As a homeowner, you likely have looked into the different ways you can access your home equity. One of the more popular ways is a second mortgage, which includes home equity loans (HE loans) and home equity line of credit (HELOC). Second mortgages, specifically HE loans, are popular among homeowners because are their low fixed interest rates and flexible financing options. With that said, many homeowners frequently ask, are there closing costs on a home equity loan?
Yes, there are closing costs on home equity loans. We’ll explain more below of ways you can offset the costs or roll them up into the loan but given the complexity of this type of transaction, you can always expect to pay some fees and costs when closing on a home equity loan. Knowing how much your home is worth will also help you understand how much equity you can pull out.
Closing costs can vary greatly, so we’ll go through the most common types of fees you’ll encounter when getting a home equity loan, as well as how you can reduce these costs.
Why are there home equity loan closing costs?
When a lender decides to issue a loan, there’s always a chance that the loan may not be paid back. To reduce the likelihood of that happening, lenders have guidelines for their loan programs and must review each application to ensure it meets its lending criteria. This review process is where most home equity loan closing costs are incurred.
For example, since a home equity loan is secured by your property, lenders will want to verify the value and condition of the property. A certified appraiser must inspect the home and conduct research to determine its market value, a service that typically runs between $450 and $750.
Other closing costs can include a title search to verify the owner of the property, flood certification fees to ensure the home is adequately insured, and notary fees for the signing of your loan documents.
It’s important to note that these are one-time fees only associated with your home equity loan. They differ from recurring fees tied to the property, such as property taxes and homeowner’s insurance.
How much does it cost to get a home equity loan?
On average, home equity closing costs range between 2% and 5% of the loan amount. You’ll get a written breakdown of the fees before committing to the loan (called a Loan Estimate).
Some examples of closing costs include government recording charges that your county recorder’s office may assess. Other closing costs can include a credit report fee and attorney fees to review paperwork as part of the due diligence process to allow the lender to determine your eligibility for the loan and any required insurance coverages for the property.
While fees can vary among lenders, here is a list of the most common types of expenses you’ll see:
- Lender origination fee ($0 to $999): An origination fee can be a flat fee that a lender uses to cover its services in processing and reviewing your loan.
- Appraisal fee ($450 to $750): An appraisal fee is used to cover the cost of hiring a certified appraiser to inspect, evaluate, and research the market value of your home.
- Credit report fee ($10 to $30): Lenders will incur a cost to obtain a copy of your credit report.
- Flood certification fee ($0 to $99): As a part of your closing costs, flood certification is used to verify if the property is located in a flood zone that would require additional insurance.
- Title company fees ($350 to $999): Fees charged to cover services provided by the title company, such as a title search to verify property ownership.
- Lender’s title insurance ($500 to $1,500): Obtained by a lender to protect itself against errors, defects, and other omissions in the title search process.
- Notary fee ($250): A notary is often hired to physically meet with you to verify your identity as part of the loan signing process.
- Government recording fees ($49 to $149): Lenders will file their interest in public records when it issues you a loan, and many county offices charge a fee for handling this paperwork.
- Document preparation fees ($0 to $199): Some lenders charge this fee as part of preparing your final loan documents.
- Discount points (varies): You may have the option to get a lower interest rate by paying more fees upfront. 1 discount point is equivalent to 1% of the loan amount.
These fees do add up so make sure to review each one carefully! Keep reading to learn how you can reduce these costs.
Are there any recurring home equity loan fees?
In addition to the one-time fees, some lenders may have additional home equity loan costs associated with keeping the loan active.
- Annual fee (HELOC, $0 to $99): Lenders may assess this fee to keep a HELOC open, although some may offer a fee waiver depending on your usage throughout the year.
- Inactivity fee (HELOC, $0 to $49 per month): HELOCs that have no activity after a certain time frame may be subject to an inactivity fee or account dormancy fee.
- Draw fee (HELOC, varies): Some HELOCs may have a fee associated with each draw you make. Read your loan agreement to understand if and when this applies.
- Early termination fee (HELOC, varies): If you close your HELOC prior to a certain date, some lenders may charge an early closure fee as a way of recouping some of the expenses it incurred.
- Prepayment penalty (varies): This fee, which applies to both HELOCs and home equity loans, might apply if you decide to pay off your loan more quickly.
What about no-closing-cost HELOCs and home equity loans?
Loans advertised as having no HELOC or home equity loan closing costs may seem attractive, but they typically have a higher interest rate or charge additional fees. This is because, at a minimum, a lender must cover its expenses to stay in business.
Lenders that do not charge upfront closing costs or advertise no equity loan closing costs will usually expect to recoup their expenses in the long run in the form of higher rates and other fees such as early closure fees, inactivity fees, prepayment penalties, or annual fees.
For this reason, it’s important to consider how you plan on using your home equity loan or HELOC, and shop lenders to find the loan that is least expensive for you over the life of the loan.
How can I reduce my closing costs on a home equity loan?
You won’t have control over all of the closing costs associated with home equity loans, but there are some things you can do to reduce your monthly payment and pay fewer interest charges:
- Improve your credit: Your credit score is a big factor in determining the interest rate you qualify for on a home equity loan. Lenders often have multiple tiers of rates based on your credit score. It’s a good idea to ask what the minimum credit score for a home equity loan is and what the scoring cutoffs are for each tier. If you’re close, it might be worth trying to pay off some of your loan balances, such as credit card debt, for a quick bump to your credit score.
- Reduce your loan amount: Similar to your credit score, the rate you get on your home equity loan could also be determined by your loan-to-value ratio (LTV). The LTV is calculated by dividing your loan amount by your property’s value. If you ask for a larger loan amount than you need, you could inadvertently be increasing your interest rate.
- Review your home’s appraised value: Since your home value is part of the LTV calculation that could impact your rate, it’s recommended that you review your appraisal report for errors that may have affected the appraiser’s opinion of value. Additionally, if you believe your home value should be higher, it can be helpful to provide the appraiser with comparable homes that have recently sold.
- Check the lender’s debt-to-income (DTI) calculations: In some cases, the pricing on your home equity loan will be affected by your DTI. Your DTI is calculated as your total monthly payments divided by your monthly income. A lower DTI can result in a lower interest rate. Common errors that a lender could make include duplicating monthly loan payments or omitting bonus or commission income you earn.
- Shop lenders: You can find a wide range of rates, fees, and terms among different lenders. Occasionally, a lender may also be offering a temporary incentive or reduced closing costs for newly opened accounts, so it’s important to get quotes from multiple lenders before making any final decisions.
Closing Costs On a Home Equity Loan
Home equity loans are complex transactions that have a wide range of fees, and share many of the same closing costs as a HELOC. Unlike smaller loans like credit cards, involvement from a number of third-party companies is required. Fees for these third-party services are often passed on to you as the borrower and must be paid upfront or throughout the course of the loan.