How Much Are Home Equity Loan Closing Costs?

Home equity loans and HELOCs are a great way to get money for significant bills or renovations without having to go into your savings.

Borrowing against your home’s equity may be a good idea if you need to finance a sizable home improvement or other expense but don’t have the cash on hand to pay for it. If you’re considering a home equity loan or line of credit as a source of funding, keep in mind that these financial products typically come with costly interest rates and fees.

Closing expenses for a home equity loan or HELOC typically range from 2% to 5% of the loan sum, which is lower than the usual closing costs for a conventional mortgage. Find out more about the home equity loan closing costs, and learn how to minimize these charges.

Home Equity Loan Closing Costs and Fees

Closing expenses for home equity loans normally run anything from 2% to 5% of the total loan sum, despite the fact that some creditors may lower or even completely cancel these costs.

Be aware, however, that there is a catch: in exchange for a possible cost reduction or exemption, you may be required to pay back some of those costs if you pay off the loan and shut it within a set sum of time, which is often three years. If you do this, be sure to plan beforehand.

Appraisal cost

A house appraisal will be ordered by your creditor in order to assist in determining your loan-to-value ratio, also known as the proportion of your home’s value that is being funded by your home loan (s). 

Although the guidelines vary from creditor to creditor, the majority of financial institutions will only allow you to draw up to 85 percent of the value of your property after deducting the sum still owed on your first mortgage.

Cost of credit reports

When determining whether or not to extend credit, the majority of creditors will check a borrower’s credit report and credit score. 

If your credit score is low, potential creditors will perceive you as a high-risk borrower, making it more difficult for you to satisfy the requirements for a home equity loan. To improve your chances of approval and securing the best interest rate, aim for a credit score of 740 or higher.

Costs linked with drafting legal documents and hiring an attorney

The preparation of all of the legal paperwork that is linked with your loan also incur an additional fee from the creditor. This paperwork might be completed by an attorney or a financial specialist, but you might be able to avoid paying for their services.

Costs linked with setting up a new loan

There is a possibility that you will not be required to pay any fees linked with the establishment of your home equity loan, including the origination charge as well as any other fees. You may wind up paying them indirectly, though, if your creditor included them in the price of the loan by increasing your interest rate.

Cost of a Notary

The process of getting material notarized by a public notary is one of the many steps that many creditors take in order to verify documents. There are states that charge a set fee, while others charge on a per-signature basis. Talk to your lending institution about the possibility of getting this fee lowered or eliminated entirely.

Title search

A creditor will want to know that you are the lawful owner of the property and whether or not there are any taxes, assessments, or easements that are still outstanding against it. This information can be obtained through a title search.

HELOC Closing Costs and Fees

Similarly to a credit card, a home equity line of credit (HELOC) is a revolving line of credit. With a revolving line of credit, you can borrow money as you need it and pay it back whenever you like, with interest.

Home equity lines of credit (HELOCs) have the potential advantage of lower closing fees compared to home equity loans. Though most of the same closing charges linked with a home equity loan still apply, be ready to pay them.

With a draw duration of five years and a payback term of ten, the following numbers can be expected:

In contrast to fixed-rate home equity loans, the interest on HELOCs tends to fluctuate over time.

When interest rates are low, a HELOC may save you money by offering a lower rate than a home equity loan would. However, if rates increase to an unmanageable level, you may be able to refinance your HELOC into a fixed-rate product.

How Are Home Equity and HELOC Loan Closing Costs Determined?

When all creditor fees and third-party services are factored in, the typical range for the sum that a home equity loan or HELOC will end up costing the borrower in closing expenses is between two and five percent of the total loan sum or line of credit.

It is possible that the creditor will pay for these expenses in the case of “no-fee” HELOCs and home equity loans; however, you should be aware that creditors may have already factored the cost of these expenses into the interest rate that they are charging you for the loan.

When evaluating the various offers provided by different creditors, it is important to remember to compare annual percentage rates (APRs), and not just interest rates.

There are significant distinctions between HELOCs and home equity loans, despite their shared nature as second mortgages. It’s possible that a no-closing-cost HELOC might be a better value than a no-closing-cost home equity loan.

Keep in mind that home equity lines of credit (HELOCs) almost always have variable interest rates, whereas home equity loans normally have fixed rates. 

Therefore, HELOC creditors are taking on less risk in the event of a rise in interest rates since they may pass the increased costs on to debtors. Because of this, companies are probably able to offer negligible or no closing expenses.

