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How To Read A Home Loan Amortization Schedule?

Once you decide to invest in real estate, and want to go for a Home loan, you will want to compare the players in the market based on home loan eligibility and home loan interest rates. When you finally approach a financial institution to avail a home loan, you may have arrived at the EMI using their Home loan EMI calculator online, but you would still want to check how your repayments are spread over the loan tenure, with the specifics of principal and interest.

 This tabular representation of your repayments is known as amortization schedule.

What is a home loan amortization schedule

An amortization schedule is a complete schedule of repayments covering the entire loan tenure, depicting the break-up of EMI into principal and interest. It provides the summary of the loan and its repayment over the loan tenure. Each repayment can be segregated into principal and interest. You will have an exact picture of your debt after each repayment, giving you a perspective on your declining liability over the tenure. This will help you to decide on additional loans, if required.

It comprises the following:

Components of an amortization schedule

  • Installment number: If you have availed of a home loan for tenure of 30 years, your installment number will vary from 1 to 360. It basically depicts the number of installments to be paid as EMI.
  • Date: This is simply the date when your EMI is due.
  • Opening Principal: This is the principal amount outstanding at the beginning of every month before interest application on the account. .
  • Installment amount: This is the Home loan EMI needed to be paid as installment.
  • Principal component: After the EMI is paid, this amount shows the component gone towards the repayment of principal. This is generally nominal, at the start of the loan tenure, and goes on increasing with the number of installment amounts. If you look carefully, the EMI comprises a bigger chunk of interest payment and smaller chunk towards principal towards the beginning of the loan tenure. This trend reverses as the tenure progresses.
  • Interest Component: This is the component of EMI that goes into the payment of interest. A significant part of EMI goes toward the payment of interest of the loan.
  • Closing principal: This is the principal outstanding at the end of each month after the EMI payment has been received. The closing principal of a month will be the opening principal of the subsequent month.
  • Interest rate: This represents the home loan interest rates applied to the home loan, or the rate that determines the home loan eligibility and also the home loan emi. Before availing a home loan, this is the most critical factor for you to decide on the lender. Select a lender judiciously after comparing home loan eligibility, home loan interest rates and EMI using home loan emi calculators online. The interest rates offered these days are floating and are changed annually.

Conclusion

Understanding how to read loan amortization schedules is of significance since it enables you to keep a track of your repayments over the years, and real-time position of your debt. You get to know what portion of your repayments is going towards principal or interest.

Along with this, an understanding of the interest component will enable you to decide on switching over in the subsequent years, to a home loan provider that gives you better rates and results in higher savings. The amortization schedule assists you in deciding whether pre-paying a home loan will be fruitful or to continue paying the EMI for the full tenure.  Hence, make sure that you decode the amortization schedule to manage your debt effectively.

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