How to Avoid Home Equity Fees and Penalties | Closing Costs to Expect
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Whether you have a home equity loan or a home equity line of credit, it’s important to know what to expect when it comes to 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.
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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 charged as a fixed fee and are as low as $25, and others may be close to $1,000. In some cases, lenders may calculate the origination fee as a percentage of the total draw amount, from 0% and higher. 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.
I’m interested in paying off an equity loan of 7,767.00 with my credit union and I’m getting all these additional fees. Is this typical?
Release Fee: 184.00
Other Fees Due: 241.50
Accumulated late charge fee:25.00
Recording fee: 20.00
Hey Ann,
Thanks for reading! Unfortunately, some lenders do have closing and other fees. I’m not privy to the lender or bank you are with but it looks like they charge fees.
I am in the final stages of acquiring a reverse mortgage for my 89 year old mother on her home in order to protect her very healthy dividend flow on her investments. The purpose of the loan is to provide an automatic monthly direct deposit into her checking account of just $ 2000.
This is being done to aid in additional living expenses.
There never has been a mortgage on her home and while the only remaining process is to schedule an appraisal; we know it will be approx
$ 275,000.
My concern is that at the sit down with the mortgage company, we found out that there were over $16,000 in closing costs.
This seams very unreasonable.
We were also told the interest rate would be fixed but then found out that wasn’t true either even though it could be changed every year with a limit of 2% increase.
I am concerned that we are moving into the wrong type of loan.
I know more information may be needed to advise me but I hope that the preceding information should be enough to render advice. Thank you
Hey Steve,
I’m sorry you went through that experience! Below is some more information on reverse mortgages and the top lenders in 2019:
https://lendedu.com/blog/best-reverse-mortgage-lenders/
When I applied for the home equity loan 25 years ago, I was asked by a banker if I was interested for a home equity line of credit just in case I need it in the future. I said yes just for in case as it was intended but I have no need to use the home equity line ever. Now I got the letter from the bank that the home equity line of credit will be closed in August, 2019 and I need to pay a final payment of $70 some dollars for the county for some kind a fee, otherwise there will be a lien holder against me when I sell the house. Is this true? I’ve never heard of it, a county would charge me a fee for closing a home equity line of credit. I am in Lehigh County.
Hey Cindy,
Which bank are you referring to? I can try and forward you the proper contact information!