In todays economic environment where millions of Americans find themselves dealing with inflation and rising interest rates, it can be difficult to find valuable credit sources. Credit cards and personal loans are two traditional options, but both come with prohibitive interest rates that could offset any help they provide. Fortunately, homeowners have a low-interest alternative at their fingertips: their home equity.
By using a home equity loan or a home equity line of credit (HELOC), homeowners can finance home repairs and renovations, pay for major expenses and help consolidate their existing debt — all at a much lower interest rate than some other popular credit types. To access the equity in the home, however, owners will need to complete a similar experience to their initial home purchase. This includes paying for home equity loan closing costs.
If you think you could benefit from taking out a home equity loan then start exploring local offers here now.
Taking out a home equity loan can be a great way to access funds for home renovations, debt consolidation, or other major expenses. However, like any loan, home equity loans come with fees and closing costs that you’ll need to factor in. In this article, we’ll break down the common fees associated with home equity loans so you know what to expect.
Origination Fees
This is a fee charged by the lender to process, underwrite, and fund the home equity loan. It’s generally 0.5% to 1% of the loan amount. So on a $50,000 home equity loan, you’d pay $250 to $500 in origination fees. This covers the lender’s administrative costs.
Appraisal Fees
Lenders will require an appraisal on the home to verify its market value before approving a home equity loan. Appraisal fees often range from $300 to $500. The appraisal confirms the home is worth enough to secure the loan.
Credit Report Fees
The lender will pull your credit report to evaluate your creditworthiness. This usually costs between $20 and $100 per report.
Recording Fees
To secure the lien on your home, the lender has to record the home equity loan with the local government office. Recording fees range from $50 to $200 in most areas.
Title Fees
There are a few potential title fees:
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Title Search The lender hires a title company to research any liens or claims on your home This costs $100 to $250 in most cases
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Title Insurance: This optional insurance protects the lender if issues with the title arise later. Title insurance costs 0.5% to 1% of the loan amount.
Attorney Fees
In some states, an attorney must review the loan documents. Even when not required, having an attorney review the paperwork is smart. Attorney fees range from $300 to $1,000 or more depending on local rates.
Property Taxes
If required in your state, you may have to pay property taxes upfront covering the first 1-2 years of the loan term. This ensures the taxes are paid if you default.
Homeowners Insurance
Lenders require homeowners insurance on properties with mortgages or home equity loans. You may need to pay the first year premium upfront at closing.
Interest Prepayments
You’ll likely need to prepay interest covering the first payment period after closing. For example, two weeks of prepaid interest if payments are due bi-weekly.
Mortgage-Related Fees
On top of the fees above, you may also encounter:
- Flood certification fee
- HOA certification fee
- Mortgage registration tax
- Courier fee
- Wire transfer fee
- Odd days interest (interest from closing date to first payment date)
While not required by all lenders, they are common additional fees that can add a couple hundred dollars or more to closing costs.
Total Fees
In total, closing costs on a $50,000 home equity loan often range from $2,000 to $5,000. The origination fee, appraisal, and title search/insurance make up the bulk of fees. Closing costs range from 2% to 5% of the loan amount on average.
To get an estimate for your specific situation, use a home equity calculator that includes closing costs.
Strategies to Reduce Fees
While closing costs are typical for home equity loans, here are some tips to reduce fees:
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Shop around: Compare quotes from multiple lenders to find the best deal. Credit unions often have lower fees.
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Negotiate: Don’t be afraid to negotiate, especially on origination or title fees. Lenders may discount for loyal customers.
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Use no-closing cost loans: Some lenders offer no closing cost loans by rolling fees into the loan amount. You pay interest on the fees over the loan term.
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Improve your credit: A higher credit score qualifies you for lower interest rates and better loan terms, which gives you more leverage to negotiate lower fees.
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Lower your DTI: Pay down debts to reduce your debt-to-income ratio before applying. This puts you in a better position to negotiate.
Tax Deductibility
The interest paid on a home equity loan is tax deductible in most cases. However, none of the upfront fees are deductible. Talk to a tax pro to understand the deductions available on your specific loan.
