Shopping for a Home Equity Loan
Home Equity Loan Costs
cost of a home equity loan is made up of interest and fees. The
APR, or annual percentage rate, is the single most important thing
to compare when shopping for a home equity loan because it takes
into account both interest and fees. The APR, which is expressed
as a yearly interest rate, factors in the loan interest rate and
all fees paid to obtain the loan. Generally, the lower the APR,
the lower the cost of your loan.
While interest is the single biggest cost in a home equity loan,
the fee component is also important and will influence the cost
of your loan. The fee component has two parts: points and closing
Points are one-time service fees that are paid to the lender at
closing - one point is one percent of the loan amount. If you take
out a home equity loan for $10,000 and are charged one point, you
will pay $100 - two points and you pay $200. The number or points
you are charged is determined by the lender, the loan amount, the
interest rate, the loan type and your credit rating.
Points are often linked to interest rates - generally, the more
points you pay, the lower the interest rate. Since points affect
interest rates, paying more points isn't necessarily a bad thing.
This of course does not mean that you should be charged an excessive
amount of points. Increasing points paid should result in a positive
shift in the interest rate.
To allow points to have greater meaning, have the lender express
points in a dollar amount. On a loan of $20,000, if you are told
you are paying $600 in points, this will have more significance
than paying 3 points.
You can generally expect the following items to be included in
as part of closing costs: attorney fees, a title search, an application
fee, a property appraisal fee, credit report fees, insurance fees,
mortgage preparation fees, recording and notary fees. Lending institutions
may have different names for these items and some may include different
items as part of closing costs. For example, an origination or underwriting
fee is charged by some lenders as part of closing costs. The origination
or underwriting fee consists of credit report fees, a property appraisal
fee and loan document preparation fess.
Closing costs are usually between 2% and 5% of the loan amount.
Lenders advertising 'no closing cost' loans are not giving you the
full picture - the closing costs have either been financed and you
are not paying them up front or interest rates have been adjusted
to recover the closing costs.
When you finance the closing costs, you add the closing costs fees
to the amount you want to borrow and you pay interest on the total
amount. If you finance your closing costs, you must know that you
will be increasing the amount you pay in closing costs as you are
now paying interest on these charges.
The 'no closing cost' scenario in which your interest rate has
been raised to waive your closing cost should only considered if
you borrow a small amount and pay it off quickly. In other situations,
the higher interest rate often costs you more than the closing costs
that have been waived.