How to Avoid Home Equity Fees and Penalties
Some fees you can’t avoid, but other fees you might be able to reduce or avoid altogether.
Although a home equity loan gives you a lump sum at closing, while a home equity line of credit gives you access to a maximum total credit that you can use at your discretion, the application process for both products is essentially the same.
As a matter of fact, the home equity application process is also similar to the mortgage application process. You’ll fill out an application online or in a local branch office. In addition to the information that you provide on the application, lenders require you to submit documentation about your income, assets, and debts.
That documentation can include pay stubs, W-2 forms, tax returns, bank statements, investment account statements, and monthly credit card or loan statements. A reputable lender should not charge you any type of fee to apply for a home equity loan or line of credit.
Fees, Penalties, and Costs of a Home Equity Loan
Lenders charge closing costs to cover the expenses associated with originating the home equity loan. These expenses include credit report fees, title search, property appraisal, attorney’s fees, and underwriter costs. Overall, closing costs on a home equity loan can vary from 2 percent to 5 percent of the loan amount.
In addition, some lenders may charge points on the loan as they do with a mortgage. You can usually choose to pay the points up front as a closing cost or bundle the expense into the loan amount. Home equity loans don’t usually have prepayment penalties. So, you don’t need to worry about paying extra money if you want to pay your loan off early.
Keep the total cost of borrowing in mind related to the dollar amount of the home equity loan. If you are paying high closing costs and points, you might find that the upfront cost is not worth what you’ll actually get as the proceeds from the loan. This is especially true if you plan to repay the home equity loan quickly.
Fees, Penalties, and Costs of a Home Equity Line of Credit
Closing costs on a home equity line of credit are much less than they are for a comparable home equity loan. Rather than basing the closing costs on the amount of the line of credit, lenders typically charge a flat fee origination.
The origination fee, however, varies greatly among lenders. Some origination fees are as low as $50, and others may be close to $1,000. So you should weigh the origination cost against the amount of money you actually need from the line of credit. Other lenders waive the origination fee entirely if you also have your mortgage with them or if you keep the line of credit open for a specified length of time.
There may be a prepayment penalty later if you close the line of credit before the end of that time period. In addition, lenders usually charge some type of annual fee or maintenance fee to keep the line of credit open.
Fees, penalties, and interest rates can vary based on your credit score and the lender. You shouldn’t assume that they are going to be the same for every lender, so it pays to do some research before you apply for a home equity loan or line of credit. Some of the fees are negotiable, others are not.
Most borrowers don’t even bother to ask about whether the fees are negotiable. Think about the loan agreement as a contract where you do not have to agree to everything that is handed to you. Know what other lenders are offering and bring that into the negotiations. If you don’t like the terms that the lender gives you, try a different lender.
Author: Kimberly Goodwin, PHD
Dr. Kimberly Goodwin is currently the Parham Bridges Chair of Real Estate and an Associate Professor of Finance at the University of Southern Mississippi. She holds a B.S. in Geophysics from the University of Delaware, a M.B.A. from the University of Southern Mississippi, a M.S. in Finance from the George Washington University, and a Ph.D. in Finance from the University of Alabama. Dr. Goodwin’s research focuses on real estate markets and has been published in some of the top real estate journals. She is also a Co-Editor for the Journal of Housing Research.