If you're planning a major home improvement, need to cover college tuition for your child or want to consolidate debt, you might be considering a home equity loan. While there are several benefits of a home equity loan, such as a low interest rate and fixed payments over a long period of time, don't forget that you will need to pay home equity loan closing costs. Before you sign your application, you can compare closing costs charged by various lenders.
Homeowners can typically borrow up to 85 percent of their home value, including both your first mortgage and your home equity loan. In some cases, if you have excellent credit and you own a home in a location where home prices are stable or rising, you might qualify to borrow up to 90 percent of your home value.
A home equity loan approval is based on your home value and the amount of equity you have, which refers to the current market value of your property minus the amount you owe on your mortgage. In addition, your credit qualifications will be reviewed. You could pay a higher interest rate if you have a low credit score or your loan could be denied. A home equity loan, since it will be repaid after your first mortgage is paid in the event of a foreclosure, is viewed as riskier by lenders and typically has a higher interest rate than first mortgages.
Pick the Right Loan Product
Depending on how you plan to spend the money you borrow and how you want to pay it back, you can choose between a home equity loan and a home equity line of credit. The closing costs for these two loan products vary along with other features. Typically, a line of credit has little or no closing costs. In contrast, a home equity loan will have similar closing costs to your first mortgage. However, home equity loans have the advantage of providing you money in a lump sum that you repay with a fixed interest rate for a fixed term, usually 10 or 15 years. You can easily calculate your monthly loan payments for a home equity loan with the LendingTree loan payment calculator.
Home Equity Loan Closing Costs
Typically, home equity loan closing costs total 2 to 5 percent of the loan. The best way to know exactly what your closing costs will be is to ask several lenders for an estimate. You can negotiate with lenders on some fees for a home equity loan, so when you get a lower quote from one lender you can always go back to other lenders to ask for comparable fees. The typical fees included in your home equity loan closing costs are attorney or title company representative fees, a title search, document preparation, an application fee, and an appraisal to evaluate the market value of your property. Some home equity loans also have a maintenance fee.
Points are sometimes paid on a home equity loan to lower the interest rate. One point is equal to 1 percent of your loan amount. For example, if you pay 1 point on a $200,000 loan, it would cost you $2,000 at closing.
Shopping around with several lenders and asking them to reduce your interest rate, your points or their fee can save hundreds or even thousands of dollars on your home equity loan.