Home Equity Loan Fees vs Mortgage Fees
If you’re a homeowner, you may have noticed that your home equity continues to rise. This change can be a good thing because it gives you more financial flexibility and options for the future. There are two main ways to access this extra cash: a home equity loan or a cash-out refinance mortgage.
In terms of interest rates, home loans tend to be higher than mortgage loans. However, they also have lower fees and closing costs. And some home equity lenders may offer waivers of some or all of these fees as an incentive for borrowers.
Key points to remember
- Home equity loans can help finance home improvement projects, a child’s college education, medical expenses, and more.
- Mortgages can buy homes, but cash refinance mortgages can give you a lump sum of cash to use for expenses.
- Home equity loans generally have higher rates than mortgages, but lower fees and closing costs.
- Some home equity lenders waive origination and appraisal fees, so it’s worth shopping around.
How are home equity loans different from mortgages?
Home equity loans and cash refinance loans are two tools you can use to get large sums of money for home repairs or other major expenses.
A home equity loan, sometimes called a second mortgage, allows you to borrow against the equity you have established in your home: the current value of your home minus what you owe on your existing mortgage.
In contrast, a cash refinance loan is a type of mortgage. With this approach, you take out a new mortgage for more than you currently owe. The lender gives you the difference in cash to use as you see fit.
When deciding what is best for you, consider the following factors:
APR: In general, mortgages have lower annual percentage rates (APRs) than home equity loans. However, your rate depends on several factors, including your credit score and income.
Amount needed: Mortgages can earn you more money than home equity loans. Some lenders offer 125% refinance loans, allowing you to borrow up to 125% of the value of your home. In contrast, home equity loans are generally limited to 80% of the equity in your home.
Repayment period : A cash-out refinance is essentially a brand new mortgage, so repayment terms can vary from 15 to 30 years. With a home equity loan, you usually have five to 15 years.
Typical Mortgage Refinance Costs
When it comes to mortgage costs, cash refinance mortgages tend to have higher costs than home equity loans. In effect, it’s essentially a brand new mortgage, so lenders have to go through the entire origination process with you, including ordering a new appraisal and title search.
Typical fees charged for a refinance mortgage include:
- Creation costs: Lenders charge origination fees to cover the processing of your loan application.
- Expert fees: This fee covers the cost of having an appraiser examine the value of your home.
- Credit application fees: Some lenders charge a fee to pull your credit report as part of the loan application process.
- Lender set-up fees: These are fees charged by the lender for originating or creating your loan.
- Securities services: You will likely have to pay for a title search and insurance as part of your refinance mortgage.
- Investigation costs: Survey fees are sometimes required to confirm the boundaries of your property.
- Lawyer’s fees: If you live in a state that requires the use of an attorney for real estate transactions, you will need to pay their fees as part of your cash refinance.
In total, the closing costs of a cash refinance typically add up to 2-5% of your loan amount. Costs are calculated on the total loan amount, not just the additional balance you add to the mortgage.
For example, suppose you own a house worth $300,000 and you owe $200,000 on your current mortgage. If you take out a $240,000 refinance loan with a 3% closing cost, you’ll pay an additional $7,200.
Some lenders offer cash refinance mortgages with no closing costs, but you may have to pay a higher rate for this option.
Typical Home Equity Loan Fees
In general, home equity loans have higher APRs than mortgages, but they may have lower fees. Fees are typically 2% to 5% of your loan amount and cover:
- Assembly costs
- Expert fees
- Credit application fees
- Title fees
- Application and filing fees
- Insurance costs
While this is the same range as cash-out refinance mortgages, keep in mind that home equity loans are generally for a lower amount than cash-out refinance mortgages. , because you’re borrowing against the established equity in your home.
For example, let’s say you have a home worth $300,000 and you owe $200,000 on your current mortgage. If you take out a $40,000 home equity loan that charges 3% closing costs, your cost would only be $1,200, considerably less than if you used a cash refinance loan to get a lump sum of $40,000.
As with mortgages, some lenders waive origination or appraisal fees, so it’s a good idea to shop around with different lenders.
What if my cash needs are somewhat unpredictable?
If you think you need continued access to cash, a home equity line of credit (HELOC) may be a better choice for you. HELOCs are revolving lines of credit, so you can use the money over and over again during the draw period, and you only pay interest on the amount you use.
What do most people use their home equity for?
The most common reason people borrow against their home equity is to pay for home improvements, including kitchen renovations and bathroom updates.
Are there any risks in using your home as collateral?
Yes. Home equity lenders place a second lien on your home, giving them the rights to your home as well as the first mortgage lien if you fail to make the payments. The more you borrow against your home or condo, the more risk you expose yourself to.
Home equity loans and cash refinance mortgages are popular ways to access cash. However, loan options charge various fees. Home equity loans generally have lower fees than mortgages, but they can have higher APRs.
Before choosing a loan and submitting a loan application, research your financing options. Depending on your needs, alternatives like personal loans or a 0% APR credit card may be a better option. If you decide to take out a loan, compare the rates of several lenders to find the best deal.