Are you looking to fund a major kitchen remodel, add a primary bedroom suite, or make other significant home improvements? A home equity loan or home equity line of credit (HELOC) can be a smart way to access the funds you need. However, it’s essential to understand the costs involved, especially the closing costs, before moving forward.
At Avanti Way Financial, we’re here to help you make informed decisions about your home equity options. Let’s dive into what closing costs you can expect when taking out a home equity loan or HELOC.
Do Home Equity Loans Have Closing Costs?
Yes, home equity loans do come with closing costs. Just like with any mortgage loan, you will encounter several fees when taking out a home equity loan or HELOC. For a home equity loan, closing costs typically range from 3% to 6% of your total loan amount.
For instance, if you take out a $100,000 home equity loan, you can expect to pay between $3,000 and $6,000 in closing costs.
But what are these closing costs, and why do they matter?
Common Closing Costs for Home Equity Loans
Home equity loans allow you to borrow against the equity you’ve built in your home. This equity is the difference between your home’s current market value and the outstanding balance of your mortgage. Several fees contribute to your closing costs. Here’s a quick guide to what you can expect:
- Appraisal Fees
One of the first steps in securing a home equity loan is a property appraisal. A third-party appraiser will determine the market value of your home. This process typically costs between $600 and $2,000, depending on the location and size of the property.
- Credit Report Fees
Your lender will check your credit score before approving the loan. These credit report fees generally range from $20 to $50 per report. If you’re applying with a co-borrower, such as a spouse or partner, they will check each applicant’s credit report.
- Attorney or Document Preparation Fees
In some states, an attorney must review your loan documents to ensure everything is in order. These fees can range from 0.5% to 1% of the loan amount.
- Origination Fees
Lenders charge an origination fee to cover the costs of processing your loan, including reviewing your financial situation and underwriting the loan. These fees are typically around 0.5% to 1% of the loan amount.
- Notary Fees
Notary services may be required to finalize documents. Expect to pay around $20 for notary services.
- Title Search Fees
Before approving your loan, your lender will conduct a title search to ensure there are no liens or ownership claims on your property. The cost of the title search generally falls between $75 and $200, depending on the complexity of the search.
- Title Insurance
Your lender will most likely require a lender’s title insurance policy to protect them from any unforeseen claims against your property. This insurance typically costs between 0.1% and 2% of the loan amount.
What About HELOCs? How Are Their Closing Costs Different?
A Home Equity Line of Credit (HELOC) works similarly to a credit card, with a credit limit based on the equity in your home. While HELOCs have closing costs too, they tend to be lower than those for home equity loans. On average, HELOC closing costs range from 2% to 5% of the credit limit.
Some unique closing costs for a HELOC include:
- Annual Fees: Some lenders charge an annual fee for keeping your HELOC open, which can range from $5 to $250.
- Termination Fees: If you close your HELOC early, you may face termination fees, typically 5% if closed within 3 years, or 3% if closed within 5 years.
- Inactivity Fees: Some lenders charge a fee if you don’t use your HELOC enough.
- Transaction Fees: Some lenders charge a small fee each time you borrow from your HELOC.
How to Lower Your Home Equity Loan Costs
While closing costs are an unavoidable part of getting a home equity loan or HELOC, there are ways to minimize what you pay upfront:
- Look for No-Closing-Cost Loans
Some lenders offer home equity loans with no closing costs. Keep in mind that in exchange for skipping the upfront costs, you may face higher interest rates, which can lead to higher monthly payments over time. It’s important to weigh the trade-off of no closing costs versus potentially higher long-term costs.
- Improve Your Credit Score
Borrowers with stronger credit scores are often offered lower interest rates. You can improve your score by paying bills on time and reducing outstanding debts before applying for your loan.
- Shop Around and Compare Lenders
Closing costs for home equity loans can vary significantly between lenders. It’s important to compare different options to find the best deal. While low closing costs are appealing, don’t forget to consider interest rates—lower rates will help reduce your monthly payments.
- Negotiate Your Closing Costs
You might be able to negotiate certain fees, such as the credit report fee, with your lender. Don’t be afraid to ask for a reduction or a credit toward closing costs.
- Reduce Your Debt
Lenders will consider your debt-to-income ratio (DTI) when determining your loan terms. By paying off as much debt as possible before applying, you may qualify for a lower interest rate.
The Bottom Line on Home Equity Loan and HELOC Closing Costs
Whether you’re considering a home equity loan or a HELOC to fund your home improvement projects, understanding the closing costs is crucial for making an informed decision. These loans can be a great way to access the equity in your home, but it’s important to consider all the costs involved.
At Avanti Way Financial, we can help you navigate the details of home equity loans and HELOCs, ensuring you select the right option for your needs. Ready to take the next step? Contact us today to discuss your options and get expert guidance on securing the best loan for your financial goals.