The Costs of Obtaining a Home Equity Loan

By Kelly Richardson
LoanPage.com Columnist

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A home equity loan can be a great way to consolidate your bills or make those much needed home improvements. But you should be aware of the costs of obtaining one as well as how it will affect your current mortgage. Weight the benefits versus the drawbacks before you sign on the dotted line.

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A home equity loan, sometimes referred to as a line of credit, uses your home as the collateral for money that you receive. Your lender will set a certain limit to the amount you can borrow, sometimes as much as 120% of the appraised value of your home minus the existing balance on your mortgage. Your lender will also look at your ability to repay, current debts, and other factors. There is also a set limit of time in which you can utilize your equity, typically 10 years.

Home Equity Loan Costs

  • » Appraisal Fee. The first fee for applying for a home equity loan is the appraisal fee. This is paid to an appraiser to determine the current value of your home, one of the key factors in determining your borrowing power.
  • » Application Fee. An application fee is a specified amount paid to your lender to initiate the loan process. This fee may or may not be refunded if you're turned down. This fee can also vary from lender to lender, so shop around.
  • » Point Fees. Point fees that you pay will affect the mortgage payments on your home equity loan. One point is equal to 1% of the annual percentage rate of the new loan.
  • » Closing Costs. These costs are similar to the closing costs of your initial mortgage loan, and include such items as attorney's fees, title and mortgage insurance, and various escrow payments, if applicable.
  • » Transaction Fees. Some lenders will charge you a transaction, or maintenance, fee every time you draw on your home equity loan.
It's always a good idea to consult your lending professional and compare offers before obtaining a home equity loan. It could mean the difference between a positive or negative financial decision.

Sources
Federal Reserve Board
Federal Trade Commission

About the Author
Kelly Richardson covers the real estate scene in major cities across the country. His articles appear in educational journals, periodicals, and e-zines.

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