A home loan is an amount an individual borrows from a financial institution such as a housing finance company to buy a new or a resale home, construct a home or renovate or extend an existing one. A liquidity problem could arise down the road if you use up all of your available cash to buy a house in one go. While only paying a portion of your income in home loan EMIs, home loans allow you to maintain your liquidity.
How to calculate Home Loan EMI?
To calculate a home loan Equated Monthly Installment (EMI), you can use the formula:
- EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
- Where:
- P: is the principal loan amount
- R: is the monthly interest rate
- N: is the loan tenure in months
The monthly interest rate (R) is calculated as the annual rate of interest divided by 12 and then by 100. For example, with a loan amount of Rs. 10,00,000, an illustrative annual interest rate of 7.25%, and a tenure of 120 months, the EMI would be approximately Rs. 11,740.
Best age to Home Loan
Technically, you can apply for home loans from the age of 18, but the best time to apply is typically from 30 to 50. However, several factors come together when it comes to deciding the timing of buying a house, and the age at which these factors come together favourably is the best age to get a housing loan.
Benefits of Home Loan
A home loan has various tax benefits. If you have a home loan, you can exclude interest and principal payments from your taxable income. Owners can deduct up to Rs. 2 lakhs in interest on their house loan for a self-occupied/ let out property under section 24 of the Income Tax. While home loans offer benefits, they also entail long-term commitments. Borrowers must maintain financial discipline to ensure timely EMI payments throughout the loan tenure, avoiding defaults that can adversely affect credit scores and lead to foreclosure risks.
Similarly, a mortgage or home loan is considered good debt as a house would appreciate in value and help build equity. If you earn rent on it, it can more than pay for itself and even earn you some profit. You may also get tax benefits, making it a good investment.
Losses in Home Loan
When buying a home, there will always be a trade-off between money and time. It is very easy to say that you should save up for a home and only then purchase it if you do not want to get into the hassle of a home loan. But just saving money is not enough. You can buy your dream home if you invest your savings wisely.
The expected loss of a given loan is calculated as the LGD multiplied by both the probability of default and the exposure at default. Exposure at default is the total value of the loan at the time a borrower defaults.
While borrowing a home loan is a good way of making your dreams of owning a home a reality, they do come with certain obligations. There are both advantages and disadvantages of home loan but it is the borrower who has to weigh their options and see if borrowing a home loan is good or bad for them.
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