how does home loan emi work

Home loan EMI, or Equated Monthly Installment, is a repayment scheme that allows individuals to borrow money from financial institutions to purchase a home. It is a fixed monthly payment that comprises both the principal amount and the interest accrued over the loan tenure. Understanding how home loan EMI works is crucial for anyone planning to buy a house with a loan. Let’s dive into the details below.

Loan Amount

The loan amount, often referred to as the principal amount, is the total sum of money borrowed from the lender. This amount varies based on factors such as the cost of the property, the borrower’s income, and the lender’s loan-to-value ratio.


The loan tenure determines the duration within which the borrower needs to repay the loan. It is typically measured in years, and the most common tenures range from 10 to 30 years. A longer tenure may result in lower EMI payments, but it also means paying a higher amount of interest over time.

Interest Rate

The interest rate is the percentage at which the lender charges interest on the borrowed loan amount. It is typically expressed on an annual basis. The EMI amount depends on the interest rate, with higher rates resulting in higher EMIs.

Calculation of EMI

To calculate the EMI, lenders use a complex formula that takes into account the loan amount, tenure, and interest rate. The formula considers the decreasing outstanding loan balance and the interest component of each payment. However, you don’t need to worry about performing the calculations yourself, as online EMI calculators are readily available on lender websites or financial platforms.

Factors Affecting EMI

Several factors can influence the EMI amount for a home loan:

  • Loan amount: The higher the loan amount, the higher the EMI.
  • Tenure: A longer tenure leads to lower EMIs, whereas a shorter tenure results in higher EMIs.
  • Interest rate: Higher interest rates increase the EMI, while lower rates reduce it.
  • Prepayment: Making prepayments towards the loan principal can reduce the outstanding balance and subsequently lower the EMI.

Interest and Principal Distribution

In the initial years of the loan tenure, a major portion of the EMI goes towards paying the interest component. With each passing month, the interest component decreases while the principal amount increases. Towards the end of the loan tenure, the majority of the EMI amount goes towards repaying the principal amount.

Table of Loan Repayment Schedule

Financial institutions provide a loan repayment schedule that shows a comprehensive breakdown of each EMI payment. The schedule includes the repayment year, outstanding loan balance, interest component, principal component, and the total amount paid until a particular point in time. This table can help borrowers keep track of their payments and plan their finances accordingly.

Understanding how home loan EMI works empowers individuals to make informed decisions when it comes to borrowing. By considering factors such as loan amount, tenure, interest rate, prepayment options, and principal and interest distribution, borrowers can manage their finances effectively and repay their home loans without any hassle.