. If not, the interest rate will keep on adding up and it will become a financial burden that leads to a lot of frustration and emotional stress. This will affect your other financial goals and also make it difficult for family members. So cut down on luxurious spending, expensive holidays and splurging for while and direct those funds towards the loan instead.

• Make a bigger down payment: It is always wiser to choose to make a huge downpayment to cut down on interest rates. The higher the down payment, the lesser the interest rate on the loan availed and vise versa.

• Take a loan for a short term: Though this may sound overwhelming in the beginning, it is always better to take a loan for a shorter duration. This will help  you pay off faster and also help save a considerable amount of money that will otherwise go out of the window as interest.

Apart from all these measures, it is also important to weigh all the pros and cons even before taking a plunge and going for a home loan. Compare all bank interest rates and choose one that is best in the market. Also, if you are a regular and long-term customer of a bank, make sure you negotiate and ask for a lower interest rate. Most banks will offer these kind of discounts to loyal customers.

Home Loans: Understanding Your Amortization Schedule

What is an amortization schedule?

A home loan amortization table is the repayment schedule depicting the EMI components of interest and principal and the outstanding balance for every month for the entire home loan period.

How is it calculated?

In order to prepare the amortization schedule you will need to first calculate the EMI on your loan. To do this you will require data on the loan amount or principal, the loan tenor and the interest rate applicable on your loan.

The overall EMI remains constant every month but the way the amount is split between interest and principal payments differs for each month.

At the start of the loan period, a larger part of the amount repaid every month is apportioned towards interest payments. With a progression in tenor, the amount apportioned towards interest reduces and the principal repayments are larger.

This happens because interest is calculated on a monthly reducing balance method. Under this, interest payable is calculated on the balance outstanding at the end of every month. The balance outstanding reduces as more and more of the loan is repaid, thereby reducing interest payable in the subsequent months.

The below illustration details the calculations involved:

Loan Amount	Loan Tenor	Interest Rate
Rs.10,00,000	5 years	10% p.a.

EMI = (P*i)^\ X (1+i)^n

            {(1+i)^n} - 1

where,

P= Principal or Loan Amount

i = interest rate p.m.

n = loan tenor in months

EMI = (10,00,000 * 0.00833) X (1 + 0.00833) ^ 60  =  Rs. 21,247

[(1 + 0.00833) ^ 60] - 1

where,

Principal = Rs.10,00,000

Interest rate p.m. = 10%/12 = 0.00833

Loan tenor (i.e. 5 years) in months = 60 months

Total Amount Payable = EMI * Loan Tenor in months

 = Rs.21,247 * 60

 = Rs. 12,74,820

Total Interest Due = Rs. 12,74,820 - Rs.10,00,000 = Rs.2,74,820

Based on this data, the repayment or amortization schedule is presented as given below:

Month	Opening Balance	Principal Repaid	Interest Paid	Outstanding Balance
1	10,00,000	12,914	8,333	9,87,086
2	9,87,086	13,021	8,226	9,74,065
3	9,74,065	13130	8,117	9,60,935
4	9,60,935	13239	8,008	9,47,696
5	9,47,696	13350	7,897	9,34,346
…..	…..	…..	…..	…..
55	1,23,845	20215	1,032	1,03,630
56	1,03,630	20383	864	83,247
57	83,247	20553	694	62,694
58	62,694	20725	522	41,969
59	41,969	20897	350	21,072
60	21,072	21071	176	0

The figures in the table are arrived at as follows:

First Month:

Interest paid = Principal X Interest rate p.m.

         = Rs.10,00,000 X 0.00833

         = Rs.8,333

Principal repaid = EMI - Interest

              = Rs.21,247 - Rs.8,333

              = Rs.12,914

Balance Outstanding (i.e. Opening Balance 2nd month)

= Principal - EMI

= 10,00,000 - 21,247

= Rs.9,87,086

Second Month:

Interest Paid = Balance Outstanding X Interest rate p.m.

                      = Rs.9,87,086 X 0.00833                                                           

          = Rs.8,226

Principal Repaid = EMI - Interest

                = Rs.21,247 - Rs.8,226

                = Rs.13,021

Balance Outstanding (i.e. Opening Balance 3rd month)

= Opening Balance 2nd month - EMI

= 9,87,08 - 21,247

= Rs.9,74,065

Third Month:

Interest Paid = Balance Outstanding X Interest rate p.m.

                      = 9,87,086 X 0.00833

                      = Rs.8,117

Principal Repaid = EMI - Interest payable

                = Rs.21,247 - Rs.8,117

                = Rs.13,130

Balance Outstanding (i.e. Opening Balance 4th month)

= Opening Balance 3rd month - EMI

= 9,74,065 - 21,247

= Rs.9,60,935

These calculations are repeated for every month of the loan period. In the last month i.e. the 60th month, the last interest payment is made and the entire principal is repaid leaving no balance outstanding.

EMI and Amortization Calculators:

The calculations on your home loan may appear tedious and time-consuming, and they well may be, especially for those who find it difficult to deal with numbers. The process becomes even more time-consuming when trying to make comparisons between lenders or incorporating pre-payments in the schedule. To resolve this issue, online financial tools like EMI calculators and amortization calculators are made available by various online financial services providers. Among the leading sites is that of Bank Bazaar’s, who's online financial tools allow users to not only arrive at required answers but also displays data in a user-friendly format.