Closing Costs

In making closing cost estimates, you should assume that a home improvement will probably cost more to close than a pure home equity loan. While they are both written as second mortgages, a home improvement loan requires more work by the lender and, therefore, often costs more to close. Depending on the improvements you want to make, a home equity loan may be a better, less expensive choice.

Most home improvement loans require

• A list of the improvements you want to make;
• A cost estimate of the individual improvements;
• The names of the contractors who you want to do the work; and
• Your estimated time frames to complete all phases of the improvements.

Your lender must review your plans and set up a disbursement schedule, which specifies how much money to give you at the completion of each phase of your improvement work. They must also either have someone physically inspect your work or verify that work is completed before giving you funds per the completion schedule. This loan is subject to appraisal or the improvements being made.

Your lender will normally calculate the cost of monitoring your improvements and charge a fee at closing. If your improvements are “simple” and will be performed quickly, you might want to consider a plain vanilla home equity loan instead of a home improvement loan. This will keep your closing costs as low as possible to get the funds you need. Take all of these factors into account when you calculate closing costs.

In most cases, closing costs for a home equity loan will be the same for a home equity line-of-credit (HELOC). If there is a difference, you might find a lower closing cost with a HELOC. This is interesting because a HELOC tends to involve more work by your lender, which normally translates into higher fees. The extra work involves making regular additions to and subtractions from your outstanding balance, and, often, making more frequent interest rate changes.

However, the competition for HELOC’s is so intense, many lenders will have low or no closing cost options for these loans. You should only require a consumer (not a mortgage) credit report, an estimation of your home’s Fair Market Value (FMV), a title rundown (to prove there are no other liens on your property except for your first mortgage), and a recording fee (charged by your local jurisdiction to record this mortgage). The only other potential cost should be one or more points that may be charged by your lender. Since many home equity lenders charge no points for both loan types, shop around to get the best deal. Should you find a lender who is charging points, closely compare interest rates and other terms with other lenders offering no point equity loans.

If you find lenders charging significantly higher closing cost fees for either loan type, you may want to disregard them as there is no obvious benefit to you. The best action plan is to compare the entire terms offered by various lenders to determine the best loan for you.

The easiest way to close a home equity loan is to finance closing costs as part of your loan process. The choice will be yours. The good news is that home equity closing costs should not be burdensome. If they are, you may be pursuing the wrong loan and/or lender. Why? There is heavy competition among lenders for home equity loans. Therefore, there are often excellent offers available, including low closing cost loans. If you search, you may even find no closing cost home equity loans from lenders aggressively attempting to put new loans in their portfolio.

In almost all cases, you will be able to include your closing costs as part of your new home equity loan. Typical closing cost items will include a consumer credit report, a third party estimate of the value of your home, a title examination, and a fee for recording your new mortgage. All of these items typically cost about one per cent or less of your home equity loan amount. If you want to keep your checkbook in your briefcase or pocketbook, you can usually just finance closing costs and repay them over the term of your new loan.

Typical closing costs include some type of appraisal, title examination, recording fees, and some document preparation expenses. Also, some home equity closing costs will include one or more points (one point equals one percent of the loan amount), although many second mortgage lenders have eliminated this item. But the home equity lending market is very competitive and your knowledge of this fact can save you a great deal of money. There are lenders offering a no closing cost home loan. When commercial banks and mortgage lending companies have money to lend, they need to have enough borrowers to lend to. While lenders cannot afford to lend at a loss, they must price their loans as low as possible when they have extra money.

Lenders know that the easiest way to make their home equity loans more attractive to you is to lower or even eliminate closing costs. When you receive the estimated closing costs from a prospective lender, understand that you may have some power to either lower them or just find another lender offering the same interest rate with a low closing cost or none at all.

Be aware that many of these no closing cost programs are only offered for a limited time so don’t ponder your choices for too long. Home equity loans are designed to be processed, approved, and closed quickly. If you find a legitimate lender offering a good interest rate and no closing costs, go for it. You will be happy you did. Good terms and no closing costs are a perfect combination to provide you with a wonderful borrowing experience.

