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Home equity loans can offer large amounts at competitive rates, but there’s some expense involved. Are there closing costs on a home equity loan? Yes, similar to a mortgage, a home equity loan might require you to pay for lender charges, an appraisal, title services, and other expenses.
You may have the option of paying these fees upfront or rolling them into your loan amount. Some lenders offer home equity loans with no closing costs, but they may charge a higher interest rate to make up the difference. Here’s a closer look at what you can expect with home equity closing costs, while keeping in mind that specific fees vary by lender.
Key Points
• Home equity loans carry closing costs similar to standard mortgage agreements.
• Costs typically include both lender-specific fees and various third-party service charges.
• Borrowers can pay fees upfront or, in some cases, roll them into the total loan amount.
• Loans advertised as having no closing costs may charge higher interest rates instead.
• Shopping around and comparing multiple lender quotes can help reduce your total costs.
Do Home Equity Loans Have Closing Costs?
If you’re exploring what a home equity loan is, understanding closing costs is an important step. Home equity loans come with closing costs that you have to pay to receive the loan. There are two main types: lender fees and third-party service fees.
Lenders generally charge administrative fees to process and originate the loan. These fees are often a percentage of your loan amount, so the amount is tied to how much you’re borrowing.
Third-party fees are often flat fees for services like a home appraisal, title search, and notarization. Lenders can arrange these services through their partners, but you may be able to shop around for some services to find a lower price.
Some lenders offer “no-closing-cost” home equity loans, but these aren’t always cheaper. Instead of charging closing costs upfront, the lender may simply roll them into the loan, which can increase your total borrowing costs. Or they may recoup costs by charging a higher interest rate.
When you’re comparing lenders, look beyond the upfront closing costs to get the full picture of your loan costs.
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Common Home Equity Loan Closing Costs and Fees
Closing costs include multiple lender and third-party fees, such as origination fees, appraisal fees, and title search fees. Here are some fees you might encounter when borrowing a home equity loan.
Origination Fee
Lenders typically charge an origination fee to process your application and underwrite your loan. It’s often a percentage of your loan amount, such as 0.5% or 1%. If you’re taking out a home equity loan for $50,000, for example, the origination fee might cost $250 to $500.
Appraisal Fee
You may need an official appraisal of your home to take out a home equity loan, just like when you borrow a mortgage. The appraisal determines the current market value of your home, which is part of calculating your home equity.
According to HomeAdvisor, the average cost of a home appraisal is $358. The cost can vary depending on where you live and how large your home is.
Some lenders will run an automated valuation model (AVM) to determine your home’s value in place of a traditional appraisal. This auto-appraisal could have a much lower fee (or potentially no fee).
Title Search and Title Insurance
A title search checks to see if there are any liens or claims against your property. Lenders often require a title search before you can take out a home equity loan, because the loan uses your home as collateral. The fee may cost around $100 to $300, depending on where you live.
Some lenders will also ask you to get title insurance for your home equity loan, which protects the lender if an issue with the title, such as a homeownership dispute, comes up. Costs will vary depending on how much coverage you have to get, but it may add up to about 0.1% to 1% of your loan amount.
Other Fees to Know
There are a few other fees you might encounter when you take out a home equity loan:
• Credit report fee: The lender may charge $30 to $120 to do a hard pull of your credit report.
• Attorney or document preparation fees: Some states require that a lawyer review or prepare your documents. This may cost a flat fee or percentage of your loan amount.
• Notary fees: You may have to pay up to $150 or so to have your home equity loan agreement notarized and filed with the office of your local county clerk.
• Closing or settlement fee: Some lenders may charge around $200 to $1,000 to coordinate the final loan agreements and disburse your funds.
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How to Reduce Home Equity Loan Closing Costs
Before you borrow, these steps may help you reduce your home equity loan fees and other closing costs:
• Shop around: Compare quotes from multiple lenders to find the lowest annual percentage rate (APR) on your loan. Make sure to check offers from your own bank too, as some financial institutions offer discounts to existing customers.
