Homeowners who have paid enough on their mortgage loan to have amassed equity can apply for a home equity loan, a type of secured loan in which a lender uses the collateral of your home equity to reduce risk and offer more competitive rates.
While annual percentage rate (APR) is a major factor in choosing a home equity loan lender, it’s also important to consider closing costs. While these fees may be lower than those for most primary mortgage loans and some refinances, they can still add up.
- Home equity loans are secured by your home’s equity, which allows lenders to offer low interest rates, but it also means they can foreclose on your home, as with any other mortgage.
- Using the home as collateral means some closing costs are necessary, including origination fees, appraisal fees, and recording fees. However, some banks and credit unions will waive some of these fees.
- The key to finding the right home equity loan for you is to find a loan with the most competitive total APR—the interest rate plus any included fees—given your circumstances.
- It never hurts to ask whether the lender can lower any fees while creating your home equity loan. But be aware the lender may change other terms of your loan to compensate for lower fees or may not be willing to negotiate.
Are There Closing Costs on a Home Equity Loan?
Home equity loans are subject to closing costs, often including:
- Application or underwriting fees
- Document prep fees
- Appraisal fees
- Other fees
“Fees may be assessed to cover internal costs on the lender's side or to reimburse the lender for third-party services used to approve the home equity loan application,” said Rob Cook, vice president and head of marketing at Discover Home Loans, in an email to The Balance. “For example, the lender may require the expertise of licensed appraisers, attorneys, title agents, and other vendors.”
However, your lender has to disclose all those details to you, and you have time to discuss them and ask if there is any wiggle room.
“With lenders that do charge fees and closing costs, you may be able to roll the cost into the loan so that you do not have to pay for these expenses upfront,” Cook said.
If you roll the fees into your loan, you will wind up paying interest on those amounts.
How To Lower Your Home Equity Loan Costs
Start by making sure you understand what your interest rate is and how it compares to your APR, which is often where annual fees and other costs from closing are rolled into a total yearly cost. It’s much easier and more accurate to compare options from multiple lenders using APRs, since a loan with a lower interest rate could also come with higher fees.
“Both home equity loans and home equity lines of credit (HELOCs) may assess a variety of closing costs. Your lender will provide you an estimate of these fees upfront as part of your official loan estimate so you can evaluate which lender provides the most attractive terms,” said Cook.
If you believe you’ll be able to pay back your home equity loan earlier than the schedule set out by the lender, you could choose a home equity loan with no prepayment penalty fee or a low prepayment penalty. Choosing a loan without this fee allows you to pay ahead, reducing the total interest you’ll pay, without penalty.
Another cost you can choose to decline is credit insurance, a product that will make payments for you if you can’t make them yourself, helping you avoid home foreclosure. The Federal Trade Commission (FTC) warns that this coverage can be helpful, but only if you aren’t already covered by a disability or life insurance policy. In that case, credit insurance would be an additional loan cost without an additional benefit.
Is a Home Equity Loan or HELOC More Expensive?
When you’re considering a home equity loan compared to a HELOC, you’ll need to think about more than just the closing costs and the interest rate to fully understand which product works best for you.
For example, you’ll borrow a certain amount with a home equity loan, while with a HELOC, you’ll have the opportunity to borrow up to a limit should the need arise. Using a home equity loan when you aren’t sure whether you need the money now incurs a lot of interest costs, and you may find it’s cheaper overall to get a HELOC and only use it if and when you need it.
If you get a HELOC, use it, then pay it back only to borrow from it again down the road, you may end up paying more in ongoing costs and fees than you would with a home equity loan. In addition, some HELOC fees aren’t present in a home equity loan.
Both home equity loans and HELOCs can have either fixed or variable APRs. If you choose a variable APR, your rates have the potential to go up, which would increase the cost of borrowing.
“HELOCs, unlike home equity loans, may also include annual fees over the life of the repayment period and transaction fees each time you make a withdrawal from your personal line of credit,” Cook said.
It’s best to first determine whether a HELOC or a home equity loan is best for your needs, since their uses tend to be slightly different. Then compare apples to apples by getting several estimates for the closing costs of that product.
How To Find the Best Home Equity Loan Rates
Lenders know that many loan applicants are focused on the interest rate, particularly any kind of promotional interest rate. If you take the time to understand the fees included in your disclosures and ask if any of them are negotiable, you can better compare your options and find the home equity loan that will fit your circumstances best.
Frequently Asked Questions (FAQs)
How much can you borrow on a home equity loan?
Many lenders see borrowing up to 80% of your existing home equity as acceptable, but the individual lender may have other stipulations or may require that you borrow less than that amount given other factors in the market or what they anticipate will change about the housing demand in your particular area.
What is the interest rate on a home equity loan?
Home equity loan interest rates vary, but they tend to be lower than those for unsecured personal loans. That’s because should you default on the loan, the lender has the right to foreclose on your home to recoup some of their costs.
How many years can you get a home equity loan for?
Home equity loans can have a variety of terms. For example, Discover offers home equity loans with terms from 10 years to 30 years. Some lenders also offer ways to refinance your home equity loan to pay it over an even longer term.
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