When you apply for a home loan, you might come across financial terms such as principal amount, interest rate, EMI, etc. Do you know what these terms mean? The principal amount is the amount borrowed for purchasing property. The interest amount is charged by the bank on the principal amount as a fixed rate and the EMI is the fixed monthly payment you need to pay to the bank during the repayment tenure.
Let’s learn about the principal amount in detail.
What is a Home Loan Principal Amount?
The principal amount of a housing loan is the initial amount borrowed from the bank or financial institutions for property purchase. It is the actual cost of the property and the calculation of interest and EMi depends on the principal amount. The principal amount of the housing loan remains fixed except in case of foreclosure and prepayment. The EMIs of the loan contain the principal amount and interest amount. However, the portion of the principal amount in EMI is comparatively low in the initial years of loan repayment.
Components of Home Loan EMI
The amount you pay as EMI for your home loan has 2 components – Interest amount and Principal amount. In the initial years of home loan repayment, you need to pay a higher interest component and lower principal amount but as the tenure passes, the EMI amount includes a higher principal component and lower interest amount.
1. Interest Amount
The interest rate is usually fixed, compounded, and applied to the loan amount borrowed. The interest amount comprises the bigger part of your EMI amount in the initial repayment tenure of the home loan.
2. Principal Amount
The principal amount is the actual sum borrowed from the lender as a housing loan. The principal amount keeps on reducing as you repay the EMIs. When the principal amount becomes zero, it means the complete loan is repaid successfully.
How to Calculate the Principal Amount?
Suppose, your home principal amount is Rs. 5 lakhs and your first EMI is Rs. 20,000. Your principal amount will be Rs. 4.8 lakhs after payment of the first EMI as the amount also includes the interest component. Calculating the principal amount can be hectic, you can use a home loan EMI calculator. It is an online tool that can help you calculate the Principal amount instantly and usually the tool is free to use. With some simple clicks and information, you can get instant results.
What is the Significance of the Principal Amount?
The Principal amount of significance can be understood using the points below:
1. Determine the loan amount
The principal amount is the total loan amount provided by the lender to the borrower. It covers the property’s actual cost along with registration charges, stamp duty, and processing charges.
2. Interest calculation
The principal amount of the home loan is responsible for determining the interest charged. As the repayment tenure passes, the interest component keeps on decreasing and the Principal amount gradually reduces.
3. EMI
EMIs are the monthly installment you need to pay for a fixed tenure for your loan repayment. Some portions of EMI contain the interest component and other portions contain the principal amount. The principal amount, interest amount, and the loan repayment tenure decide the EMI.
Conclusion
The Principal amount is an essential component of a home loan as it decides the EMI and helps to determine other aspects of the loan. The principal amount is gradually paid in EMIs along with the interest amount. The calculation of principal amount is complex and that is why borrowers prefer to use the online tool to get the results instantly.
