What is the Cost of Closing a Home Equity Loan?

Homeowners who have paid enough on their mortgage loan to raise equity can apply for a home equity loan, a type of secured loan in which the lender uses your home equity guarantee to reduce risk and offer more competitive rates.

While the annual percentage rate (APR) is a major factor in choosing a home equity loan lender, it’s also important to consider closing costs. While these fees may be lower than most major mortgage loans and some refinancing, they can still add up.

Key Takeaways

  • Home equity loans are secured by your home equity, which allows lenders to offer low interest rates, but it also means they can foreclose on your home, just like any other mortgage.
  • Using the home as collateral means that several closing costs are required, including origination fees, appraisal fees, and listing fees. However, some banks and credit unions will waive some of these fees.
  • The key to finding the right home equity loan for you is to find the loan with the most competitive total APR—interest rate plus included fees—given your circumstances.
  • It never hurts to ask if a lender can lower costs when making your home equity loan. But be aware that lenders may change other terms of your loan to compensate for lower fees or may not be willing to negotiate.

Are There Closing Fees on Home Equity Loans?

Home equity loans are subject to closing costs, often including:

  • Application or underwriting fees
  • Document preparation fee
  • Appraisal fee
  • Other costs

“Costs may be assessed to cover internal costs on the lender’s part or to reimburse lenders for third-party services used to approve home equity loan applications,” said Rob Cook, vice president and head of marketing at Discover Home Loans, in an email to Balance. . “For example, lenders may need the expertise of licensed appraisers, attorneys, property agents, and other vendors.”

However, your lender should disclose all of those details to you, and you have time to discuss them and ask if there is wiggle room.

“With lenders charging fees and closing fees, you may be able to incorporate those fees into the loan so you don’t have to pay these fees up front,” Cook says.

If you include a fee in your loan, you will pay interest on the amount.

How to Lower Your Home Equity Loan Cost

Start by making sure you understand your interest rate and how it compares to your APR, which is often the annual fee and other costs of closing combined into the total annual fee. It’s much easier and more accurate to compare options from multiple lenders using an APR, because loans with lower interest rates can also incur higher fees.

“Both home equity loans and home equity lines of credit (HELOCs) can assess a wide range of closing costs. Your lender will provide you with an estimate of these costs up front as part of your official loan estimate so you can evaluate which lender provides the most attractive terms,” Cook said.

If you believe you can repay your home equity loan ahead of schedule set by your lender, you can opt for a home equity loan with no prepayment penalty fees or low prepayment penalties. Opting for this no-fee loan allows you to pay up front, reducing the total interest you’ll pay, with no penalties.

Another expense you can choose to decline is credit insurance, a product that will make payments for you if you can’t do it yourself, helping you avoid home foreclosures. The Federal Trade Commission (FTC) warns that this coverage can help, but only if you are not already covered by a disability or life insurance policy. In this case, credit insurance would be an additional borrowing cost with no additional benefit.

Are Home Equity Loans or HELOCs More Expensive?

When you’re considering a home equity loan versus a HELOC, you’ll need to think beyond closing costs and interest rates to understand which product is best for you.

For example, you will borrow a certain amount with a home equity loan, while with HELOC, you will have the opportunity to borrow up to the limit if needed. Using a home equity loan when you’re not sure whether you need the money now incurs a lot of interest, and you may find it cheaper overall to get a HELOC and only use it if and when you need it.

If you get a HELOC, use it, then pay it back only to borrow from it again at a later date, you may end up paying more in ongoing fees and costs than you would with a home equity loan. In addition, some HELOC fees are not included in a home equity loan.

Both home equity loans and HELOCs can have a fixed or variable APR. If you choose a variable APR, your rates could potentially increase, which will increase borrowing costs.

“HELOCs, unlike home equity loans, may also include annual fees over the repayment period and transaction fees each time you make a withdrawal from your personal line of credit,” Cook said.

It’s a good idea to determine in advance whether a HELOC or home equity loan is best for your needs, as their uses tend to vary slightly. Then compare apples to apples by getting some estimates for the closing costs of those products.

How to Find the Best Home Equity Loan Interest Rate

Lenders know that many loan applicants focus on interest rates, especially any kind of promotional interest rate. If you take the time to understand the fees included in your disclosure and ask if any are negotiable, you can better compare your options and find the home equity loan that best suits your circumstances.

Frequently Asked Questions (FAQ)

How much can you borrow for a home equity loan?

Many lenders find borrowing up to 80% of your existing home equity acceptable, but individual lenders may have other terms or may require you to borrow less than that amount given other factors in the market or what they anticipate will change about demand. housing in your particular area.

What is the interest rate on a home equity loan?

Interest rates on home equity loans vary, but tend to be lower than unsecured personal loans. That’s because if you default on the loan, the lender has the right to foreclose on your home to cover some of their costs.

How many years can you get a home equity loan?

Home equity loans can have a variety of requirements. For example, Discover offers home equity loans with maturities from 10 years to 30 years. Some lenders also offer a way to refinance your home equity loan to repay it over a longer period of time.

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