Principal Amount of Home Loan: Meaning and Calculation with Examples in 2024

The Principal Amount of a Home Loan is the original sum borrowed from a lender, excluding interest. It's the amount on which interest is calculated. For example, if you borrow ₹50 lakhs, that’s your principal. As you repay the loan, the principal decreases, while interest is charged on the remaining balance.

If you’re considering buying a home, we’re sure you are also looking at how to get a home loan to help you finance your purchase. Well, don’t put off your home buying any longer, NOW is a good time to buy as interest rates have dropped and you just might be able to buy your dream home within your budget. But, if you need some clarity on how a home loan works and how to calculate the principal amount in a home loan, you’re not alone. Read on to get answers to your questions. 

Understanding The Principal Amount Meaning

In layman's terms, the principal amount is the sum of money borrowed from a lender, which serves as the foundation for interest and payback schedule calculations. It is the initial loan amount, excluding interest, taxes, and other costs. Unless prepayments are made, the principal amount stays the same for the duration of the loan. 

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The amount you borrow will always be less than the amount you need to pay back; banks and other lenders charge interest on the amount you borrow. This rate of interest varies from bank to bank and lender to lender. This is why when you have an EMI (equated monthly instalment) you will notice that it is broken into two components – 

1. Principal: what do you borrow, and what do you have to pay back 
2. Interest: It is the fees the lender or bank charges you for lending money. 

How to Calculate Principal Amount in a Home Loan

To calculate the Principal Amount in a home loan, subtract the down payment from the total property cost. The principal is the amount you borrow, excluding interest. This base amount is used to determine monthly payments and interest charges.

For Example:

• Principal Amount = Total Property Cost - Down Payment
• Principal Amount = ₹70 lakhs - ₹20 lakhs = ₹50 lakhs

Principal Amount Formula

This is not as complex as you think; there is an easy formula that you can use to calculate the principal amount in a home loan:

Interest Amount (I) / 100) / Number of Years (N) * Interest Rate (R) = Principal Amount (P)

Total Loan Amount - Total Interest Due = Principal Amount

Borrowers can also use the housing loan principal repayment calculator for better ideas. 

P=(I*100)/(N*R) 

Where is the amount of interest?

• P is the principal amount
• R is the Rate of interest annually
• N is the period in years

For Example:

Let’s take an example to demonstrate the Principal Amount Formula:

Suppose you paid ₹2 lakhs as interest (I) over 5 years (N) with an annual interest rate of 8% (R). Using the formula:

P = (I * 100) / (N * R)

P = (2,00,000 * 100) / (5 * 8)
P = 2,00,00,000 / 40
P = ₹5,00,000

So, your home loan's Principal Amount (P) would be ₹5 lakhs.

Again, suppose a bank sanctioned a home loan of Rs.5 lakhs to you at 7.35% P.A. for 10 years. 

In this example, the simple interest amount for all years will be Rs.3,67,500/- {5 lakhs*10yrs*7.35%}. Now, in a span of 10 years, you must pay the bank a total of Rs.8,67,500/- i.e. (The original amount that the bank has sanctioned + the interest amount on the loan). Here, in this example, Rs.5 lakhs, which the bank already sanctioned, is the principal amount of the home loan.

Now, we will calculate the principal amount as follows: -

P = (Amount of interest*100)/ (rate of interest *number of years)

P = (367500*100)/ (7.35*10)

P = Rs. 5,00,000/-

Home Loan Eligibility Check

It’s that simple! But if you need any help getting a home loan for your house, just click below. Or if you need help finding the right house for you, let NoBroker help. You can even drop a comment below, and we will get in touch with you to assist you. 

FAQ’s About Principal Amount of Home Loan

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