A Guide To Home Equity Loan Closing Costs

Need to pay for a major kitchen remodel? Want to add a primary bedroom suite? A home equity loan can be a savvy way to pay for these and other home improvements.

With a home equity loan, you borrow against the equity you’ve built in your home, a figure that rises as you pay down your mortgage loan or as the value of your home rises.

Equity is the difference between what you owe on your mortgage and what your home is worth. If you owe $200,000 on your mortgage and your home is worth $325,000, you have $125,000 of equity.

You can then borrow against this equity in the form of a home equity loan. You might, for example, apply for a loan of $100,000. You’d receive the money in a lump sum that you can spend on whatever you’d like. You’d pay this loan back, with interest, in monthly payments, just like you pay back your primary mortgage.

Though you can use the funds from a home equity loan for anything, if you use a home equity loan to cover the costs of home improvements, you may be able to deduct the interest that you pay on the loan throughout the year on your income taxes.

But home equity loans, while useful, are not free. You’ll have to pay closing costs to your lender and other third parties. And those costs can add up.

As with any mortgage loan, you’ll pay a variety of closing costs when taking out a home equity loan. You can expect to pay from 2% to 6% of your total loan amount in closing costs. If you take out a home equity loan of $100,000, then, expect to pay from $2,000 to $6,000 in closing costs.

Appraisal Fee

A home appraisal is a key step in your application for a home equity loan. Before approving you for a loan, your lender must determine how much your property is worth. To do this, your lender will order a home appraisal. A state-licensed third party appraiser will visit your home and compare it to similar nearby properties that have recently sold. The appraiser will then determine the market value of your property, a figure your lender will need in calculating how much equity you’ve built. The appraisal fee will vary by location, but you can generally expect to pay around $300 – $500.

Credit Report Fee

Before approving you for a home equity loan, your lender will pull your credit report and check your three-digit FICO^® credit score. Credit service fees vary, but most will cost anywhere from $20 to $50. If you are applying with another person for your home equity loan, such as your spouse or partner, lenders will check the credit of everyone listed on the mortgage and will charge for every credit report they pull.

Attorney Fee or Document Preparation fees

Your lender will prepare numerous documents that are required to help you qualify for a home equity loan. In some states, you'll need to hire an attorney to review these documents and to make sure that the documents you sign reflect the accurate costs of closing your loan. These fees will vary, but you can expect to pay from 0.5% to 1% of your loan amount on doc prep fees and/or attorney fees.

Origination Fee

Your lender will charge a mortgage origination fee to cover the costs of processing your loan. This fee covers the costs of collecting your financial information and underwriting your loan. Underwriters are responsible for verifying your income and making sure you can afford your new monthly mortgage payment. This fee will also vary, but you can expect to pay from 0.5% to 1% of your loan amount.

Notary Fee

If you need papers notarized during the loan-closing process, you’ll need to pay for a real estate notary. Notaries charge varying fees, but you can expect to pay about $20 for notary services.

Title Search Fee

Your lender will order a title search before approving you for a home equity loan. This search should find any liens, or ownership claims, that other entities, including government bodies or individuals, have against your home. For example, if you didn’t pay your property taxes, your county might have a lien against your home, something that would show up during a title search. A title search fee generally costs $75 – $200, often depending on where the property is located.

Title Insurance Costs

Your lender will probably require a lender’s title insurance policy when you take out a home equity loan. This insurance protects your lender if an individual, government body or other entity makes an ownership claim against your home (that isn’t found during the title search). You can expect to pay $500 to $1,000 for a lender’s title policy. You probably don’t need to buy an owner’s title insurance policy – which protects you against claims made on your home that weren’t found during the title search -- when taking out a home equity loan if you already purchased one when you bought your current residence.

Another way to borrow against your home’s equity is through a home equity line of credit, better known as a HELOC. As with a home equity loan, how much you can borrow with a HELOC is based on how much equity you’ve built in your home. A HELOC, though, acts more like a credit card with a credit limit based on the equity in your home.

You’ll pay most of the same fees as you’d pay for a home equity loan, though HELOCs may also come with additional costs.

HELOC Annual Fee

Your lender might charge an annual fee to keep your HELOC open each year. Think of your annual fee as a type of membership fee. These fees vary, with some lenders charging as little as $5 a year while others might levy an annual fee as high as $250.

HELOC Termination Fee

A termination fee is a type of prepayment fee. You’ll pay it if you close your HELOC before a certain date. You might, for instance, pay a termination fee equal to 5% of your loan if you close your HELOC before 3 years or 3% if you close it before 5 years have passed. These fees vary, so you can shop around for lenders who either don’t charge these fees or levy lower ones.

HELOC Inactivity Fee

Your lender might charge you a small fee if you don’t borrow against your HELOC often enough. Again, lenders vary. Shopping around for a lender that doesn’t charge this fee could save you money.

HELOC Transaction Fee

Some lenders might charge a small fee every time you borrow against your HELOC. Again, it’s best to shop around for a lender who won’t charge these fees.

There are ways to lower what you pay to close your home equity loan. It helps to build a strong credit score, reduce your monthly debt and shop for those lenders who charge the lowest, or no, closing costs.

Reduce Your Debt 

You can boost your odds of enjoying a lower interest rate on your loan by reducing your monthly debt before applying. Lenders look at your debt-to-income ratio when determining how low of an interest rate you’ll qualify for. This ratio measures how much of your gross monthly income your monthly debts, including your estimated new loan payment, eat up. Lenders reserve their lowest interest rates for borrowers with a debt-to-income ratio of 43% or lower. You can lower your debt-to-income ratio by paying off as much of your credit card debt and other debts as you can.

Improve Your Credit Score 

Borrowers who work on improving their credit scores will also qualify for lower interest rates on home equity loans. Fortunately, you can improve your credit score by taking two main steps: Pay your bills on time each month and pay off as much outstanding debt as you can, before applying for a home equity loan.

Shop Around And Compare Lenders 

Lenders will charge varying closing costs for home equity loans. If you want the least expensive loan, it makes sense to shop for lenders that offer the lowest fees. Just be careful when choosing a mortgage lender: Low fees are important, but you also want to work with lenders that charge you a lower interest rate. The lower your interest rate, the lower your monthly payments. Landing a lower interest rate could outweigh the negatives of paying slightly higher closing costs.

Negotiate Your Closing Costs 

Negotiating closing costs with lenders is also a way to lower the cost of your home equity loan. Lenders that charge certain fees – such as credit pull fee – might be willing to waive them if you ask.

Find Lenders With No-Closing-Cost Loans

Some lenders offer home equity loans with no closing costs. There is a downside, though: You’ll usually pay a higher interest rate, which will result in a higher monthly payment. You’ll have to decide whether skipping the upfront closing costs is worth the higher interest rate and monthly payment.

A home equity loan is an affordable way to fund major home improvements or cover other large expenses. But as with all mortgages, borrowing against your home’s equity isn’t free so make sure the loan is in your best financial interests. Ready to tap into your home’s equity? You can work with us to get a home equity loan at a fair interest rate.