Source: The Economic Times.
The very idea of buying a house is an exciting one. It is an undeniable fact that investing in real estate is a prudent financial decision. When your dream house nears reality, it is an exhilarating experience. People spend much time selecting a property, working with carpenters, plumbers, furnishing and interiors. But how many of us really spend time selecting a lender and analysing expenses? Most deals are finalised with the first lender you meet, who agrees to sanction you the required loan amount. It is only much later that home loan borrower complains of increasing rates, additional costs and penalties.
Many still believe that cost of a loan is simply the equated monthly installment (EMI) towards the loan amount. But in reality, any loan comes with a plethora of other expenses and penalties. This is a caution for those people who decide on a Housing Finance Company (HFC) based on the advertised interest rates and other freebies on offer. There are numerous other charges and hidden costs that must be compared when comparing the cost of borrowing.
The first cash or cheque that you must hand over is in the form of an application fee. Lenders charge this fee when you file in an application for a loan. This is a very small fraction charged by the HFC and is usually non refundable.
Processing (Fee) your application for a loan involves, verifying your documents, analysing credit worthiness, doing a check on your credit history and verifying property documents. There is a team of legal experts, finance experts and administrative staff doing all this work. This cost is passed on to the prospective borrowers by most lenders. While many lenders advertise as 'zero processing fee', this expense could be billed to the applicant under some other title.
Application and processing fees are sometimes refunded and at other times not. Find this out before you proceed. Some banks also charge legal fees, technical fees, charges for stamp duty and registration of the mortgage deed. There are a host of other charges that are passed on to the customers which includes increase in the effective rates of interest due to the annual reducing balance method, pre payment charges, delayed payment charges, duplicate statement request, bounced cheques and so on.
Prepayment penalty is yet another core issue that prospective borrowers need to make clear from their lenders. It is comes to a huge 2 percent that translates into big money. Most people try to clear the debts on their homes first, if they receive huge money from some other source. There is always a desire to rid the house off the dangling loan as house carries more of an emotional value. Since banks would lose interest money on loans, they levy a penalty if a borrower tries to repay the loan ahead of schedule. This is known as a pre payment penalty.
This may come as a rude shock for fixed rate borrowers who are already paying huge money when compared to their floating rate counterparts. Most borrowers lock themselves in fixed rates with the hope that there will be no hike in their rates. The recent hike in their rates is real surprise for many customers. Be aware that even in a fixed rate agreement, the force majeure clause empowers the lending institution to increase the rate, if the market situation demands.
So, it is not only your monthly principal and interest component of your loan, but also all these additional costs and fine prints. Further, you will have to make arrangements to pay property tax, registration fees, association fees, maintenance deposits, woodwork, furnishing and moving expenses.
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