Home Equity Loan Costs

By MortgageCreditProblems.com Columnist
Mortgage Credit Problems Columnist

With falling home values and tightened credit, it's much tougher to borrow against your home equity than just a few years ago, especially if you've got bad credit, and for a growing number of Americans, it's impossible. A third of homeowners in Los Angeles and Orange counties, for instance, owe more on their homes than they're worth.

Got Home Equity?

Consider yourself fortunate if you've got a large enough chunk of home equity to borrow against. If you've already started cleaning up poor credit, there's some good news: Lenders are taking a more hands-on approach and may consider your finances as a whole, versus just your credit score, so even you've had poor credit in the past, you may still be eligible for financing.

If you can qualify for a home equity loan or home equity line of credit (HELOC), consider all the costs as you shop around for the best deal.

Home Equity Interest

Interest is the biggest cost you pay for borrowing against your home equity. Home equity loans usually have fixed rates, while a home equity line of credit, or HELOC, usually carries a variable rate, which moves up and down according to an index like the prime rate. Shop around for the lowest rate, whether you're looking for a home equity loan or HELOC. Be aware that lenders sometimes offer introductory rates which then go up after a certain period. For a variable rate loan, make sure you understand the cap on the interest rate, which limits how much and how often the rate can go up, and ask your lender what your payments will be at different levels.

Home Equity Fees

Interest isn't the only cost you'll pay for a home equity loan. You'll also pay fees, which can cost two percent to five percent of the loan amount. Those include costs for an appraisal, application, title search, attorney or title agent, and document preparation. The APR of a home equity loan takes into account these costs, while the variable rate of a HELOC is based just on the interest rate. HELOC lenders often charge no closing costs, unless you pay off the credit line before the term is up.

HELOC Fees

HELOCs often include other charges, such as an annual maintenance fee, transaction fees each time you draw from the account, or even inactivity fees when you don't use the account. Make sure you understand all the fees before signing up for a HELOC.

If you're thinking about borrowing against your home equity, fill out the form on this page to get up to four free quotes from lenders.

Sources:

http://www.ocregister.com/articles/loan-foreclosure-credit-2619755-payment-orange

http://www.kiplinger.com/magazine/archives/2008/03/home-equity-taps-out.html

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