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A home equity loan can be a relatively inexpensive way to finance large projects such as home renovations, debt consolidation, or college education. But, as with most types of loans, there are costs to consider. Many home equity loans come with additional fees that can make your loan significantly more expensive than you might expect from the interest rate alone. Here are some of the most common ones and what you can do with them.

Key Findings

  • Home equity loans use your home as collateral, so they are less risky for the lender (and cheaper for you) than unsecured personal loans or credit cards.
  • In addition to interest, home equity lenders typically charge a fee, which can add significantly to the overall cost of the loan.
  • Some lenders will waive or reduce certain fees in order to profit from your business.
  • If the lender offers to include your fees in the loan amount, you still have to pay them – and with interest.

What is a home loan?

A home equity loan is a loan secured by capital you have accumulated in your main home. Your equity is determined by subtracting the amount you still owe on the mortgage from the current market value of your home. By making mortgage payments, you create capital by reducing your debt balance. If your house goes up in value, it also increases your capital.

With a home loan, you get a lump sum of money from the lender, which you then pay back over an agreed period of time, usually 5 to 30 years. The longer the repayment period, the more interest you will pay in total. Real estate loans usually have fixed rather than variable interest rates.

Because home equity loans are secured by your home, they tend to have significantly lower interest rates than unsecured debts such as credit cards or personal loans.

But interest isn’t all you pay. You will also face a range of fees, whether you pay them upfront or they are included in the loan and you pay them gradually.

Tip

If your lender is unable or unwilling to waive all fees, try negotiating a lower interest rate instead. Lenders generally have some flexibility in term length, interest rate or fees.

General fees and closing costs

Home equity loans usually have the same fees as conventional mortgages. Among the most common ones are:

  1. Appraisal fees. The lender will bring in a professional appraiser to inspect your home and assess its current market value. A house you bought a few years ago may now be worth much more, increasing your available capital. A home appraisal usually costs between $300 and $500.
  2. Credit report fee. The lender will review your credit reports from one or more of the major credit bureaus to see how you are using credit and how reliable you are in paying your bills. Lenders will also check your credit score before they consider offering you a home equity loan. While you can get your credit reports for free once a year, lenders typically charge $10 to $100 per report when you apply for a loan.
  3. The cost of preparing documents. They cover various documents and vary from lender to lender.
  4. Title search fee. A title search confirms that you are the legal owner of the home and tells the lender if there are any liens on it. The cost varies from 100 to 250 dollars.
  5. Application or initiation fees. This is the fee that the lender charges for initiating the loan process. Some lenders charge no fees at all; others charge up to $500.
  6. Early repayment fee. They are relatively uncommon for home equity loans, but they do exist. Early repayment fees or penalties are an additional fee for repaying a loan before the end of the scheduled term. These are more common with real estate lines of credit, but it’s worth learning about them just in case.

Note

It’s a good idea to check your credit reports for errors that reflect negatively on you before applying for a home equity loan. You can request them for free on the official website AnnualCreditReport.com.

Will lenders waive commissions?

Many home equity lenders advertise that they do not charge “bank fees”. This may mean that they waive filing or origin fees. They may also incur some fees that cannot be waived, such as ratings or title searches.

Some lenders also offer to include any fees in the total loan amount. While this may save you cash costs during closing, you will still end up paying these fees plus interest on them over the life of your loan.

Can your lender use the estimate from the original mortgage application?

Unfortunately, even if you purchased your home very recently, the lender will require some sort of new appraisal. Because equity can change as the housing market rises or falls, your equity may not be exactly the same as it was even a few months ago.

How much capital do you need to apply for a home secured loan?

Most lenders require you to have at least 15% equity in your home before you are eligible for a home purchase loan.

Do you need good credit for a home loan?

Yes. Lenders prefer borrowers with a credit rating of at least “good”. Some lenders set the minimum at 620, 660, or 680. A higher credit score may qualify you for a lower interest rate on a loan.

bottom line

Equity loans are a relatively inexpensive way to borrow, but they come with costs. Borrowers should ensure that they receive complete information about all fees, including when and how they are due. Talking to multiple lenders – and making it clear that you’re eyeing them – can also encourage them to compete to offer you a lower interest rate and/or lower fees.

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