How Much are Home Equity Loan Closing Costs?
Home equity loan closing costs can range from 2% to 5% of your loan amount. A home equity loan allows you to borrow against your available equity in a lump sum. It can be a viable option to pay for home improvements, fund your child’s college tuition or consolidate high-interest debt.
Home equity loan closing costs and fees
Closing costs for a home equity loan typically range anywhere from 2% to 5% of the loan amount, although some lenders may reduce or waive the costs altogether. Beware of the catch, though: in exchange for a reduction or waiver, you may have to repay some costs if you pay off and close the loan within a certain period, usually three years.
|Closing cost type||How much?|
|Appraisal fee||$300 to $400|
|Credit report fee||$30 to $50|
|Document preparation and attorney fees||Varies|
|Loan origination fee||Varies|
|Notary fee||$50 to $200 per signature|
|Title search||$75 to $100|
- Appraisal fee. Your lender will order a home appraisal to help determine your loan-to-value (LTV) ratio, which is the percentage of your home’s value being financed by your home loan(s). Each lender is different, but most will only let you borrow up to 85% of your available equity.
- Credit report fee. Most lenders will pull your credit reports and scores to determine your creditworthiness. A lower credit score tells lenders you’re a high-risk borrower, and it may be harder for you to qualify for a home equity loan. Aim for a score of at least 740 to increase your chances of approval and receiving the best interest rate.
- Document preparation and attorney fees. Lenders also charge a fee to prepare all the legal documents related to your loan. An attorney or financial specialist may complete this paperwork, but you may be able to avoid this cost. For example, American 1 Credit Union, based in Jackson, Mich., waives their document prep and other fees for a home equity loan.
- Loan origination fee. Depending on your lender, the origination fee and other costs associated with your home equity loan may be waived. However, you might pay them indirectly if your lender rolls them into the cost of the loan and increases your interest rate.
- Notary fee. Many lenders will verify paperwork by having it notarized by a notary public. Some states charge per signature, while others have set costs. Ask your lender whether this charge can be reduced or waived.
- Title search. A title search tells a lender that you are the rightful homeowner, and whether there are any outstanding taxes, assessments or easements against the property.
HELOC closing costs and fees
A home equity line of credit, or HELOC, is a revolving line of credit that works like a credit card. You use and repay the credit line as needed, but pay interest only on the amount you borrow.
Your home is used as collateral for a HELOC, as is the case for a home equity loan, and that means you could lose your home to foreclosure if the loan isn’t repaid. Typically, lenders will set a draw period, or a fixed amount of time you’re allowed to withdraw money. Once the draw period ends, you enter the repayment period. In this phase, you’ll make principal and interest payments on the HELOC and can no longer access the credit line.
One key advantage of a HELOC versus a home equity loan is that HELOC closing costs may be lower. However, be prepared to pay many of the same closing costs found with a home equity loan.
To give you a better idea of what these costs may look like, the Bank of Colorado lists the following fees charged when opening a HELOC. The numbers are based on a five-year draw period and 10-year repayment period:
|Closing cost type||How much?|
|Document preparation fee||$150|
|Flood certificate fee||$17|
|Home appraisal fee||$300 to $500|
|Recording fee||$21 to $36|
|Tax certificate fee||$15 to $25|
|Title insurance||$100 to $1,500|
Some lenders may waive HELOC closing costs, but there are usually conditions to meet. For example, if you take out a HELOC of $10,000 or more from BB&T and SunTrust’s newly merged Truist Bank, you won’t incur closing costs if you keep the credit line open for three years. But if you close your account early, closing costs generally range from $100 to $2,000 and are added to your outstanding balance.
Other HELOC expenses
Be on the lookout for ongoing HELOC costs as you shop around, including:
- Annual fees. Whether or not you use your line of credit, you may be charged an annual membership fee to have the line of credit available when you need it. The amount can vary: For example, the Bank of Colorado charges between $50 and $250 annually.
- Inactivity charges. While a HELOC can give you financial flexibility — especially when you aren’t sure exactly how much you’ll need for home improvements or another financial need — you may be penalized for not using it all. If this appears on the list of fees for your HELOC, negotiate its removal, or try another lender.
- Early termination fees. Many lenders will require your account to be open for a certain time period. If you close your account early, the lender may charge you an early termination or cancellation fee. For instance, TD Bank charges 2% of the principal balance, up to a maximum of $450, if your HELOC is paid off and closed within two years.
- Minimum withdrawals. Some lenders may require a minimum withdrawal of funds, which can cause you to pay interest on money you don’t need. If you can’t drop this requirement, be sure the amount you’re required to withdraw isn’t excessive.
HELOCs typically have variable rates, unlike rates on most home equity loans. HELOC rates are usually lower than home equity loan rates because lenders offer you the security of a fixed interest rate with the loan, and this could work to your advantage when rates are low. If, however, rates later rise to an unaffordable level, you may qualify to convert your HELOC to a fixed-rate option.
How to reduce your home equity loan closing costs
1. Reduce your risk.Aside from increasing your credit score (which can affect your home equity loan interest rate), build at least 20% equity in your home. Pay down any non-mortgage debt you have, as this can demonstrate you’re a creditworthy borrower with the financial bandwidth to repay a new loan.
2. Shop around.Closing costs and interest rates vary between lenders, so it’s always wise to comparison-shop. Start with your own bank, credit union or nonbank lender — an existing relationship could help curb your costs. In addition, identify two to four other lenders to find the lowest home equity loan rates and costs available.
3. Negotiate, negotiate, negotiate.Question every cost and don’t hesitate to ask about having some of your fees reduced or waived. This can save you hundreds on your home equity loan.
4. Borrow only what you need.You won’t fully avoid paying any home equity loan closing costs — simply because it costs money to borrow money — though you can lessen the sting. Tap only the equity you need, rather than borrowing the maximum allowed. This preserves equity and prevents you from overextending your finances.