The Hidden Costs of Refinancing Home Loans

Buying a home remains a long-awaited aspiration for millions of Indians. It’s no surprise that most of them turn to home loans to fulfil this dream. Although availing a home loan might have become somewhat easier owing to the innumerable available options, refinancing home loans comes with several hidden costs which we might be unaware of.

However, homeowners in India who are seeking lower interest rates, better home loans, and the chance to access their home equity may find refinancing their mortgage, also known as a balance transfer, to be a favorable option. It is important to note that although there are potential advantages, there are also hidden expenses associated with this decision.

In order to make well-informed decisions regarding the refinancing of home loans for long-term benefits, it is crucial to have a clear understanding of these hidden expenses. Let’s examine these costs.

Processing fees

One of the major costs involved in refinancing home loans is the processing fee charged by the new lender. This can range anywhere between 0.5% to 1% of the total loan amount. While some financial institutions and lenders may waive off this amount as part of promotional offers, that doesn’t mean processing fees need not be taken into consideration.

Technical and legal charges

When you opt for refinancing your home loan, the new lender will demand a fresh set of technical and legal documents to ascertain the legal status as well as the value of the property. These verifications usually include:
Technical Charges: These fees are often demanded for valuation of the property by authorised technical evaluators, ensuring that the property is worth the amount being lent. The amount can range anywhere between Rs 3000 to Rs 5000.
Legal Charges: These are paid to lawyers or legal firms to check the title of the property and ensure there are no encumbrances. This cost can range between ₹5,000 to ₹15,000.

Registration charges and stamp duty

In certain states of India, such as Rajasthan, Haryana, Punjab, Karnataka, and others, homeowners who want to refinance their home loans often face the requirement of restamping and registering the existing loan agreement. The stamp duty on the loan agreement can be quite costly, ranging from 7% to 3%, depending on various factors, including gender. Additionally, registration charges can range from Rs. 50,000 to 1%, and in some states like Himachal Pradesh, it can even go up to 8%. Needless to say, these additional costs can significantly increase the overall financing expenses for homeowners.

Prepayment Penalties

The Reserve Bank of India has already mandated that banks cannot levy prepayment penalties on home loans that are availed on floating rates. However, this rule is not applicable to fixed-rate home loans or to housing finance companies. If your existing or current home loan has a fixed interest rate, you might end up incurring a prepayment penalty for paying off the loan early. This penalty rate can range anywhere between 2% to 4% of the outstanding loan amount – depending upon the agreed upon terms and conditions.

Involved Administrative Costs

Refinancing home loans demands some amount of paperwork and administrative tasks. This includes collecting and submitting documents such as identity proof, income proof, property documents and existing loan statements. While these costs are not always quantified, they require a significant time and effort. Apart from that some lenders often end up charging administrative or processing fees for handling the entire process, leading to additional costs.

Differences in Interest Rates

One commonly overlooked expense is the potential for an interest rate mismatch. Although lower interest rates are frequently promoted, the actual amount saved is contingent upon several other factors, including the remaining duration of your existing loans and the structure of the new interest rates. For instance, if your current home loan has a short remaining tenure, the savings from a reduced interest rate may be minimal compared to the expenses involved in refinancing.

Impact on Credit Score

Whenever you submit a loan application, whether it’s for a home loan or if you’re thinking about refinancing your existing home loan, the lenders will perform a credit search or credit inquiry. This can have a small adverse effect on your credit score. If you have multiple inquiries within a short period of time, it can have a more significant negative impact on your credit score. Although the cost may not be financial, it can greatly influence your ability to obtain future loans.

Author’s Final Word

Often, we overlook the details involved in refinancing a home loan. It is crucial to not only consider the fees associated with obtaining the loan but also carefully examine the undisclosed expenses that are often disguised as additional services and amenities. These hidden charges can escalate your interest payments and ultimately reduce the amount of funds you have available for purchasing the property. Therefore, prior to applying for a refinancing home loan, it is essential to thoroughly review the terms and conditions in order to uncover any hidden pitfalls.