Home Equity Loans: 5 Hidden Costs

Often referred to as HEL, home equity loans is a type of loan wherein the borrower or the homeowner uses the equity of their home as collateral. Although many homeowners take out home equity loans on their houses, it is important to take into account charges that are not commonly explained to the borrower. You have to be careful when looking for home equity loans because there might be hidden costs that you are not aware of.

1 - Origination Fee

Home equity loans often have what they refer to as an origination fee. Origination fees are the payments made to open an account with a broker, bank or any other institution that provide services in handling loan processing.

Often referred to as an activation fee, this cost can jack up the price of any home equity loans if not taken into consideration. These fees are often charged upfront against the value of the overall home equity loan. In this sense, it is best to look for home equity loans without any origination fees.

2 - Appraisal Fees

Since the amount to be given by the lender is often base on your home equity and the current value of your property, there are several steps taken to insure that the property is in good condition. This is where an appraisal of the property takes place.

During the appraisal, an expert takes a look at the house and the location of the property to determine its market value. It is also during the appraisal that the homeowner will learn how much his or her property is really worth.

Often times, the appraisal fee will be included in the overall cost of the loan. In this regard, it is important to check if an appraisal has already been done on your home in the last few years. If there has been an appraisal done recently, then another appraisal of your property may not be necessary.

3 - Documentation and Certification Fees

You also need to take into consideration any documentation and certification fees during the processing of home equity loans. This may include title search, insurance and document preparation. Title search is the examination of public records to ensure that your property is legally yours. Any documents or certificates that are needed to process the loan will be added to the overall cost.

4 - Attorney Fee

Another hidden cost that borrowers are not aware of that is added is attorney’s fee. Since this type of loan requires certain legal documents and processes, often times, the services of an attorney is needed. The fee for this service is also added on to the cost of the loan.

5 - Points

Points are a type of pre-paid interest. Each point refers to 1% of the amount of the home equity loan. Any increase in points essentially increases the yield on the loan above the interest rate. This means that the more points there are, the lower the interest rate may be, but the higher the upfront amount you will need to pay when closing the home equity loan.