• Negotiate with lenders: You may be able to negotiate for lower closing costs, especially if you can leverage a better offer from another lender.
• Ask about AVMs: Find out if the lender runs an AVM or requires an in-person appraisal. An AVM may have lower costs than a traditional appraisal, if any.
• Compare third-party services: Find out if you can shop around for third-party services, like the title search or title insurance. The Consumer Financial Protection Bureau (CFPB) says that borrowers who shop around could save as much as $500 on title services alone.
• Consider no-closing-cost options: Some lenders offer home equity loans with no upfront closing costs, though they may charge a higher interest rate. Add up your total costs when comparing loan options.
• Ask about lender credits: Lender credits can cover your closing costs, though you may have to pay a higher interest rate in exchange. While a credit could save you money upfront, it may cost you more in the long run.
Home Equity Loan vs HELOC Closing Costs
If you’re looking for a more flexible approach to borrowing, you may prefer a HELOC over a home equity loan. Instead of giving you a lump sum upfront, a HELOC is a revolving line of credit you can access as needed over a period of time.
The HELOC closing process is similar to the home equity loan process, though the closing costs for a HELOC can be lower than those for a home equity loan or first mortgage. HELOCs often charge some similar closing costs as home equity loans, such as fees for appraisals, credit reports, title services, and notarizations. However, rather than an origination fee, you may instead pay an application or activation fee.
Some HELOC lenders may charge an annual fee to keep your line of credit open, as well as an early cancellation fee if you want to close it ahead of schedule. You may also face penalties for prepayment or inactivity, as well as a conversion fee to lock in a fixed interest rate.
The Takeaway
Borrowing a home equity loan isn’t all that different from taking out a mortgage when it comes to closing costs. You may have to pay home equity loan costs, including an origination fee, appraisal fee, title service fees, and legal fees.
But the specific costs of home equity loan fees can vary significantly by lender, so it’s important to shop around and compare multiple quotes. Along with closing costs, compare interest rates, repayment terms, and your total borrowing costs to find your best deal on a home equity loan.
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FAQ
Can you roll closing costs into a home equity loan?
Many lenders let you roll closing costs into a home equity loan so you don’t have to pay them upfront. This will increase your loan amount and thus the total amount of interest you pay over time.
What happens if you can’t afford home equity loan closing costs?
If you can’t afford home equity loan closing costs, your lender may allow you to roll them into the loan. This will reduce your upfront costs, but it will increase your loan amount and total interest costs. You might also try negotiating with the lender to reduce your closing costs or shopping around for a different loan. Some lenders offer no-closing-cost home equity loans, though they may come with a higher interest rate.
Are home equity loan closing costs tax deductible?
No, home equity loan closing costs are not tax deductible. However, you may be able to deduct some of the interest you pay on a home equity loan if you use the loan to “buy, build, or substantially improve” the residence you borrowed against. The residence must be your main home or second home to qualify. “Undertaking home improvements can be exciting for homeowners. But before you embark on a project, know whether you’re looking at a renovation or a remodel, how much inconvenience you’re willing to put up with, and what you’re willing to pay,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.
Do no-closing-cost home equity loans really save you money?
No-closing-cost home equity loans don’t necessarily save you money, as they may charge a higher interest rate so the lender can recover those costs over time. If you’re planning to pay off the home equity loan quickly, however, you may end up saving money with this approach. You also want to check whether the lender is truly waiving the home equity loan costs or rolling them into the loan, which means you’d pay interest on those costs over time.
Why do home equity loan closing costs vary by lender?
Lenders set their own administrative fees for processing and originating loans, so home equity loan closing costs can vary significantly by lender. Your location also plays a role in the HELOC closing process, since fees like appraisals, title services, and local government fees can vary by location. According to the Consumer Finance Protection Bureau, you can shop separately for some third-party closing services to find the best price. It’s also worth getting quotes from multiple lenders to compare closing costs and interest rates.
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