With interest rates low today, a home equity loan or line of credit (HELOC) can give homeowners an injection of cash to renovate their homes, consolidate their debts, or finance their businesses.
But there will be some upfront cost associated with it.
Just like a mortgage, home equity products have closing costs, and it all adds up. So be aware of these fees before deciding to take out a home loan or HELOC.
“Home equity loans and HELOCs are also considered mortgages,” said Khari Washington, broker and owner of 1st United Realty & Mortgage. “There are many of the same fees that apply to primary mortgages.”
Homeowners confident they can make the monthly payments they need will find that home loans and HELOCs typically have lower interest rates than other types of loans and credit cards. However, if you are looking to take out a home equity loan or HELOC, keep in mind that your home will be used as collateral and failure to pay your monthly payment could result in foreclosure.
Read on to learn more about the cost of home equity loans and HELOCs.
Costs and fees of taking out a home loan
If you borrow against the equity in your home, be prepared to pay the closing costs. The closing costs for homes are between 2 and 5% of the total loan amount.
Fees vary from lender to lender, so take a look around – comparing closing costs when shopping for lenders could help you save money. Fees should be announced in advance so request a full list. Here are some of the fees that you can expect when taking out a home loan:
Registration fee – A fee for the standard registration fee.
Appraisal fee – The valuation helps the lender determine the amount of equity in your home. With a home equity loan, you can get up to 85% of the equity in your home.
Credit report fee – Most lenders charge a credit check fee to check your creditworthiness. Make sure your credit rating is in order to get 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 liens on the property it will come up in this process.
Legal and notary fees – Any fees for the preparation of the papers by a lawyer or the certification of the papers are added here.
“The size of the loan determines part of the fees,” said Daniel Milan, managing partner of Cornerstone Financial Services. “Some lenders will combine all fees into one flat fee.”
If you take out a home equity loan, you will receive the full loan amount when the loan is closed.
HELOC closing costs and fees
The main difference between a home equity loan and a HELOC is that a HELOC allows funds to be withdrawn from the loan as needed during the draw phase – it works much like a credit card. After the withdrawal period has expired, you must start repaying the loan.
HELOC closing costs vary by lender, so do your research for the best rates.
With a HELOC, you must pay formation fees, subscription fees, borrowing fees, and other expenses.
Here are some other closure costs to watch out for:
- Notary fee
- Title search
- Appraisal fee
- Credit Report Fee
- Attorney fee
- Admission fee
HELOCs are unique in that they have different fees that are unique to HELOCs. These are ongoing charges you need to be aware of while keeping your HELOC open.
Annual fees and maintenance fees – This is a fee for managing and maintaining your account.
Minimum payout – As you gradually increase your equity, a minimum amount may be required for the payout, which is indicated in the fine print of your contract.
Cancellation fee – If you close your HELOC before a certain time, you may be charged.
Inactivity fee – If your lender requires you to use your HELOC all the time, you need to be active. If not, you could run into debt.
Before deciding whether a HELOC or home equity loan is right for you, weigh all of the options. If you need flexibility to develop equity, a HELOC could be a good option. However, if you have one-time expenses, a home loan might be your best option.
How to reduce the closing costs of your home loan
To get the best interest rates on a home loan, or HELOC, shop for various lenders.
“Some lenders will cover most, if not all, of the costs at certain rates,” says Washington. “Remaining fees can also flow into the loan. When a homeowner allows a slightly higher rate and an early repayment penalty, the rate usually goes down. Fees such as underwriting, origination and processing fees are not set in stone and can be negotiated with some lenders. “
Pro tip
When looking for the best home loan or home equity interest rates, there are several different lenders you should look for.
Also, make sure you have a good credit score. This will make you look your best when lenders decide whether to grant you the loan or not. “By reducing your debt-to-income ratio, the percentage that lenders charge to measure how much they will borrow to the applicant, you can save,” said Jason Gelios, 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. If you ask your lender to forego or reduce some costs, you can save thousands of dollars.
