Once you have taken out a home loan, there will be a monthly deduction for the principal and interest payment called the Equivalent Monthly Installment (EMI).
The “equivalent monthly payment”, or EMI, is the amount you will pay us regularly until the loan is fully paid off. It includes the principal amount as well as the interest due, which is spread over the fixed term.
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Monthly declining balance method
A loan calculated on a monthly reduction basis is more advantageous for borrowers than a loan calculated on an annual basis. Interest is calculated on the outstanding principal balance for that month for monthly resets. According to the RBI’s Home Loans FAQ, “The principal paid is deducted from the opening outstanding principal balance to arrive at the opening principal for the following month and interest is calculated on the new reduced outstanding principal. In the event annual resets, the principal paid is only adjusted at the end of the year, so you continue to pay interest on some of the principal that has been repaid to the lender.”
Tax advantage on the loan
Under the Income Tax Act 1961, borrowers of home loans are eligible for specific tax benefits on the principal and interest of their loans. You are entitled to an income tax credit for interest reimbursement up to Rs 1,50,000/- per year under the laws in force. Also, you may be eligible for additional tax savings under Section 80 C on principle refunds up to Rs. 1,00,000 per annum.
Is prepayment of the loan allowed?
Most banks allow you to prepay your loan by paying one or more lump sum payments. However, many banks charge prepayment penalties of up to 2% of outstanding debt. However, you can regularly credit more than your EMI amount to your loan account to reduce your interest burden as funds become available. If you regularly deposit more than your EMI due, most banks do not charge a prepayment penalty. However, ask your bank about prepayment conditions before applying for a loan.