If you’re thinking of buying a home, we’re sure you are also looking at how to get a home loan to help you finance your purchase. Well, don’t put off your home buying any longer, NOW is a good time to buy as interest rates have dropped and you just might be able to buy your dream home within your budget.

But, if you need some clarity on how a home loan works, and how to calculate the principal amount in a home loan, you’re not alone. Read on to get answers to your questions. 

What is a principal amount in a home loan? 

When you are applying for a home loan you normally need to look at two things, the first is how much you need to borrow and the second is how much you will need to pay back. 

The amount you borrow will always be less than the amount that you need to pay back, banks and other lenders charge interest on the amount you borrow. This rate of interest varies from bank to bank and lender to lender. This is why when you have an EMI (equated monthly installment) you will notice that it is broken into two components – 

  1. Principal – what you borrow and what you have to pay back 
  2. Interest – the fees the lender or bank charges you for lending you the money. 
home loan calculations

home loan calculation

How do you calculate the principal amount in a home loan? 

This is not as complex as you think, there is an easy formula that you can use to calculate principal amount in a home loan – 

P=(I*100)/(N*R) 

Where I is amount of interest

P is Principal amount

R is Rate of interest annually

N is time period in years

home loan calculations

home loan calculation

Let’s suppose a bank sanctioned a home loan of Rs.5 lakhs to you at the rate 7.35% P.A. for 10 years. 

In this example, the simple interest amount for all years will be Rs.3,67,500/- {5 lakhs*10yrs*7.35%}. Now in a span of 10 years you must pay the bank a total of Rs.8,67,500/- i.e. (original amount which bank has sanctioned + interest amount on loan). Here in this example, Rs.5 lakhs which the bank already sanctioned is the principal amount of home loan.

Now we will calculate the principal amount as follows: –

P= (Amount of interest*100)/ (rate of interest *number of years)

=(367500*100)/(7.35*10)

=Rs. 5,00,000/-

It’s that simple! But, if you need any help with getting a home loan for your house, or even finding the right house for you, let NoBroker help. You can even drop a comment below and we will get in touch with you to assist you.