Availing a home loan might not be easy. Even if you find the best lender, you would still have a series of decisions to make that would significantly affect your monthly payout. For example, choosing between a longer flexible tenure or a shorter one, opting for a fixed interest rate or a floating one, among others. Similarly, you might also need to choose between paying the full EMI or just the Pre-EMI on your home loan. However, you can do so only when you are well acquainted with both the terms. 

 

Here is a quick guide on pre-EMI and EMI to help you make an informed decision. 

 

Understanding Pre-EMI

Pre-EMI is available for you when you take a home loan to purchase an under construction house property. In such conditions, the lender could disburse the loan amount gradually as per the progress of the construction. When you opt for Pre-EMI, you only need to pay the interest component of the loan and not the full EMI including the principal repayment component. You start repaying the full EMI only when the entire loan amount sanctioned to you is disbursed. However, this facility is usually available only for up to three years, within which the construction should be completed. 

 

Let us understand this with an example. Suppose you apply for a home loan and the lender approves a loan amount of Rs 20 lakh at a rate of 10%. In the first phase, only Rs 5 lakh is disbursed to you. Now, if you opt for Pre-EMI, you will only have to pay the monthly interest on the presently disbursed amount, until the entire 20 lakh is disbursed to you. 

Full EMI

In the full or regular EMI method, you pay the entire EMI irrespective of loan disbursal. Your lender could disburse the loan amount partially or entirely, but you pay the EMI amount in full (comprising of both interest and principal). For example, you opt for a home loan of Rs 20 lakh at an interest rate of 10% and a tenure of 15 years. 

Though the lender offers to disburse the whole amount sanctioned, you opt for a partial disbursement. In the first phase, you receive Rs 5 lakh as the first disbursal amount. However, as you have opted for the regular EMIs, you would pay the EMI of the entire loan amount consisting of principal as well as the interest component. So, your monthly EMI would be computed using the EMI calculator or as per the mathematical formula – 

EMI = P × r × (1 + r)n/((1 + r)n – 1) 

Where,

P= Loan amount,

r= interest rate divided by 12, 

n=loan tenure in months

 

Pre-EMI vs EMI

 

Basis	EMI	Pre- EMI
Loan repayment	The EMI amount you pay is higher and consists of principal component too	The EMI amount is lower as compared to what you pay in full EMI and only includes the interest component.
Loan disbursal	The entire loan amount could be disbursed to you	The loan amount is disbursed partially as per the progress of the construction

If there is a choice between EMI vs a Pre-EMI, it is suggested to opt for full or regular EMI as it reduces the overall interest payout over the loan tenure. While a Pre-EMI might appear to be attractive at first, it must be noted that your principal amount repayment does not start until you start paying regular EMIs. Effectively, this results in to increase of the overall interest component of your loan repayment. You should choose Pre-EMI only if you are facing a cash crunch and cannot pay the entire EMI amount.