With today’s low interest rates, a home equity loan or home equity line of credit (HELOC) can give homeowners a cash infusion that they can use to renovate their homes, consolidate their debts, or fund their businesses.
But it will come with some upfront costs.
Just like a mortgage, home equity products carry closing costs, and all that adds up. So beware of these fees before you decide to take out a home equity loan or a HELOC.
“Home equity loans and HELOCs are also considered mortgages,” says Khari Washington, a broker and owner of 1st United Realty & Mortgage. “Many of the same fees that come with primary mortgages apply.”
Homeowners who are confident they can make the required monthly payments will find that home equity loans and HELOCs typically carry lower rates than other types of loans and credit cards. Still, if you want to take on a home equity loan or HELOC, remember that your home is used as collateral and failure to pay your monthly payment can result in foreclosure.
Read on to learn more about the costs of home equity loans and HELOCs.
Home Equity Loan Closing Costs And Fees
When you borrow against the equity in your home, be prepared to pay closing costs. Home equity closing costs range from 2%-5% of the total loan amount.
Fees vary from lender to lender, so shop around—comparing closing costs when shopping for lenders could help you save money. Fees should be disclosed upfront, so ask for a full list of them. Here are some of the fees you can expect when closing on a home equity loan:
Application fee — A charge for the standard application fee.
Appraisal fee — The appraisal will help the lender determine the amount of equity in your home. With a home equity loan, you can borrow up to 85% of the equity in your home.
Credit report fee — Most lenders charge a fee for running your credit score to see your creditworthiness. Make sure you keep your credit score in good standing to receive the lowest loan rate you can.
Title search fee — This part of the home equity loan process proves to the lender that you own the home and if there are any liens against the property, it will come up in this process.
Attorney and notary fees — Any professional fees will be added here in regards to a lawyer drawing up the papers or having the paperwork notarized.
“The size of the loan partly determines the fees,” says Daniel Milan, managing partner of Cornerstone Financial Services, a financial services firm. “Some lenders will roll all the fees into one flat charge.”
When you take out a home equity loan, you receive the full loan amount when the loan is closed.
HELOC Closing Costs And Fees
The primary difference between a home equity loan and a HELOC is that with a HELOC, funds can be withdrawn from the loan as needed during the draw period — it acts similarly to a credit card. After the draw period ends, you have to start paying back the loan.
HELOC closing costs vary depending on the lender, so shop around to get the best rates.
With a HELOC, you’ll have to pay origination fees, underwriting fees, loan recording fees, and other expenses.
Here are some other closing costs to look out for:
- Notary fee
- Title search
- Appraisal fee
- Credit Report fee
- Attorney fee
- Recording fee
HELOCs are unique in that they have other fees that are only associated with HELOCs. These are ongoing fees you must know about as you keep your HELOC open.
Annual fees and maintenance fees — This is a fee for managing and maintaining your account.
Minimum withdrawal — As you tap into your equity little by little, there might be a minimum amount required to withdraw which is written in the fine print of your agreement.
Cancellation fee — If you close your HELOC before a certain time, you might get charged.
Inactivity fee — If your lender requires you to use your HELOC on an ongoing basis, you must be active. If not, you could owe.
Before deciding whether HELOC or home equity loan is right for you, weigh all the options. If you need flexibility to tap into equity, a HELOC might be a good option. But if you have a one-time expense, a home equity loan might be your best bet.
How to Reduce Your Home Equity Loan Closing Costs
“Some lenders will cover most if not all of the costs at certain rates,” Washington says. “Leftover fees can also be rolled into the loan. If a homeowner allows for a slightly higher rate and a prepayment penalty, the rate usually decreases. Fees such as underwriting, origination, and processing fees aren’t set in stone and can be negotiated with some lenders.”
If you’re looking for the best rates on a home equity loan or home equity line of credit, be sure to shop around with different lenders.
Also, keep a great credit score. This makes you look good when lenders are deciding whether to give you the loan or not. “Reducing your debt-to-income ratio, the percentage that lenders calculate to measure how much they will lend the applicant, can help you save,” says Jason Gelios, a real estate agent at Community Choice Realty in Michigan and author of Think Like a REALTOR.
You may be able to negotiate your closing costs. Asking your lender to waive or reduce some costs could save you thousands of dollars down the road.