How Banks Calculate Home Loan Interest Rate?

When it comes to determining the interest rate on your home loan application banks use information such as your CIBIL score. Loan amount along with your income capacity and various other factors. Knowing this information is crucial to borrowing wisely when it comes to home loan apply. You’ll be better able to analyse the cost of the loan and decide if you can afford it if you know how much interest you’ll be paying. This is why the EMI calculator is such an important element of the house loan application process, as it allows you to prepare ahead of time based on reliable data. Knowing the elements that determine home loan interest rates will help you plan your loan. These factors include the Reserve Bank of India’s policies and money supply, but your credit score also influences the rate you are offered. A good credit score can help you get a lower interest rate or a better loan.

Factors that Affect Home Loan Interest Rates

Credit Rating

Your credit score determines your creditworthiness. If you have a good credit score, you are considered creditworthy and may be granted a lower interest rate. Similarly, if your credit score is low, you are deemed high-risk. And you may be required to pay a higher interest rate to obtain a loan.

RBI Policy

Any changes in the RBI’s policy will result in a change in your home loan interest rate. You can now choose a date (typically every 6 months or one year) when your interest rate will be reset, thanks to the recent introduction of the MCLR system. This allows you to quickly benefit from a drop in interest rates.

Monetary Supplies

Financial organisations can offer reduced housing loan interest rates when they have more money to lend. Like they did following demonetisation. If there is a money shortage in the economy, though. They are likely to charge a higher rate of interest on the loan. In addition, when loan demand is high, so is the interest rate, and vice versa.

How to Calculate Your Home Loan Interest Rate?

To calculate the interest rate on your home loan application you can use the following formula:

EMI= [P x R x (1+R)/\N]/ [(1+R)/\N-1]

Where, P stands for the Loan’s Principal Amount,

N represents the Number of Monthly Installments,

And, R is the rate of interest on a monthly basis. 

Manual calculations are prone to human errors. Therefore, most of the banks and lenders offer a home loan EMI calculator on their websites for the applicants. To make the calculations easy for them. The process is now very easy for the applicants as they can easily access the home loan EMI calculator. The home loan EMI calculator allows you to enter the principal amount, interest rate and loan tenure. You can adjust these amounts and see your EMI amount. Along with this the major benefit of using the calculator is that you can see the total interest payable on your home loan as well as the total repayment amount. 

Banks also use these EMI calculators to calculate the EMI as well as the interest rate on your home loan application. As soon as the banks receive your home loan application they tend to verify your application and your other factors such as your credit score and your income levels. However, home loans are long term debts and therefore the interest rate on almost all the home loan applications is nearly the same. Talking about the general home loan interest rate, RBI policies play an important role in determining the home loan interest rates.

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