Is It Possible to Get a Home Equity Loan with No Closing Costs?

There are some home equity loans available that do not require any closing expenses to be paid. 

However, it is nearly certain that you will be subjected to a higher rate of interest than you would be if you were to settle the costs upfront. This could result in you having to make total payments to your creditor that are noticeably higher throughout the course of the loan’s duration.

It can be in your best interest to ask the creditor to include the closing fees in the loan sum. To put it another way, you borrow the sum necessary plus the costs linked with closing the deal.

Consider the following scenario: you need to borrow $20,000, and the closing charges sum to $1,000 (5% of the total). You might propose to your creditor that they grant you $21,000 and subtract the costs from the total sum that they provide you at the end of the loan.

You will, in fact, be required to make interest payments on $21,000 rather than $20,000 in the future. On the other hand, it could end up being a better deal for you financially in the long run than getting a home equity loan with a higher interest rate even if you don’t have to pay any closing costs.

Naturally, you won’t know for certain unless you run the numbers first. Therefore, obtain loan estimates from various creditors for both possibilities.

How to Reduce Your Closing Costs on Home Equity Loans

There are a variety of methods available to cut down on the costs linked with the closing of your home equity loan. 

It is in your best interest to work on building a solid credit score, reducing the sum of debt you carry on a monthly basis, and shopping around for creditors who offer the lowest or no closing costs.

• Pay off or reduce your debts – You can improve your chances of getting a loan with a cheaper interest rate by minimizing the sum of monthly debt you have before you apply for the loan. The ratio of your monthly debt payments to your income is one factor used by creditors to determine the interest rate they will offer you.
  
  This ratio determines the percentage of your total monthly income that is consumed by your monthly obligations. This percentage takes into account the sum that you anticipate paying toward your new loan each month. 
  
  Creditors will only offer the most attractive interest rates to borrowers who have a debt-to-income ratio that is lower than 43 percent.
  
  Paying down as substantially of your debt as possible, including credit card balances and any other loans or loans, will help reduce your debt-to-income ratio.

• Build and improve your credit – Borrowers who try to improve their credit scores will be eligible for cheaper interest rates on home equity loans, provided they meet the other requirements for eligibility. 
  
  You will be able to enhance your credit score, thanks to the fact that there are two primary measures you need to take: Prior to actually registering for a home equity loan, you should ensure that all of your monthly expenses are paid on time and that you eliminate as much of your outstanding debt as possible.

• Shop around and compare multiple creditors – Getting multiple quotes from different creditors is the greatest way to reduce the cost of a HELOC or home equity loan. Since the interest rates on HELOCs and home equity loans can vary greatly from one creditor to the next, obtaining rate estimates from multiple creditors is the best way to discover the best possible offer.
  
  Be important to analyze not only the interest rate but also the closing charges and the overall cost of borrowing before deciding which option is best for you. 
  
  It’s possible that a loan with no closing expenses also comes with a greater interest rate, and it’s also possible that a loan with a cheap rate comes with upfront penalties that boost the total expense of the loan.
  
  When you are shopping around for different creditors, it is important to use a loan calculator to determine the overall cost of borrowing as well as the monthly payment. This will ensure that you are comparing apples to apples.

• Negotiate your closing costs with your creditor – Do not be afraid to haggle over the rates and fees linked with a home equity loan. When it comes to these additional fees, the creditor typically has more leeway than they let on. If a creditor is hesitant to negotiate the closing costs of a loan, you might want to look into working with another creditor.

When looking for a creditor, it is crucial to examine both the interest rates and the closing charges offered by various creditors because some creditors may provide no or very low closing costs. It is possible that if you take this additional time and prepare ahead, you will end up paying less of your own money for the home equity loan.

Bottom Line

Use a home equity calculator to determine how much money you might be able to get by taking out a loan against the value of your property. This can help you determine whether or not taking out a loan against the value of your property is the best option for you. 

Using this as a point of departure, you should be able to gain a better understanding of how the fees that were discussed earlier may affect the total sum that you will have to pay back for the loan.

When you are set to push forward with a creditor, you should make sure to request a detailed list of the closing fees. Verify that the checklist includes any verbal agreements on closing fees and that these commitments are incorporated in the loan agreement that you have signed.

Before you sign the documentation, you should discuss any omissions with your creditor. If anything is missing, this should be done immediately.