What is the Principal Amount in a Home Loan?

What is the Principal Amount in a Home Loan?

If you are planning to apply for a home loan to buy your dream home, you must first understand the nitty-gritty of the loan. One such critical component that you must have absolute clarity on is the principal amount of the home loan. 

 

What is the principal amount of a home loan?

When you apply for a home loan, you request the lender to let you borrow a certain amount so that you can purchase the property of your choice. Let us assume, you want to buy a property worth Rs. 50 Lakh, and you want to apply for a loan of Rs. 40 Lakh. When the lender sanctions the amount and you get the disbursement, i.e., Rs. 40 Lakh, that is the principal amount in home loan. 

You must know that the lender may not always approve the loan amount you apply for. They consider a lot of factors, like your income, credit score, amongst others to determine your eligibility, and approve the loan amount accordingly. Whatever amount you get from the lender is the principal amount. 

 

How to decide the right home loan principal amount?

Buying a new home can be an exciting prospect, especially if it is your first home. And, since it is such a big financial decision, you must be careful about applying for a home loan. It should serve both your purposes – the amount should help you afford to buy the desired property, and it must be easy to repay. 

The amount you borrow may take a significant amount of time to repay, which could run into a couple of decades. So, you must consider this long-term financial commitment and borrow an amount that is easy to repay without compromising on your other financial commitments. 

While deciding the home loan principal amount you want to borrow, you must take into account your current financial obligations. If you are taking out any loans or have any other essential financial commitments, it is better to scale down the home loan amount to suit your repayment capacity. 

Typically, the lenders fund only 75% to 90% of the property’s value as a home loan. You must pay the balance from your pocket, which is called a down payment. Consider this valuable information to decide how much you can afford to pay as a downpayment and how much you want to borrow. 

 

How to check the outstanding principal amount on a home loan?

After your home loan application is approved, the repayment tenure starts immediately. You must pay the EMI (equated monthly installment) every month until the end of the loan tenure or until you repay the full amount. The EMI amount includes both the principal amount and the interest component. 

As you continue to repay the EMI every month, the principal amount will gradually decrease. As a borrower, you must be aware of the outstanding amount. So, if you are wondering how to check the balance principal amount, here are two ways –

 

• Home loan statement

The easiest way to check the outstanding principal amount of your home loan is to check the statement. The lender issues the statement, which typically contains a detailed breakdown of the loan repayment history, including the initial amount, the amount already paid, and the outstanding amount. 

 

• Amortisation schedule

An amortisation schedule gives a summary of the entire repayment schedule, including the opening balance at the start of the year and the outstanding principal amount. It also gives details of how each EMI contributes to repaying the principal and interest of the home loan. 

 

Do you get tax benefits on the principal amount of the home loan?

Yes, as per Indian tax laws, if you have availed of a home loan, you are eligible to get tax benefits. One of the significant benefits of applying for a home loan is that you get tax benefits on the repayment of the principal amount. You can get a deduction up to Rs. 1.5 Lakh per year under Section 80C of the Indian Income Tax Act. You can enjoy this tax benefit every year throughout your loan tenure. 

You may also like to read - Steps to claim Home Loan Tax Benefits in India 

 

Frequently Asked Questions

 

What is the formula for finding the principal amount?

As a home loan borrower, you must always be aware of the home loan principal amount so that you can make informed borrowing decisions. Calculating the principal amount is easier than you would imagine. You just have to use the following formula –

 

P = i x 100 / n x r

 

In the above formula, 

P – The principal amount

I – Interest amount

N – Loan tenure in years

R – Interest rate levied by the lender

 

The principal amount is the same as the amount that the lender sanctions and disburses. 

 

Are the sanction amount and principal amount the same as a home loan?

Yes, the sanction amount and the principal amount are the same in a home loan. Let us assume that you apply for a loan of Rs. 10 Lakh. If the lender approves your application and disburses the amount, then Rs. 10 Lakh is your principal amount. 

However, if the lender feels that you don’t meet the requirements for a Rs. 10 Lakh loan and sanctions only Rs. 7 Lakh, then Rs 7 Lakh is the principal amount. 

 

What is the principal amount and total amount? 

In simple terms, the principal amount is the amount that you borrow from the lender, i.e., the sanctioned amount. The total amount refers to the actual cost of borrowing. It may include the charges levied by the lender like processing fees, documents assessment charges, interest rate, stamp duty, property registration taxes, etc. 

The total loan amount is always higher than the sanction amount. So, you must always factor in the additional charges payable while determining the total loan cost.