The amount that a lender gives to a borrower is known as the principal amount. This principal amount added with interest and is the final amount to be paid to the lender on time. This amount can be repaid in the form of easy monthly installments (EMI).
Components of EMI
EMI is made of principal amount and interest, which keeps changing as and when you repay the borrowed amount.
EMI component #1: Principal amount
The principal amount is the total amount that has been secured from the home loan lender at the start of the loan tenure. As time progresses and you repay the home loan, the principal amount reduces and on complete payment, the principal amount becomes zero.
Calculation of principal amount
If a homebuyer borrows Rs 80 Lakh from a financial institution, then the principal amount is Rs 80 Lakh.
If your first EMI was Rs 20,000, the principal amount will not become Rs 79.8 Lakh after the first EMI payment as there is an interest component attached. To find out the principal amount, use a home loan calculator as the ratio of interest and principal component keeps changing throughout the loan tenure.
EMI component #2: Interest
Interest is charged based on interest rate that the loan is subjected to. The interest can be fixed or floating that is compounded and applied on the entire home loan amount. In the beginning of your home loan journey, the interest charged is a big part of your EMI and it gradually reduces when the loan gets paid.
For instance, if you have paid Rs 10 Lakh out of Rs 80 Lakh home loan, the principal amount will be Rs 70 Lakh. However, the interest to be paid will be on Rs 70 Lakh and not on Rs 80 Lakh. As time passes, the share of interest reduces.
See also: How to reduce home loan interest rate?
Ways to make fast repayment of principal amount
- Increase the down payment to be made in the transaction.
- Make prepayment of the home loan whenever possible.
- Choose a short loan tenure so that the loan can be closed at the earliest.
- Add a co-applicant on the home loan document. In this way, the co-applicant can also contribute and help in fast payment of the principal amount.
- Change the lender, if you feel the new lender offers low interest rates for your home loan.
FAQs
What is the formula for calculating the principal amount?
Principal payment = monthly payment - interest payment
What is the formula for calculating the principal balance amount?
Principal balance = present loan balance – principal payment
In a home loan, does the sanction amount and the principal amount same?
No, the sanction amount and the principal amount is not the same.
What is a sanction amount in a home loan?
A sanction amount is the maximum amount that a home loan borrower can get from the lender.
What is a principal amount?
Principal amount is the amount that a home loan borrower gets from the lender.
Should a home loan borrower borrow the entire sanctioned amount?
No, it depends on the borrower as to how much money he wants to borrow.
What is the total amount?
Total amount is the principal amount plus interest to be paid to the money lender.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
