What is a Mortgage?

A mortgage, commonly known as a home loan, is a loan used by purchasers of real property to raise funds to buy real estate. The property itself is used as collateral to secure the loan. The borrower enters into an agreement with the lender (usually a bank or financial institution), where they receive a lump sum of money upfront and agree to pay it back in a series of regular payments, or installments, over a set period of time. These payments include both the principal amount borrowed and the interest charged by the lender. For millions of people, a mortgage is the key to achieving the dream of homeownership.

Understanding Your Monthly Payment (EMI)

The monthly payment, or Equated Monthly Installment (EMI), is the fixed amount you pay to the lender each month. It's the most important number for a borrower to understand. A complete monthly mortgage payment is often referred to as PITI.

• Principal (P): This is the portion of your payment that goes towards paying down the original loan amount. In the early years of a loan, the principal portion is small, but it gradually increases over time.
• Interest (I): This is the cost of borrowing the money, paid to the lender. In the early years, the interest portion makes up the majority of your payment.
• Taxes (T): This refers to property taxes, which are levied by local municipal bodies. Lenders often collect these taxes as part of your monthly payment and hold them in an escrow account, paying the tax authorities on your behalf.
• Insurance (I): This is the premium for homeowner's insurance, which protects your property against damage from events like fire or natural disasters. Like taxes, this is also often collected by the lender via an escrow account.

Our calculator allows you to include these additional costs to get a true estimate of your total monthly housing expense.

The Mortgage EMI Formula

The Principal and Interest (P&I) portion of your EMI is calculated using a standard formula.

EMI = [P × r × (1 + r)ⁿ] / [(1 + r)ⁿ - 1]

Where: P is the principal loan amount, r is the monthly interest rate (annual rate / 12 / 100), and n is the number of monthly installments (loan term in years × 12).

Key Factors in a Mortgage

• Home Price: The total purchase price of the property.
• Down Payment: The initial, upfront portion of the total price that you pay out of your own pocket. A larger down payment reduces your loan amount, leading to a lower EMI and less total interest paid. Typically, lenders in India require a down payment of at least 10-20%.
• Loan Term: The duration over which you will repay the loan. Common terms are 15, 20, or 30 years. A longer term means a lower monthly payment, but you will pay significantly more in total interest. A shorter term results in a higher EMI but saves a substantial amount of interest.
• Interest Rate: The rate at which the lender charges you for borrowing the money. This is one of the most critical factors affecting your EMI and total cost. It can be fixed or floating.

Fixed vs. Floating Interest Rates

• Fixed-Rate Mortgage: The interest rate remains the same for the entire loan tenure. This provides predictability, as your EMI will not change, making it easier to budget.
• Floating-Rate Mortgage: The interest rate is linked to a benchmark rate (like the RBI's repo rate) and can change over time. If the benchmark rate goes down, your EMI may decrease, but if it goes up, your EMI will also increase. Floating rates are often slightly lower than fixed rates initially.

Frequently Asked Questions (FAQs)

1. What is an amortization schedule?

An amortization schedule is a table that details each payment on a loan over its lifetime. It shows how much of each payment goes towards principal and how much goes towards interest, and it tracks the remaining loan balance after each payment.

2. How can I lower my monthly mortgage payment?

You can lower your EMI by making a larger down payment, choosing a longer loan term (though this increases total interest), or securing a lower interest rate. Improving your credit score before applying for a loan is the best way to qualify for a lower interest rate.

3. What is prepayment of a home loan?

Prepayment is the act of paying off a part of your loan principal ahead of schedule. Making prepayments can significantly reduce your total interest cost and shorten your loan tenure. Most floating-rate loans in India do not have prepayment penalties.

4. What other costs are involved in buying a home?

Besides the down payment, be prepared for other upfront costs like stamp duty, registration charges, processing fees for the loan, legal fees, and brokerage fees. These can add up to a significant amount.