That may be a slightly controversial title, but it’s true. Look at it this way, when you’re looking for a home loan, what are you really looking for? Well, the answer is, you’re looking for a way to slowly, over a period of time, own your property.
That’s right. When your loan gets approved and you move in, you don’t immediately own the property. It’s been LOANED to you.
You remember the ’10.5% p.a’ on your loan agreement? Yes, the interest. Now, here’s how the total amount you have to pay is calculated.
Say you have a 20 year tenure for a 1 crore loan on your property. By those metrics…
• Your total interest on your loan – Rs. 1,39,61,117 (1.39 crores)
• The total amount you have to pay over your tenure (principal + interest) – 2,39,61,117 (2.39 crores)
Now this 2.39 crores is divided into equal payments over your 20 year tenure.
But here’s the interesting part. When you start paying off your loan, you are paying off very little of the principal amount you took a loan for. A major part of your EMI goes towards paying off the total interest you owe. So your monthly loan payments are an addition of your principal and interest dues.
Slowly but surely, as your tenure progresses, your payments go more towards the principal amount than towards the interest. But it will take a while before this happens. A few years, at the very least.
Why is this figure important, you might ask? Well, at any given time, the percentage of the property you actually own is the amount you’ve paid off the principal. Yes, so if you’ve only paid off a tenth of your principal amount, you technically only have 10% equity of your own property. This is an extremely important fact you should remember.
Another situation where this ownership figure becomes crucial is refinancing. Sometime during your tenure, if you decide that you want to refinance your mortgage, you need to know whether it will be beneficial for you in the current situation. For that, you must know how much of your principal amount you have paid off.
Another case where this figure becomes crucial is if you decide to sell off your house mid-tenure. If you thought you’d get a profit based upon the original price you bought the house at, you’re wrong.
At any time within your tenure, if you’re selling your property, the amount of money you will get will be based upon the equity you have of your own property. The rest of the amount will be paid to the bank by the buyer.
Now, how do you figure out all of this complicated math? Fear not, the internet is at your service. This entire process is actually known as an ‘amortization schedule’. A quick Google search for ‘amortization schedule’ will serve up a few online calculators that will easily let you find out how much equity you currently have in your own property. Online calculators are also subject to errors since they may not reflect the exact financial conditions that prevail at the moment you search, so take the figures with a pinch of salt.
With your amortization schedule in hand, you should be more than ready to face any financial challenges that pertain to your mortgage in the near future.