The Bottom Line
Home equity loans come with closing costs and fees ranging from 2% to 5% of the loan amount. The major fees are origination, appraisal, title, and attorney fees. Shop around, negotiate, and explore no-closing cost options to reduce your costs. Just be sure to factor the fees into your overall cost analysis when considering a home equity loan or line of credit.
How much are home equity loan closing costs?
Closing costs for a home equity loan are about 2% to 5% of the total loan amount. So if youre taking a loan on your home equity for $50,000, you can expect to pay between $1,000 to $2,500. This is an approximate figure, however, and it will rise based on how much equity you ultimately withdraw as well as other factors. In general, borrowers can expect to pay for all of the following items when they close on their home equity loan:
- Origination fee: This is what you pay the lender to help cover the processing and funding portion of your home equity loan. This could be a set figure or it could be a percentage of your total home equity loan (it depends on the lender being used).
- Appraisal: Your lender will want to verify that your home is worth what they think it is, as this can affect the amount of equity you actually have to borrow. Appraisal costs vary but you can expect it to be at least a few hundred dollars (think $300 to $500).
- Credit report: Your lender will also want to make sure that youre not a credit risk, so expect to pay for a credit report for them to review before agreeing to disburse the funds (each credit report cost is different but can range from $10 to $100 each, approximately).
- Document fees: This will range based on how many documents you need and how many copies of those are required, but it can range from less than $100 to slightly more depending on what the lender wants.
- Title check: Before giving the homeowner access to the home equity the lender will want to do a title check to make sure there are no liens or issues with the title to the home as it currently exists (this can be a few hundred dollars, too, depending on who does the checking).
Closing costs on a home equity loan could conceivably include other items not on the above list. Some borrowers may pay “points” to secure a lower interest rate. There are also may be items that some lenders want to see that other lenders are comfortable skipping. Thats why it pays to do your research to find the best and most cost-effective home equity loan lender for you.
To minimize the out-of-pocket expenses youll have to pay to secure a home equity loan it makes sense to get your credit in the best shape possible before applying. This will help improve your chances of getting a low interest rate. You shouldnt automatically proceed with your current lender, either, as other banks and institutions may offer you better rates and terms. Even if you do stay with your current bank, make sure youve shopped around first so you know what else is out there. Its possible that you can negotiate better loan terms with your current lender by pointing out the other options on the market.
Home equity loan costs will generally fall in the 2% to 5% range, depending on the above factors. But those costs could be a small price to pay to get low interest credit otherwise unavailable for most borrowers. Because of the interest rates available on home equity loans and HELOCs, many homeowners may want to pursue them now to help make ends meet and get their credit back on track.
Matt Richardson is the managing editor for the Managing Your Money section for CBSNews.com. He writes and edits content about personal finance ranging from savings to investing to insurance.
HELOC Vs Home Equity Loan: Which is Better?
FAQ
Does it cost anything for a home equity loan?
What is the origination fee on a home equity loan?
What are the fees associated with a HELOC?
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Common HELOC Closing Costs
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Annual Fee
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$50 to $100
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Early Termination Fee
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$500
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Inactivity Fee
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$100 per year
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Transaction Fee
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Varies
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Why are home equity loans so expensive?
Can you get a home equity loan without closing costs?
Find a zero-closing-cost lender. Yes, you can get a home equity loan without closing costs. Some lenders waive most or all closing costs on home equity loans and HELOCs. They might compensate by charging a higher interest rate. The longer you think you’ll keep the loan, the more important a low rate is.
How much does a home equity loan cost?
Fees range from $100 to $250. Application or origination fees: This is the fee the lender charges to initiate the loan process. Some lenders don’t charge one at all; others charge up to $500. Early payoff fees: These are relatively uncommon for home equity loans, but they do exist.
Do home equity lenders charge fees?
In addition to interest, home equity lenders typically charge fees, which can substantially increase your total borrowing cost. Some lenders will waive or reduce certain fees to gain your business. If the lender offers to roll your fees into the loan amount, you’ll still have to pay them—and with interest. What Is a Home Equity Loan?
How much does a home equity line of credit cost?
With a home equity line of credit (HELOC), closing costs and fees typically range from 1% – 5% of its credit limit. While HELOCs share some fees with home equity loans, they have additional fees you wouldn’t pay with a home equity loan. Like a home equity loan, how much you can borrow with a HELOC is based on the equity you’ve built in your home.