Home loans are often seen as a big financial step, offering an easy way to own property. However, what most people don’t realize is that banks can add extra charges, quietly cutting into your savings. These hidden fees often come to light only after the loan is finalized, leaving borrowers with unexpected costs. If you’re thinking of refinancing your home loan or transferring it to another bank for lower interest rates, it’s crucial to understand the extra expenses that come with it.
Processing Fees
One of the first hidden costs of home loans is the processing fee. According to Atul Monga, CEO of Basic Home Loan, banks often charge between 0.5% to 2% of the loan amount as processing fees. For instance, if you are borrowing Rs. 20 lakh, the processing fees could range from Rs. 10,000 to Rs. 40,000. Though some banks offer discounts as part of promotions, these are rare. Always inquire about processing fees before finalizing the loan.
Legal and Technical Fees
When you refinance a home loan, the new bank will evaluate both the property and its legal documents. For this, they charge legal and technical fees:
- Legal Fees: Paid to lawyers or legal experts who verify the property’s title and ownership. Legal fees can range between Rs. 5,000 and Rs. 15,000.
- Technical Fees: These fees cover the valuation of the property, ensuring it’s worth the loan amount. This usually costs between Rs. 3,000 and Rs. 5,000.
Both these charges are mandatory and should be factored into your loan calculations.
Stamp Duty and Registration Fees
In certain states, when you refinance a loan, the loan agreement must be re-stamped and registered. Stamp duty is based on the property’s value and can range between 3% to 7%. In states like Himachal Pradesh, the rate can even go up to 8%. Besides stamp duty, there’s also a registration fee, which can be as high as Rs. 50,000 or more, depending on the property’s location. These charges can significantly raise your overall cost, making refinancing less attractive.
Prepayment Penalty
If you’re paying off an existing home loan with a fixed interest rate ahead of time, you may be charged a prepayment penalty. This fee can be between 2% and 4% of the outstanding loan amount. However, if your home loan has a floating interest rate, you don’t have to worry about prepayment penalties, as the RBI has prohibited banks from charging them on floating-rate loans.
Administrative and Documentation Fees
When refinancing or applying for a new home loan, you’ll need to provide documents like ID proof, income proof, property papers, and loan statements. Collecting and processing these documents can be time-consuming and may come with additional administrative fees. Some banks even charge separate administrative costs as part of the loan processing. It’s essential to factor these into your overall loan expenses.
Comparing Interest Rates
Before switching banks for a home loan refinance, compare the interest rates of your existing loan with the new one. While a lower interest rate may seem appealing, it’s important to check whether the savings will outweigh the extra costs involved in refinancing, especially if you only have a short term left on your current loan.
Impact on Credit Score
Each time you apply for a loan, the bank checks your credit score. Too many credit inquiries in a short period can negatively affect your score, making it harder to get approved for loans in the future. Be mindful of how often your credit score is checked during the refinancing process.
Understanding these hidden charges can save you from unexpected financial strain. Always ask your bank for a full breakdown of all costs before signing on for a home loan or refinance. With this knowledge, you’ll be better equipped to manage your home loan smartly and avoid unnecessary expenses.
