Concept of Home loan

A home loan is an amount individual borrow from a bank or financial institution to purchase a house. This property can be for self-occupation or just a financial investment. It is borrowed at a specific rate of interest to be paid in Equated Monthly Instalments- known as EMI- every month. The Instalment amount is inclusive of interest. It is a prevalent instrument used by many individuals to purchase homes.

Types of home loans available in the market are:-

1. 1) Home Purchase Loans - This type of loan is taken to buy ready-to-move residential property, including flats, rowhouses, and bungalows. An individual who wants to avail of a home purchase loan
2. 2) Home Construction Loans: - People can also avail of home loans to get their house constructed – either by themselves or by employing a contractor to build the house – on a plot they own.
3. 3) Home Improvement Loans: - You will likely need sufficient home repair and maintenance funds. You can take a home renovation or improvement loan and keep your savings intact while efficiently meeting your requirements.

ADVANTAGES OF HOME LOAN

1. 1) Tenure: - You can get a loan and pay it in an installment in a particular tenure. You can choose the term. This is one of the best advantages of taking a Home loan. You can get the loan and make a tenure to pay the loan in EMI. The maximum loan tenure for housing loans is capped at 30 years.
2. 2) Low-interest rates: - You can get a home loan at a lower interest rate. You can compare the various bank and choose as suitable for your requirements. Home loans have become very affordable today, with interest rates moving down recently. Lower interest rates result in lower EMI amounts, making home loans more attractive and cheaper.
3. 3) Instalments: - If you are thinking of not taking a loan, you have to pay the total amount simultaneously, but if you take a loan after receiving the loan, you can make installments and pay it monthly. This makes you burden-free from paying all the amount.

DISADVANTAGES OF HOME LOAN

1. 1) LOSS OF INVESTMENT OPPORTUNITY: - When you apply for a loan, irrespective of big or small the loan amount is, or how long or short the duration is, as you continue to repay the amount, you lose the opportunity to invest the same amount in an investment tool that could yield you valuable returns.
2. 2) HOME LOAN MAY CARRY RISKS: - The home loan duration typically spans 10 to 30 years, which is quite a long time. If you fail to repay the loan, the lender has the authority to take over the property and sell it to gain back the money they lent you as a home loan.
3. 3) Long Term Commitment: - A Home Loan is a long-term commitment of at least 15-20 years. ... This is why you must always keep an eye on your outstanding Home Loan amount. A periodic review of your Home Loan amount will help you decide if your loan needs a foreclosure, top-up, or a balance transfer.

WHAT IS EMI?

An equated monthly installment (EMI) is one part of the equally divided monthly installments to clear off the outstanding loan within a particular tenure. A fixed payment amount is made by a borrower to a lender at a specified date each calendar month, and equated monthly installments are used to pay both interest and principal each month so that over a set number of years, the loan is paid off in full.

The EMI is dependent on multiple factors, such as:-

1. 1) Principal borrowed
2. 2) Rate of interest
3. 3) Tenure of the loan
4. 4) Monthly/annual resting period

How EMI Calculated

The EMI usually remains fixed for the entire tenure of your loan, and it is to be repaid over the loan term every month. During the initial years of your loan tenure, you pay more toward interest. The interest rate will be taken monthly as EMIs are paid monthly.

For Example, if the interest rate is 10%, you must divide it by 12. Also, the tenure (NPER) will be the number of months. So, if your loan tenure is 20 years, the tenure will be 20x12 = 240 months.

EMI = principal amount + interest paid on the loan

You can also calculate EMI’s on various websites

You can calculate your EMI here.

Below is the tentative EMI schedule for purchasing flat at The Eastern Park

As a matter of financial wisdom, one should only pay EMIs of less than 40%-50% of monthly cash inflow. While the combined EMIs of all your loans should be less than 45-50% of your total income, home liabilities should be within 35-40 % of the revenue.

If you are renting in Ludhiana, you would be paying at least Rs 10000 monthly for a decent 2-bedroom accommodation. Considering this expense, paying EMI and owning a home with tremendous potential for incremental returns is the better option.