Principal Amount in Home Loan
Nov 20, 2023
Getting a house loan is a big step toward becoming a homeowner, and it's important to know the financial nuances of it. But queries such as "What is the principal amount?" may come up.
The idea of the main amount—the original quantity borrowed to buy your dream home—is crucial to understanding this subject. However, what does the term "principal amount" mean, how is it determined, and how does it affect your path to homeownership?
In this article, we will get into the specifics of figuring out a house loan's principal amount.
What is the Principal Amount in Home Loan?
The principal amount of a home loan is the initial amount that you borrow from a lender in order to buy a home. The amount you are required to repay throughout the course of the loan is the main component of your loan. Interest and other charges are not included in the principal amount; they are computed separately.
A portion of your monthly mortgage payment is applied toward principal reduction, and another component is used to pay interest. The amount that makes up your monthly installments' principal and interest varies over time as long as you keep making payments. A larger portion of your payment goes toward lowering interest in the later stages of the loan than it does in the earlier ones.
Principal Amount and Interest Rate for Home Loan
The first amount borrowed for a home loan is known as the principal. It serves as the basis for your mortgage. The cost of borrowing, stated as a percentage, is known as the interest rate. Your monthly mortgage payments are determined by how the interest rate and principal amount interact. Larger payments result from higher principal or interest rates, and vice versa. When applying for a house loan, it's critical to find a balance between a reasonable principal amount and a good interest rate.
Components of a Home Loan EMI
The first loan sanction that is given to you as a borrower is referred to as the principal amount when discussing a home loan or loans in general. But when it comes time to paying back your home loan, the amount you have to repay consists of two parts:
1. The principal of your home loan, or the initial amount you borrowed.
2. The interest paid on a home loan is the cost of borrowing the money over the loan amount.
The rate of interest is compounded monthly on your outstanding principal amount and the interest accrued on it - as of the latest EMI payment - when calculating your total home loan repayment amount.
How is the Principal Amount for a Home Loan Calculated?
This is how it operates:
Property Cost: Finding out how much the property you want to buy will cost overall is the first step. This covers the selling price of the property as well as other expenses like stamp duty and registration fees.
Down Payment: A down payment, often equal to a portion of the cost of the property, is demanded from the borrower. The home loan will be used to finance the principal, which is the remaining sum.
Principal: The amount that remains after deducting the down payment from the overall cost of the property is the principal. You will borrow this sum from the lender.
For example, if the property costs INR 2,50,000 and you make a down payment of INR 50,000, the principal amount would be INR 2,00,000. This is the sum you'll repay over the loan tenure, along with interest.
How to Check Your Outstanding Principal Amount?
There are two ways to find out how much of the principal on your home loan is still owed.
Amortization timeline: Beginning with your initial balance and ending with the principle that remains unpaid at the end of the year, amortization tables provide a summary of your whole repayment timeline. Extensive amortization tables compute the remaining principal after each EMI payment, illustrating the contribution that each EMI makes to the principal repayment of the home loan.
Home Loan Statement: Examining your home loan statement is a simple way to find out how much principal you still owe on your home loan. It includes a thorough analysis of your loan repayment history, including the total amount borrowed, the amount paid back so far, and the balance due on the principal.
Read More: Possession Certificate and Its Importance
Principal Payment Amount of Home Loans
Certain banks allow you to pay down your house loan early while it's still in term. For borrowers hoping to lower their debt load and save money on interest, this can be a big benefit.
In essence, you are paying a portion of the loan's principal when you make a prepayment. You can lower the amount owed on the loan by making more principal payments.
Even if the interest rate stays the same, the interest component of the loan drops as the principal amount does. This is because the interest rate you pay on a loan is determined by the amount still owed. Therefore, the interest that is charged on the remaining balance decreases as the principal is lowered.
Conclusion
To sum up, knowing how to figure out a home loan's principal is an essential part of being a responsible homeowner. Understanding the nuances of the principal amount will help you make wise financial decisions, whether you're a first-time buyer or an experienced property owner. As you embark on your home buying or refinancing journey, it's crucial to explore various loan options to find the best fit for your needs. One notable avenue to consider is SMFG Grihashakti Home Loans. Know your eligibility criteria, estimate your monthly EMIs, and apply now!
FAQ's
Is the sanction amount and principal amount the same in a home loan?
In a home loan, the sanction amount and the principal amount are different. The principal amount is the actual amount borrowed, whereas the sanction amount is the total loan amount that the lender has approved.
How is the principal and interest component calculated in EMI?
Using a conventional formula, the principal and interest components of an EMI are determined. This formula determines the fixed monthly installment that a borrower must pay by factoring in the principal amount, interest rate, and loan tenure. The primary component steadily rises over time, while the interest component is larger in the earlier EMIs.
How do I clear my principal amount on my home loan?
With a house loan, you can pay down your principal through prepayments, extra payments, or monthly installments. A lower principal amount facilitates quicker loan payback.
Can I claim both principal and interest on a home loan?
Under Section 80C, the annual principal paid on the home loan EMI is deductible. A claim may be made for a maximum of INR 1.5 lakh*. However, the home property must not be sold within five years of ownership in order to be eligible for this deduction. *T&C apply.
What are the benefits of adding a co-applicant in Home Loan?
Adding a co-applicant to your home loan application can have a number of benefits, including enhanced eligibility, possibly better terms, and a shared financial responsibility.
What is the difference between loan amount and principal amount for a home loan?
The principal amount is the original amount borrowed minus interest, whereas the loan amount is the total amount borrowed. Over time, as you make repayments, the principle drops.
Disclaimer: *Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG Grihashakti. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG Grihashakti’s policy at the time of loan application. If you wish to know more about our products and services, please contact us.