Everything You Need To Know About Closing Costs on Home Equity Loans

Taking out a home equity loan or home equity line of credit (HELOC) can be a great way to access funds for home renovations debt consolidation or other big expenses. However, like any loan, there are costs associated with the process. Closing costs on home equity loans can range from a few hundred to a few thousand dollars, depending on the size of your loan and other factors. As you consider a home equity loan or HELOC, it’s important to understand these fees so you can budget for them and make sure the loan still makes sense for your situation.

What are closing costs?

Closing costs refer to the various fees charged by lenders to process, underwrite, and close the loan. Common closing costs for home equity loans and HELOCs include:

• Origination fee – Covers lender’s costs to process the loan application and underwrite the loan, Typically 05-1% of loan amount,

• Appraisal fee – Pays for appraisal to establish property’s value. Usually $400-$700.

• Credit report fee – Covers cost of credit report(s). Around $50-$100 per applicant.

• Title fees – Includes title search, title insurance, etc. About 0.5% of the loan amount.

• Attorney fees – In some states an attorney is required to review documents. Can be hourly rate or flat fee of a few hundred dollars.

• Recording fees – Cost for recording the mortgage with local government. Varies by location.

• Other miscellaneous fees – Survey fee, mortgage registration taxes, etc may also apply.

As you can see, some fees are fixed costs while others are percentage based. This means closing costs rise as the loan amount increases. On a $50,000 home equity loan, total closing costs may be around $1,500. On a $200,000 loan, closing costs could reach $5,000 or more.

HELOCs may have some additional costs like annual fees, transaction fees for drawing on the line of credit, and early termination fees if you close the HELOC within the first few years. However, the main closing fees are similar to a home equity loan.

Strategies for reducing closing costs

If you want to minimize home equity loan closing costs, here are some tips:

• Shop around – Compare quotes from multiple lenders. Each will have different fees and some offer lower costs.

• Ask about discounts – See if lender offers any discounts for existing customers or bundling with other accounts.

• Look for lender credits – Some lenders may offer a lender credit to offset certain closing costs.

• Compare closing cost estimates – Review the Loan Estimates to see which lender has lower overall fees.

• Choose “no-closing-cost” option – Some lenders offer home equity loans with no or very low closing costs, usually in exchange for a higher interest rate.

• Pay discount points – Allows you to “buy down” the interest rate in exchange for paying more closing costs upfront.

• Negotiate fees – See if lender is willing to waive or lower any fees, especially if you have another offer with lower costs.

Are closing costs tax deductible?

In most cases, the closing costs on a home equity loan or HELOC are not tax deductible. The main exception is if you use the funds from a home equity loan for home improvements – then the loan origination fees, appraisal fees and other costs directly related to obtaining the loan can be deducted.

You may also be able to deduct mortgage interest if you itemize deductions. However, the tax deductibility of interest depends on how you use the loan proceeds. Talk to a tax professional to understand the deductibility of your specific home equity loan.

Tips for budgeting closing costs

Here are some tips to make sure closing costs fit within your budget:

• Get closing cost estimates early – Ask for a Loan Estimate when applying so you know costs upfront.

• Factor fees into loan amount – Consider applying for a larger loan to cover closing costs, keeping monthly payments the same.

• Save up – Set aside funds to cover closing costs in advance. Aim to have the money saved before starting the loan process.

• Ask about bringing funds to closing – Some lenders let you pay closing costs at closing, rather than financing them.

• Pay with a low-rate card – Consider charging closing costs to a credit card offering 0% financing to pay over time.

With a little planning and preparation, you can keep home equity loan closing costs from derailing your financing. Understanding these fees in advance is key, so make sure to get all the information from lenders early in the process. Shop around, negotiate when possible, and determine the best way to fit closing costs into your overall loan amount and budget. This will lead to a smooth closing and successful home equity loan or HELOC.