Finance

# How to Calculate Interest Rate Amount on Home Loan in 3 Simple Steps

To ensure a hitch-free home loan application process, you must know the interest rate that your prospective lender is offering. Remember that you will repay the loan amount plus a certain amount (i.e. interest) charged by the lender for taking a home loan.

The home loan is divided into two parts: the principal amount (the exact sum you borrowed) and the interest component. How to calculate the interest rate on home loan? As you know, calculating your interest before applying enables you to opt for an amount that aligns with your current financial status.

Before taking a housing loan in India, your primary thought should be the interest rate. Certain factors, such as the amount desired and your credit history, help your lender determine the interest to charge.

Want to learn how to calculate your home loan interest rate? This article will show you how to do so in 3 easy steps.

Table of Contents

## How to Calculate the Interest Rate on a Home Loan

Below are three easy ways to calculate the interest rate on your desired home loan amount:

### Step 1

You must first know the formula for home loan interest rates. The formula is:

EMI=[P × R × (1+R)/\N]/ [(1+R)/\N-1]

Here,

P stands for the principal amount

N stands for the monthly instalments

R stands for the interest rate per month

### Step 2

Doing this with pen and paper isn’t easy, so we recommend that you utilize a home loan interest calculator. A home loan interest calculator is an online financial planning tool that allows you to know the results of your calculations promptly.

Below are some of its benefits:

● With it, you can know the amount a lender will charge you as interest for taking a home loan.

● It enables you to select a convenient repayment tenor.

● It also helps you to tell if you can afford the loan or not.

● It allows you to plan a workable repayment schedule.

● It guarantees you accurate results in real-time.

### Step 3

After calculating your home loan interest rate, you can either opt for the loan or not.

## Three Factors that Affect the Interest on Your Desired Home Loan Amount

Below are three factors that affect the amount lenders charge you for taking a home loan from them.

RBI Policy

The Reserve Bank of India, or RBI, has a set of policies that greatly affect the interest rate on home loan. When there is a sudden modification of the policy, the interest increases or decreases. For instance, based on the Marginal Cost of Funds based Lending Rate, or MCLR, your interest rate undergoes a reset every 6 months or a year. You can set the exact date for the reset.

Credit Score and Credit Report

Two ways by which the lender determines your creditworthiness are through credit score and credit report. Having a score of 725 upward increases your chances of getting approved because the lender will see you as a low-risk borrower. This means that your lender feels convinced that you can repay the loan amount within the set tenor. Having a low score means that you will be charged a high-interest rate.

Money Supply

Lenders can offer low-interest rates on home loans when they have more money. If there isn’t enough money, the interest charged will increase due to the shortage of money in circulation. If there is a high demand for home loans, lenders typically charge more interest.

## 3 Effective Ways to Lower the Interest Rate on Home Loans

Below are three sure fire ways to reduce the interest charged for taking a home loan in India.

Opt for a Short Tenor

Your tenor is an important aspect of the home loan, especially the interest rate. For instance, a tenor of 20 to 30 years means that you will pay low EMIs but higher interest. However, shorter tenors mean that you will spend less on interest.

Do a Balance Transfer

If the interest rate is a bit high, you can renegotiate with your lender for better terms. If they refuse, initiate the process for a home loan balance transfer. This means that you move your home loan to a new lender with better terms and conditions like low interest.

Compare Interest Rates

Do not accept the first offer that you receive. Instead, make a shortlist of lenders and compare their respective interest rates. Doing this gives you a chance to select the one that best suits you.

There you go! That’s all you need to know about calculating your home loan interest rate. Now, go ahead and put this information to use.