Home Loan Principal & Interest Rate Explained

Understanding Home Loan Principal & Interest Rate

Bank of Baroda offers a wide variety of Home Loans that you can choose from, based on your requirements. The bank offers loans of several lakh to a few crores in various Indian cities and towns. With its streamlined, online process, you can now apply for the loan online through the bank's website. You can even get a pre-approval for the loan, select a property based on your eligibility, and submit your documents online. But before you take a Home Loan , you should familiarise yourself with the various terminologies associated with the loan; two of which are most crucial. We are talking about the Home Loan principal amount and interest rates. Let's understand these in detail.

What is the Home Loan Principal Amount?

To put it simply, the Home Loan principal is the amount of money financed by the bank to help you buy a property of your choice. The property in question could be cost of newly constructed, a pre-owned property, or an under-construction property. It could also be a plot of land and construction thereon you want to buy. The bank also offers you the necessary finance to construct a property on a piece of land you want to buy, renovate, or remodel your existing property. Such financing also falls under the umbrella of the Housing Loan principal amount.

As such, the Home Loan principal amount is nothing but the original amount of money you borrow from the bank as a loan. It is the actual loan amount. Depending on your eligibility, income, and the value of the property you wish to buy, the bank offers maximum financing of 75 to 90 per cent of the property's market value as the principal loan amount. You must provide the remaining 10 to 25 per cent of the property's value as a down payment.

Example to Help Understand Home Loan Principal Amount

Let's say you want to buy a 2BHK in Pune City. The cost of the flat is Rs. 1 crore. After assessing your eligibility, the bank decides to offer you a loan amount of 75%, while you must provide the remaining 25% as a down payment. As such, you would be eligible for a loan of Rs. 75lakh and you must make a down payment of Rs. 25lakh. Thus, your principal on Housing Loan would be Rs. 75 lakhs. This amount reduces with every EMI you pay towards Home Loan repayment.

Difference Between Home Loan Principal & Interest Rate

Having explained what Home Loan principal is, let's understand what interest rate on Home Loans is, and how it differs from the principal loan amount.

Interest is the amount of money the bank charges on principle of the amount loaned to you. The interest rate on a Home Loan is typically expressed as a percentage and calculated as the Home Loan interest.

What is EMI?

The EMI you pay towards your Housing Loan comprises both the Housing Loan principal amount and the interest amount. With every EMI you repay, the principal amount reduces. Interest is charged on every month on remaining outstand principal. So gradually with repayment of every EMI, original principal amount is reduced and according to every month amount of interest is reduced. Thus, in later EMIs, portion of principal is higher, and it increases further with every payment of EMI. In the beginning, a significant portion of the EMI goes towards interest repayment, while a smaller portion goes towards repaying the principal amount.

This becomes apparent through the bank's amortisation schedule that shows you how your loan repayment is calculated. The amortisation schedule is nothing but a tabular representation of the loan repayment, highlighting the amount going towards the principal amount and interest repayment each month, even though the amount of EMI remains unchanged. As per the amortisation schedule, the amount going towards repaying the principal amount increases progressively every year. You can easily calculate the same with the help of an online tool known as the Home Loan EMI Calculator .

Conclusion

So, if you're planning to take on a Home Loan, make sure you understand the concepts of Home Loan principal interest rate and EMI thoroughly. You can now apply for Bank of Baroda Home Loan conveniently.