Principal amount in Home Loan refers to the core sum you borrow from a lender to purchase your home. It serves as the foundation of your journey towards homeownership, much like the cornerstone of a house. This core component of your loan dictates your repayment schedule and forms the basis for interest calculations. Understanding the principal amount in Home Loan is key to making informed financial decisions during your homeownership journey.
What is principal amount in Home Loan?
When you secure a mortgage, the principal amount in Home Loan is the amount you initially agree to pay back, excluding the interest. For example, if your bank agrees to lend you ₹60 lakh for a home purchase, then ₹60 lakh is your Housing Loan principal amount. It excludes additional charges, like interest, processing fees, or other costs associated with securing the loan.
Home Loan EMIs depend on the principal amount in your Home Loan and the interest rate
- Each EMI (Equated Monthly Instalment) you pay comprises a principal repayment towards Home Loan and an interest component.
- The interest is calculated as a percentage of your outstanding Housing Loan principal amount.
- Early on, your EMI payments are mostly dedicated to interest; later, they shift towards principal amount repayment towards Home Loan.
- Gradually, as you repay the principal amount in Home Loan, the proportion going towards the principal increases.
Components of a Home Loan EMI
- Interest Amount: This is the price paid for the opportunity to buy now rather than save up the full purchase price over time. It is the percentage of the outstanding principal amount in Home Loan charged by the lender as their fee. The interest is calculated on the outstanding balance of the Housing Loan principal amount.
- Principal Amount: This part of your EMI goes towards repaying the original sum borrowed, thereby reducing the outstanding loan balance.
How does Housing Loan principal repayment work?
Monthly installments (EMIs)
Each payment made towards your Home Loan is structured to cover both the interest charged and the principal amount. This system ensures that your loan balance decreases with every payment over time.
Amortisation schedule
An amortisation schedule is a comprehensive chart illustrating how each EMI payment is divided between the interest and the principal amount. Initially, a larger portion of your EMI is applied towards the interest, with the remainder reducing the principal. Over time, as the interest portion decreases, more of your payment goes towards reducing the principal.
Equity buildup
With each payment that lowers the principal, your equity in the property increases. This growing equity is a significant aspect of building wealth through homeownership and representing your stake in the property.
How to check the outstanding principal amount in Home Loan?
Loan statement from lender
Regular statements provided by your lender detail the remaining principal amount in Home Loan.
Loan amortisation schedule
This chart portrays the exact principal and interest amount per installment.
Online banking or lender's website
Most lenders provide real-time information about your loan balance online. Axis Bank customers can easily check their outstanding balance using Axis Bank's online banking services, which offer a user-friendly interface and detailed, up-to-date information.
Conclusion
Understanding the principal amount in your Home Loan is crucial for effective financial planning and repayment management. Regularly reviewing your loan amortisation schedule can help you understand how much of your property you truly own at any point in time. You can also plan for prepayments to save on interest. To optimise your repayment efforts, consider exploring Axis Bank's Home Loan options, available at both fixed and floating interest rates, as well no prepayment charges.
Also Read: What is a down payment on a Home Loan?
FAQs
1. Can we prepay both the principal amount in Home Loan and the interest?
Yes, prepayments can be made towards both components, potentially reducing the total interest paid over the life of the loan.
2. Is the loan sanction amount the same as the principal amount in Home Loan?
The loan sanction amount is typically the maximum approved by the lender, which can be the same as or more than the principal amount in Home Loan you initially borrowed.
3. How does prepayment of Home Loans work?
Prepayment involves paying off a part or all of the principal amount in a Home Loan before the loan's scheduled end, reducing the total accrued interest.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision
