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How Does Home Loan EMI Work?
EMI – Equated monthly Installment is calculated on the diminishing Principal balance @ the end of each loan month. The components of an EMI are: Monthly EMI amount, Principal part of the EMI & Interest part of the EMI.
As the initial period of the loan consists of Higher Loan outstanding; the Interests component is always higher compared to the Principal component (vice-versa at the end period of the loan).
How to do smart part-payments on Home Loan:
It is wise to do part-payments on the loan during the initial years compared to later years.
For example, the below metric would show how much interest can be saved comparatively with a 1 lac part-payment on a 10 lac Home loan (@ 9.50% Rate of Interest & 20-year tenure).
The decision of part-payment has to be basis the net savings after considering the tax saver on Interest on Home loan, i.e., upto Rs.1,50,000/- (Rs.2,50,000/- in case of a 1st time borrower + loan quantum being <= 25 lacs)