EMI calculators are readily available online and are quite user-friendly. They contain custom fields for loan amount, loan tenure, and interest rate, so you can customise the values according to your needs. However, there are some significant mistakes to avoid when using these EMI calculators, especially when considering a home loan.
Mistakes to Avoid When Using a Home Loan EMI Calculator
To achieve the best results with an EMI calculator for your home loan, you need to consider several key aspects. For example, you need to be careful not to enter the wrong loan amount, enter the correct interest rate, select a realistic loan tenure, and even consider the possibility of hidden charges. Let’s take a closer look at some of these common mistakes.
Entering an Incorrect Loan Amount
An EMI calculator is programmed to produce the correct value for potential EMIs based on the loan amount, loan tenure, and interest rate. So, if you enter the wrong loan amount, your estimated EMI will also be wrong. This can result in an unexpected monthly burden after your loan has been approved.
To avoid this mistake, you can subtract the down payment on your housing loan from the sale price of the house. This will provide you with the exact loan amount and, thereby, a correct EMI estimate.
Ignoring Interest Rate Variations
Interest rates may fluctuate depending on bank and government regulations. If you enter an older (possibly lower) interest rate, you will get a lower EMI estimation. However, upon approval, you may find that the EMIs are much higher than your monthly payment capacity.
To avoid this mistake, research the current interest rates on housing loans first. Only then should you enter the interest rate, resulting in a more accurate estimate of the EMI.
Selecting an Unrealistic Loan Tenure
Another significant error you need to avoid when using a home loan EMI calculator is related to the loan tenure. Since the interest rate is a percentage of the loan amount, it is essential to select the loan tenure carefully. The resulting interest payments may even become double the loan amount.
To avoid this, you should find the right balance between loan tenure and loan amount. The right balance will ensure that your EMIs are not too high while your total interest is within manageable limits.
Not Accounting for Additional Loan Charges
Some housing loans may come with additional hidden charges. These charges do not show up on an EMI calculator. Most borrowers make the mistake of considering the EMI estimation from the calculator to be the only amount they have to pay. There may be additional charges, such as processing fees, legal fees, prepayment penalties, late payment fees, and foreclosure charges.
To avoid this, you should conduct thorough research and be aware of the additional fees each bank charges. By dividing the sum of these additional charges by your loan tenure and adding them to your estimated EMIs, your results from a loan calculator will be more accurate.
Overlooking Prepayment and Part-Payment Options
When using a home loan EMI calculator, it’s essential to consider the possibility of prepayment and part-payment options. Some banks offer the option to pay a lump sum amount, which effectively reduces your EMIs by offsetting the principal owed to the bank.
To avoid this, you should carefully plan your finances. For example, if you can save up sufficiently each month and make a lump sum partial repayment after a few months, this can reduce your future EMIs. Hence, you must use the EMI calculator again and enter the new reduced loan amount against the remaining loan tenure.
Use a Home Loan EMI Calculator the Right Way
By paying heed to the mistakes mentioned above, you can use an EMI calculator correctly. This will help you plan your finances better. It can also help you save significantly and avoid foreclosure of the housing loan before completing the entire loan tenure. This can effectively help you avoid paying more interest to the bank.
