What is Principal Amount in Home Loan – Important Things to Know

Today, as there are many lenders in India that are willing to offer loans at competitive interest rates with flexible repayment terms, getting a home loan has become easier than ever before. While it is easy to get the loan you desire, it is paramount that you understand the different aspects of the loan. You must know what is the principal amount in loan, the fixed and floating interest rate, the REPO rate, etc. If you are a first-time home loan borrower, then read on to know more about the principal amount in a home loan.

Be it a home loan, or any other type of loan, the principal amount is the actual loan that the lender has sanctioned and disbursed to you. In other words, the principal amount in a home loan is the amount you receive from the lender. This amount may or may not be the same as the amount you wish to borrow. The lenders decide the final loan amount based on their assessment of your financial profile.

When it comes to repaying the home loan, there are two components to it, which are:

• The original loan amount you have borrowed, i.e., the principal amount and
• The interest levied by the lender, i.e., the home loan interest rate

Now that you know about the principal amount in home loan, it can help you understand how much to borrow.

While the prospect of buying a new house and being a homeowner can be exciting, you must understand that when you avail of a home loan, you are essentially taking a big credit. You would have to repay the amount over a period of 10-30 years. Thus, taking a home loan is a huge financial commitment. Hence, it is paramount that you choose the loan amount wisely so that the repayment is easy.

So, while deciding how much to borrow, you must consider the following aspects.

LTV (Loan to Value Ratio)

The Loan-to-Value ratio is the maximum amount that a lender can lend to buy the property you want. As per the RBI mandate, lenders cannot finance or fund 100% of the property’s value as a loan.

Generally, the lenders or the financial institutions assess the LTV before they sanction the home loan application so that they don’t lend more than the actual price of the property. You can borrow a maximum of 80% of the property’s value as a home loan.

Some lenders sanction up to 90% of the property’s value based on the customer’s good relationship with them. So, you must pay the balance of 10% to 20% of the amount from your pocket. Hence, it is paramount that you assess your financial condition, know the maximum down payment amount you can pay, and apply for the loan accordingly.

Many experts recommend paying a higher down payment than the mandatory 20% of the property’s value. This will help you borrow less, which in turn, will make your EMIs more affordable.

Existing Debts

When you apply for a home loan, you must consider your existing financial commitments. If you have any dues, then it is better to avoid applying for a new home loan before you repay the debts completely, or you can avail of a lower amount so that you don’t feel the pinch while repaying the EMIs. Remember, you must manage your regular family expenses as well. So, do the calculations carefully, and choose the right amount accordingly.

How to check the outstanding principal amount?

Let us assume you have taken a home loan of Rs. 5 Lakhs, and you repay the first EMI of Rs. 20,000. Now, if you think, after paying the first EMI, your outstanding amount is now Rs. 4.8 Lakhs, then you are highly mistaken. This is because when you pay the EMI, it also includes the interest component.

For the initial years, a major portion of the EMI goes to repaying the interest amount. So, as you continue to repay the EMIs, you would like to know the outstanding principal amount, right? Here are two simple ways to know the outstanding principal amount.

• Check the amortisation schedule

The amortisation schedule gives you a full summary of the repayment schedule. It helps you know the opening balance at the start of the month, the outstanding principal amount, and the break of the EMI towards interest and principal amount repayment.

• Get home loan account statement

Another easy way to know about the principal amount paid on housing loan and the balance amount is to get a home loan account statement from the lender. It is like a regular bank account statement that has all the details of your loan-related transactions.

Final Word

The principal amount in a home loan is the amount you borrow. When you avail of any loan, make sure that you have a good repayment strategy in place so that you never default on repayment.