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Costs Involved in a Home Equity Loan

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Sometimes life makes taking out a loan necessary. You might need money for education, a house remodel, medical bills, or any number of other things that life throws at you. A home equity loan or line of credit can be a viable solution to these problems and, generally, can be much more favorable than a personal loan. Still, there are costs associated with getting a home equity loan or line of credit that you have to consider before going through with it.

Common Fees

Interest is the biggest cost that you'll face when taking out a home equity loan or line of credit. APR (annual percentage rate) is calculated differently for each of these. With a traditional home equity loan your interest rate will be fixed, while a home equity line of credit has a variable rate. Figure out what your interest rate is likely to be, and then see if the loan is worth the cost.

  • Application Fee: This is the cost of applying for a home equity loan or line of credit. It includes initial considerations like attaining a credit report. $0-$300

  • Loan Origination Fee: This covers the cost of putting the loan together. 0-1.5% of your principal

  • Appraisal Fees: These cover the cost of getting an appraisal for your home. If you've had one done recently, your lender may accept the information you have already. $300-$700

  • Attorney Fees: An attorney will have to review the loan and oversee the closing procedures. You may have to pay for this service. $500-$1000

  • Title Search/Title Insurance: This is the fee your lender charges to cover the cost of searching your home's records to verify that you are the owner of the home and to check for liens. Title insurance protects the lender against errors in their research. $700-$900

  • Transaction/Inactivity Fees: If you get a home equity line of credit, you may be required to pay a fee each time you make a withdrawal or if you don't use your line of credit for a specified period of time. $0-$50

Paying for the Costs

There are two options to choose from when paying for all the fees associated with home equity loans or lines of credit. Either you can pay the fees up front or you finance them as part of the loan. Paying the fees up front is your best option (of course transaction/inactivity fees will have to be paid as you go). If you finance the fees along with the loan, you'll have to pay interest on them, so you'll end up paying more in the long run. Financing them is a good option to have, though, if you can't afford to pay them up front.

Before you decide which route to go (and even before deciding to get a loan), make sure that you can handle all these fees. In many cases, the fees are so expensive that the loan isn't even worthwhile.

TIP: For more information on the difference between a home equity loan and line of credit, check out our guide entitled "Loan or Line of Credit?"

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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