When you have a big project to pay for and equity in your home, a home equity loan can be an obvious choice for quick and relatively low-interest cash. But, as with any kind of borrowing, home equity loans aren't free. All home equity loans charge interest and most also charge fees that can significantly boost your costs. Is there such a thing as a fee-free home equity loan? Let's find out.
- Home equity loans allow homeowners to borrow against the equity in their homes.
- Many home equity loans have closing costs similar to those on a regular mortgage.
- Lenders will often waive or discount certain fees in order to win your business.
What Is a Home Equity Loan?
A home equity loan, sometimes referred to as a second mortgage, is secured by the equity in your primary residence. You receive a lump sum from the lender and then pay it back in fixed installments over an agreed-upon period, generally five to 30 years.
Once you have a certain amount of equity available in your home (typically at least 10% and often 15% or 20%), you may qualify for a home equity loan. Home equity loan interest rates hover slightly above primary mortgage rates, making them attractive alternatives to credit cards and personal loans. But beware—if you can't keep up with the loan payments, you risk losing your home.
Rolling your fees into the loan is not the same as having the lender waive them. Ask your lender for a clear explanation of the all fees it's charging you and when they are to be paid. Including fees in the loan simply raises the amount of money that will be accruing interest.
What Are Common Fees for Home Equity Loans?
Home equity loans typically have similar fees to regular mortgages. Some of the most common ones are:
- Appraisal fees: The appraiser will inspect your home to determine its current market value. In times of rising housing costs, the home you purchased a few years ago may be worth much more than you paid for it, boosting your available equity. A home appraisal can cost anywhere from $300 to $500, and the borrower usually pays.
- Credit report fees: The lender will check your reports from one or more of the major national credit bureaus to see how you use credit. Do you pay your bills on time? If so, that's a positive. Do you use all of your available credit all the time? If you do, that's a negative. Lenders will also check your credit score, which is separate from your credit reports. Most will want to see a credit score of at least 660 to consider issuing a home equity loan. While you can request your credit reports for free at least once a year, lenders generally charge you anywhere from $10 to $100 each when they pull them.
- Document preparation fees: Getting the loan paperwork in order will also involve a fee, which varies from lender to lender.
- Title search fees: A title search verifies that you own the home and there are no outstanding liens against it. Fees typically range from $100 to $250.
- Application or origination fees: Origination fees, also known as application fees, are what the lender charges to initiate the loan process. Some lenders don't charge them at all; others can charge up to $500.
Can Home Equity Fees Be Waived?
While all of these fees are common, many lenders will waive at least some of them to get your business, especially in a competitive market or if you're a longtime customer of theirs.
As an alternative, the lender may offer to roll the fees into the loan amount, saving you the upfront cost. While that may seem like a discount, rolling fees into your loan just adds to the amount you're borrowing and that you will have to pay interest on year after year.
It's very common to see lenders advertising no bank fees or offering to discount fees for loans above a certain dollar threshold. If you're shopping for a home equity loan, let each lender know that you're considering multiple lenders. Even if they don't advertise that they'll waive certain fees, they may be inclined to do so or to offer you a discount.
How Much Are Closing Costs on a Home Equity Loan?
Although they vary from lender to lender, closing costs generally range from 2% to 5% of the total amount. On a $50,000 loan, for example, that would be $1,000 to $2,500.
How Much Money Can You Take Out With a Home Equity Loan?
Since your home's equity is securing your loan, the amount you can borrow depends on how much equity you have. Most lenders will limit your loan to 80% of your available equity.
What Credit Score Do You Need To Qualify for a Home Equity Loan?
Most lenders look for candidates with credit scores in the good range and prefer scores of 700 or higher.
The Bottom Line
When you're shopping for a home equity loan, compare several to see which have the best rates, fees, and other terms. Letting each lender know that they are competing for your business can encourage them to offer discounts or waive fees. Whether they waive the fees or not, make sure they explain precisely what you're paying for and how much it will cost you.
Also, consider the tradeoffs: A loan with no fees but a higher interest rate may be no bargain in the long run. Similarly, a loan with a low interest rate but high closing costs could end up costing you more—especially if you roll those fees into your loan balance.