Home equity loans can be a relatively inexpensive way to fund big-ticket projects like a home remodel, debt consolidation, or college education. But as with most kinds of loans, there are costs to consider. Many home equity loans come with added fees that can make your loan considerably more expensive than you might expect from the interest rate alone. Here are some of the most common ones—and what you can do about them.
- Home equity loans use your home as collateral, so they are less risky to the lender (and less expensive for you) than unsecured personal loans or credit cards.
- In addition to interest, home equity lenders typically charge fees, which can substantially increase your total borrowing cost.
- Some lenders will waive or reduce certain fees to gain your business.
- If the lender offers to roll your fees into the loan amount, you'll still have to pay them—and with interest.
What Is a Home Equity Loan?
A home equity loan is a loan that is secured by the equity you have accumulated in your primary residence. Your equity is determined by subtracting the amount you still owe on your mortgage from the current market value of your home. As you make mortgage payments, you build equity by whittling down the balance you owe. If your home rises in value, that adds to your equity too.
With a home equity loan, you receive a lump sum of money from the lender that you then repay over an agreed-upon period of time, typically five to 30 years. The longer the repayment term, the more interest you'll pay in total. Home equity loans generally 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, like credit cards or personal loans.
But interest isn't all you'll pay. You'll also face an assortment of fees, whether you pay them upfront or they're rolled into the loan and you pay them over time.
If your lender can't or won't waive all of the fees, try to negotiate a lower interest rate instead. Lenders generally have some flexibility in either term length, interest rate, or fees.
Common Fees and Closing Costs
Home equity loans typically have similar fees to conventional mortgages. Among the most common ones are:
- Appraisal fees: The lender will bring in a professional appraiser to inspect your home and estimate its current market value. The house you purchased a few years ago may be worth much more now, boosting your available equity. A home appraisal will normally cost anywhere from $300 to $500.
- Credit report fees: The lender will examine your credit reports from one or more of the major credit bureaus to see how you use credit and how reliable you are in paying your bills. Lenders will also check your credit score before they'll consider offering you a home equity loan. While you can pull your credit reports for free once a year, lenders generally charge anywhere from $10 to $100 per report when you apply for a loan.
- Document preparation fees: These cover assorted paperwork and will vary from lender to lender.
- Title search fees: A title search verifies that you are the legal owner of the home and tells the lender whether there are any liens on it. Fees range from $100 to $250.
- Application or origination fees: This is the fee the lender charges to initiate the loan process. Some lenders don't charge one at all; others charge up to $500.
- Early payoff fees: These are relatively uncommon for home equity loans, but they do exist. Early payoff fees or penalties are an additional charge for paying your loan off before the end of your scheduled term. They are more common with home equity lines of credit (HELOCs), but worth inquiring about, just in case.
It's a good idea to check your credit reports for any errors that reflect negatively on you before you apply for a home equity loan. You can request them free of charge at the official website AnnualCreditReport.com.
Will Lenders Waive Fees?
Many home equity lenders advertise that they don't charge bank fees. This could mean that they waive the application or origination fee. They might also absorb some fees that cannot be waived, such as appraisals or title searches.
Some lenders will also offer to roll any fees into the total amount of the loan. While this can save you on out-of-pocket costs at closing time, you'll still end up paying those fees—plus interest on them—over the life of your loan.
Can Your Lender Use the Appraisal From Your Original Mortgage Application?
Unfortunately, even if you purchased your home just recently, the lender will require a new appraisal of some kind. Since equity can change when the housing market rises or falls, your equity may not be exactly the same as it was even a few months ago.
How Much Equity Do You Need to Apply for a Home Equity Loan?
Most lenders require you to have at least 15% equity in your home before you'll be eligible for a home equity loan.
Do You Need Good Credit for a Home Equity Loan?
Yes. Lenders prefer borrowers with at least a good credit score. Some lenders set the minimum at 620, 660, or 680. A higher credit score may make you eligible for a lower interest rate on your loan.
The Bottom Line
Home equity loans are a relatively inexpensive way to borrow, but they aren't without costs. Borrowers should make sure they receive full disclosure of all fees, including when and how they need to be paid. Talking with several lenders—and making it clear that you're shopping around—can also encourage them to compete to offer you a lower interest rate and/or lower fees.