What is Pre EMI?
On buildings that are still being built, pre-EMI options are available. With this option, the principal of an EMI is not paid; only the interest portion is. Why? The lender also delivers funds in tranches because the majority of construction projects necessitate paying a portion of the total cost at various construction phases.
In light of this, pre-EMIs enable you to reduce your loan expenses while paying only the pre-EMI interest throughout loan servicing. As soon as you settle into your new house, you begin making principal payments.
However, the pre-EMI period often lasts for three years, during which you must begin making full EMI payments whether you have possession of the property or not.
EMI
Equated Monthly Instalment (EMI) is a home loan repayment option in which the lender is paid both the interest and the principle through a set monthly payment. These days, lenders provide creative options for paying back house loans. What is pre-emi? One choice is the pre-EMI plan, in which the homebuyers only pay the interest on the portion of the loan that has been partially issued, depending on the stage of the property’s construction. Only properties that are still under development may use this plan.
You must comprehend the distinctions between what is pre-EMI and what is full-EMI as a borrower. To learn more, keep reading.
What is Pre EMI?- Examples
Let’s assume that Mr. Prem Kumar sought for a home loan from an HFC (housing finance business) and was approved for Rs. 5,00,000 in funding. The house Mr. Kumar wants to buy is still being built. The lender now distributes the loan cash in various tranches, the first one being of Rs. 500,000, if Mr. Kumar picks the pre-EMI option. Mr. Kumar only needs to make a monthly pre-EMI payment of Rs. 4,167 because the loan amount issued is only a portion of the total loan amount sanctioned (calculated as Rs. 500,000 x 10% / 12). Now, Mr. Kumar must pay a pre-EMI fee of Rs. 12,500 (calculated as Rs. 1,000,000 x 10% / 12) if he accepts the subsequent distribution of Rs. 1,000,000 after a period of 6 months.Mr. Kumar’s actual EMI, i.e. principal + interest payment, begins only after the entire loan amount is sanctioned to him.
What is FULL EMI?
The term “full EMI” refers to the EMI payment made by borrowers as soon as the lender releases the principal loan amount. In this case, the principal amount may be paid in full or in part, but the borrower opts to pay the entire monthly EMI. If you choose to settle your EMI in full, you must pay the entire amount due rather than just the amount that has been disbursed. Before we discuss the distinction between pre EMI and full EMI, here is an example to help you comprehend how full EMI functions.
Full EMI Example
Let’s assume that Mr. Prem Kumar sought for a home loan from an HFC (housing finance business) and was approved for Rs. 5,00,000 in funding. The house Mr. Kumar wants to buy is still being built. The lender now distributes the loan cash in various tranches, the first one being of Rs. 500,000, if Mr. Kumar picks the pre-EMI option. Mr. Kumar only needs to make a monthly pre-EMI payment of Rs. 4,167 because the loan amount issued is only a portion of the total loan amount sanctioned (calculated as Rs. 500,000 x 10% / 12). Now, Mr. Kumar must pay a pre-EMI fee of Rs. 12,500 (calculated as Rs. 1,000,000 x 10% / 12) if he accepts the subsequent distribution of Rs. 1,000,000 after a period of 6 months.
How to Calculate?- What is your Pre-EMI?
The formula to calculate pre-EMI is the same as that for EMI, viz.
Pre-EMI = [P x R x (1+R)^N]/[{(1+R)^N}-1]
Here, P is the amount disbursed till now
R is the applicable rate of interest per month
N is the total duration of the loan in months
What is Pre EMI and Full EMI – the differences?
- Calculating the interest rate
Based on the loan amount disbursed to the builder, the pre-EMI interest rate is compounded. In contrast, the sanctioned principal amount is used to determine the interest rate for the whole EMI.
- Loan repayment term
A higher portion of the instalment goes toward principal repayment in the later stages of the loan period when you pay the entire EMI. This indicates that you can pay off the debt more quickly by selecting the full EMI option than the pre-EMI option.
- Loan disbursal
When disbursing the sanctioned amount in instalments over a period of time, the financial institutions typically ask the house loan borrowers to pay the pre-EMI. The full EMI must be paid, however, if you receive the entire disbursement all at once in a lump sum.
- Start date for EMI payments
If you decide for pre-EMI, the monthly payment will start as soon as the lender pays out the first instalment during the construction phase. In contrast, if you choose the full EMI option, the payback period does not begin until after you have obtained possession of the house and the building is complete.
- Influence on loan components
When you select the full EMI option, the principal amount and the tenure decrease with each instalment that is paid back. However, when you pay back the pre-EMIs, the payments have no bearing on the loan’s principal sum, period, or interest rate.
- Impact on your personal finances
As you only pay back the interest during the construction time, paying the EMIs using the pre-EMI option may be feasible. If you decide to use the full EMI option, this might not be achievable.
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What is Pre EMI?- Tax advantages
The pre-EMI option has no tax advantages, and the buyer does not benefit from tax deductions until the project is finished. For a self-occupied residence, the tax benefit for principle repayment under Section 80C is covered at Rs 1.5 lakh each fiscal year, and the tax benefit for interest payment under Section 24 is covered at Rs 2 lakh. The tax advantages are only available after the house is in your possession. The total interest paid during the under-construction stage can be reclaimed in a spread of five years if the buyer has been making EMI payments from the start. Under Section 24 of the Income Tax Act, pre-EMI deductions may be allowed.
What is pre-EMI in personal loan ?
Pre-EMI interest is the interest you pay on the loan amount that has been disbursed up until the beginning of the EMI payment cycle. For instance: Loan disbursement date. Date of 1st EMI. Pre-EMI Interest.
What is pre-EMI sbi home loan?
Pre-EMIs are monthly payments for your home loan that only cover the interest. You don’t make any payments toward the principle amount when using pre-EMI. Pre-EMI payments will be an option for you to make while your house or apartment is being built.
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What is pre-EMI- FAQs
- Is pre-EMI a wise choice?
Answer-But if you want to sell the home as soon as you take possession, using the pre-EMI option may be preferable than making full EMI payments.
- Is Pre EMI required?
Answer-Typically, you are only obligated to begin paying interest on the loan amount disbursed (called the pre-EMI interest). If you want to begin principle repayment right away, you can choose to tranche the loan and begin making EMI payments on the total sums released.
- Pre-EMI is it refundable?
Answer-In the pre-EMI option, just the interest portion of the mortgage is paid until the building is finished or is transferred.
- Can I pay my EMI in front?
Answer-Yes, even if the interest rate is a fluctuating rate, you can choose to make EMI payments in advance.