You’ve done your homework and found a home equity loan with a great interest rate. Bravo! But beyond obtaining an attractive rate, when looking at loan possibilities do you have a handle on what your full cost of borrowing could be? Think: closing costs and appraisal fees you may have to fork over to get the loan. “The expertise of licensed appraisers, attorneys, title agents and other support staff could be needed during this time,” says Rob Cook, Head of Marketing and Customer Experience for Discover Home Equity Loans, which is why some home equity loans also carry fees and closing costs. So if you’re not aware of all aspects of your loan, you may find yourself paying a lot more than you anticipated.
The key takeaway here is that not every loan is created equal and closing costs and fees vary by lender. For instance, “Home equity loans from Discover have no application, origination or appraisal fees, and no cash is required at closing,” Cook says. But for lenders that do charge fees and closing costs, you may be able to roll the cost into the loan amount so that you don’t have to pay for these expenses upfront.
Before signing on the dotted line, take a look at the types of fees you could be paying— in addition to interest—and what to look for when comparing lenders:
Understanding your upfront closing costs
Closing costs vary but they’re typically between 2 percent and 6 percent of your loan amount.2 Some lenders may waive the fees or pay for a portion of them. Here are some common closing costs you should know about:1
1. Appraisal fee: A home appraisal determines your loan-to-value (LTV) ratio to figure out how much you can borrow. This fee varies depending on if you need a full appraisal, a drive-by appraisal (a less-thorough version), or a desk appraisal (where the lender uses existing data). These fees are often around $300 to $400, but can run higher or lower depending on the location, property and type of appraisal.
2. Origination fee: Some lenders may charge you a fee to apply for a home equity loan, also known as an origination fee. Some will charge you this fee upfront or roll it into the cost of the loan with a higher APR. These fees typically range from $0 to $125. Some lenders may charge an application fee instead of an origination fee.
3. Document preparation fees: Your lender may ask you to pay them a fee for preparing documents related to your loan. This could involve lawyers or notaries who will verify the paperwork. Document preparation fees can run anywhere from $100 to $400.2
4. Credit report fee: Lenders check your creditworthiness using credit reporting companies. Looking at your credit history and score will determine if you qualify for a home equity loan and for how much. This fee is usually around $25.
5. Title Search: This search confirms for the lender that you actually own your property. It also offers other information, such as if there are any liens or taxes owed. This fee typically ranges from $75 to $100.
Tips on comparing lenders
Closing fees can significantly add to the overall cost of your home equity loan. Even if you find a loan with the lowest annual percentage rate (APR), paying for closing costs could mean that you haven’t found a good deal. Looking for ways to reduce these costs is best. Try to find loans with no fees or closing costs, take advantage of lender discounts and only borrow what you need. And be sure to do a side-by-side comparison of loan features for the loans you are considering.
Most closing costs can’t be waived so keep that in mind when shopping around, and be realistic about your budget so you are able to make on-time payments each month. Doing so could mean saving hundreds or thousands of dollars throughout the life of your home equity loan.
2. Additional sourcing for fees: https://www.magnifymoney.com/blog/mortgage/how-much-are-home-equity-loan-closing-costs/