One commonly asked question is: “Are home equity loan closing costs tax deductible?” The answer: Some expenses necessary to close a loan will NOT result in a closing cost tax deduction. A loan closing cost is an expense you pay to a lender or other third party who performs a service (appraiser, attorney, etc.) necessary to close your loan. You can add many of these costs to the “cost basis” of the home but not deduct them on your tax return.

A closing cost that usually proves to be a tax deduction is the paying of any prepaid expenses or points. If you pay any points necessary to close your loan right from your bank account, you can deduct them at your next tax filing date. However, if you finance your points, you are technically required to deduct this expense over the term of your loan. For instance, if you get a home equity loan that is to be repaid over ten years, you are technically allowed to deduct one-tenth of your points each year since you are “paying” this cost over the term of the loan. Should you pay off this loan in five years, you can deduct the remaining amount, in this case 50 percent, in the tax year you made the payoff. However, according to the Internal Revenue Service, you are technically allowed to deduct only those points that relate to the loan proceeds you are going to use for home improvements.

Be sure not to deduct any “escrows” related to advance monthly payments, real estate taxes, or homeowner’s insurance that the lender might require you to reserve. These are not technically closing costs. This is not normally an issue with a home equity loan since these items are usually involved with your first mortgage, not home equity financing. The safest course of action: Save all records and documents you receive for a home equity loan from your lender. Then consult with your tax advisor before taking any questionable deductions and filing your taxes.

ENGLending representatives are not tax advisors. Please consult your tax attorney for more detailed information.

Unlike the costs to close a first mortgage, typical closing cost items for a home equity loan are few and much more straightforward. The level of investigation and the protection items required by first mortgage lenders is much less with a home equity loan. Why? The extensive level of protection required by first mortgage lenders often extends to home equity loans, also. Therefore, home equity lenders do not need to obtain – or charge you – for duplicate protection.

The following are the most common home equity closing costs.

• Credit report – normally the more expensive mortgage credit report from all three credit bureaus is not necessary – only a consumer report is required, around $5 to $10;
• Appraisal- $350;
• Title Work- brief title examination covering the time from the date of recording your first mortgage up to the present day to ensure there are no other liens recorded against your property, around $500-$700; and
• Recording fees – the amount your local jurisdiction (town, city, county, etc.) charges to record a mortgage, around $25 to $60.

While closing costs can become burdensome for a first mortgage, a home equity loan can be closed without hurting your bank account. You can sometimes even find a no closing cost home equity loan. Also, don’t be afraid of negotiating closing costs with second mortgage lenders. To give your bank account balance a break, you can usually finance closing costs so you never have to put your own checkbook on the table.

To arrive at the current Fair Market Value (FMV) of your home, only a low cost ($75 to $100) “drive by” appraisal or possibly just a current real estate tax bill showing its valuation is sometimes necessary. Since you probably already have a title insurance policy (usually need one to close your first mortgage), you will not need to pay for another one. A brief title examination will be necessary to ensure your lender that there are no other liens recorded after your first mortgage as they cannot be in “second” place if another lien is recorded “in front” of them. This title rundown should cost around $75 to $100. The only other required fee is the cost of recording the new, second mortgage in your local area. This expense should be around $60 or less.

The average closing cost for a home equity loan should amount to around one per cent to one and one-half per cent – or less – of your loan amount . You should not be required to pay the many processing, underwriting, document, mail, etc. fees often required with a first mortgage closing. Once again, shop around and you will be able to lower your closing cost fees, possibly even to zero.

It is difficult (if not impossible) to find a pure home equity closing cost calculator on the Internet. However, once you answer the question: “What are closing costs?” you can use one of the many first mortgage closing cost calculators that are available. Closing costs involve those items required by your lender to be accomplished in order to close your new loan. Home equity loans require many fewer items than a first mortgage and, therefore, it is much less expensive to close an equity loan.

After finding a closing cost calculator you like, eliminate the standard first mortgage closing cost categories (title insurance, flood certification, survey cost, etc.) and include the following items.

• Credit report – around $5 to $10;
• Appraisal – around $350;
• Title examination (rundown) – around $500 to $700; and
• Recording fee – around $25 to $50.