Types of Home Loan Charges

Most people fulfil their wish of becoming homeowners by taking out a home loan. It is the easiest way to afford a property as one can pay for the house in monthly instalments. When you take out a loan, you have to pay several different charges which exceed the actual value of the property and while most borrowers are aware of processing fees and stamp duty charges; there are several, lesser-known charges related to home loans that not many are aware of. If you are taking on a home loan, you should be aware of these different types of home loan charges.

Loan processing fee:

This is the most common type of charge levied by lenders. The lender charges a fee to obtain your documents when you apply for the loan. This is a non-refundable fee which is charged by the lender in lieu of all the formalities related to the loan, even if the loan is not sanctioned. Typically, you would be charged a processing fee of 0.50% to 1.0% of the loan amount.

Administrative charges:

A few lenders charge a separate administrative fee, which is also non-refundable. This type of home loan charge basically includes the cost for technical and legal verification of the property and the information provided by the borrower. Every lender has its own team or agency in place to evaluate the property you wish to purchase and create a report on the same, based on which the loan amount is determined by the lender. The agency charges the lender to prepare the report and the lender passes on the charge to the home loan applicant.

Conversion fee:

If you wish to change the interest rate you are paying when the rate of interest falls, you can do so by paying a conversion fee. Conversion fee is simply the amount you must pay to reduce your home loan interest rate. The conversion fee you pay depends upon the difference between the new and old interest rate and if there is a major difference between the two, you would end up paying a higher conversion fee. Also, this fee can affect the loan tenure in that, it may be reduced. Most borrowers often switch to a new lender when the interest rate declines so as to avoid paying this fee; however you need to remember that the new lender may charge you the loan processing fee since they too, need to appraise your outstanding loan amount.

Late payment charges:

This is another type of home loan charge that all lenders should be aware of. As is apparent from its name, this is a charge levied by the lender on borrowers who delay the equated monthly instalment or EMI payment. Borrowers need to ensure that they do not delay or skip paying the EMI. If you fail to repay the EMI on time, you could be charged a hefty penalty that could be as high as 2% of the overdue EMI amount.

Prepayment charges:

When you take out a home loan you must read the document carefully, especially the clause regarding prepayment charges. The Government of India has abolished prepayment charges on home loans taken with a floating interest rate. However, in case of fixed interest loans, the lender can still levy a prepayment charge. While it may seem prudent to close off a debt, you need to calculate the amount you would be paying as prepayment penalty against the overall amount you would save if you repay the loan within your chosen tenure. You should go for this option only if it makes financial sense, otherwise it is better to put your money in another investment and see the loan to term.

These are the different types of home loan charges that all borrowers should be aware of. It is in your best interest to gain as much information as possible about the various charges associated with home loan before you apply for one.