Buying a home is a dream for many, and a home loan makes it easy to turn that dream into reality.
However, when taking a home loan, understanding the terms of your loan is critical to making smart financial decisions. Among the many terms you’ll encounter, principal amount is one of the most fundamental.
It’s the foundation of your home loan and influences everything from your monthly EMIs to the total interest you pay over the years. In this article, we’ll break down what is the principal amount in a home loan, why it is essential, and the factors that affect your home loan principal.
What is the Principal Amount in a Home Loan?
The principal amount in a home loan is the total amount you borrow from a lending institution. It is the agreed-upon primary value based on which the loan calculations are determined.
For example, if you purchase a house valued at Rs. 1 crore and you avail a loan of Rs. 90 lakhs, then Rs. 90 lakhs will be your principal amount.
The principal amount is a standalone term and does not include interest as a component because the interest is calculated based on the principal amount. This means the principal will also determine the monthly instalments on the loan.
Why is the Principal Amount Important?
The principal amount in a home loan is the core amount that affects the other aspects of your home loan structure. Here’s how-
- Loan duration- A high principal amount typically translates into a longer loan duration due to the sizeable loan and EMIs.
- Interest amount- The overall cost of the loan is directly proportional to the principal. This is because a high principal will lead to increased interest payouts over a longer tenure, assuming the interest rate remains constant.
- EMI- The monthly EMI amount is calculated by factoring the principal and the rate of interest. A high principal amount usually means higher EMIs, unless you extend the loan tenure.
Factors that Influence the Home Loan Principal Amount
Several factors affect the amount you borrow as the principal in a home loan-
- Cost of property- The principal amount you will need to borrow will directly depend on the cost of the property.
- Down payment- The higher amount you pay upfront as a down payment will reduce the principal amount you need to borrow.
- Eligibility- Your income, existing liabilities, and credit score are various factors that determine how much you are eligible to borrow as principal.
Components of a Home Loan EMI
Different parts make up the total amount you pay every month as EMI –
- Principal amount: The initial sum borrowed from the lending institution is the principal amount. It refers to the total amount at the beginning of the loan term. As you pay each instalment, the principal amount is reduced proportionally. In the final EMI, the principal amount reaches Nil, indicating that you have paid off the loan.
- Interest amount: Lenders charge interest on the principal amount borrowed from a home loan. This amount is what the lenders earn for lending the lump sum money. The rate at which the interest is charged is usually fixed, compounded, and applicable to the total loan amount.
How to Calculate the Principal Amount
Here is a simple formula you can use to calculate the principal amount in a home loan-
Principal amount = Total loan amount – Total interest payable
The total loan amount is the amount borrowed from the financial institution, while the total interest payable is the amount you will pay in interest over the years. Understanding the home loan principal can help you determine and plan the down payment, home loan tenure, and EMI payment.
Reducing the Principal Amount over Time
Every time an EMI payment is made, it pays off a part of the principal amount in a home loan. During the initial tenure, a large part of the repayment goes toward paying off the interest; however, a significant portion of the EMI covers the principal repayment during the later stages.
To reduce the loan burden, you can use the pre-payment option. You can prepay the loan through lump sum payments or by increasing the EMI amount. This way, your loan amount will significantly decrease, saving you from paying higher interest.
Quick Tips to Manage your Home Loan Principal Smartly
- Make a higher down payment- A higher down payment means you will have to borrow a lower amount. This can also help you fetch a better interest rate and lower the overall cost of the loan.
- Prepay when you can- You can use any bonus income, gift, or unexpected income toward the pre-payment of your loan. This will reduce your principal amount for the remaining tenure and lower the EMI payments.
- Choose shorter tenure- While a shorter tenure attracts higher EMIs month on month, it means you will have to pay a lower amount, which can help manage the home loan better.
In conclusion
Now that you know what is the principal amount in a home loan, it can help you plan your loan better. The principal directly affects the interest amount and loan tenure. You can use Tata Capital’s EMI calculator for a housing loanto determine your monthly EMI and interest component.
To learn more and apply for a home loan, visit the Tata Capital website or download the app today!
FAQs
Under Section 80C of the IT Act, you can claim tax deductions on the principal amount repaid towards your home loan.
The home loan principal is calculated by subtracting the total interest paid from the total loan amount.
To reduce the principal amount of a home loan, consider making a larger down payment, shortening the loan tenure, and making loan pre-payments.
If you pay more principal, you will have to repay a lower interest amount over the life of the loan.
14 May 2025
5 mins read
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