How much does it cost to get a home equity loan? The cost of taking out and repaying a home equity loan is not as simple as just looking at the interest rate. There are other fees and even closing costs to consider, which may make them not as worthwhile as you think.
Get the complete picture of home equity loan costs in this easy-to-follow guide. We walk you through these loans and common fees here.
Home equity in a nutshell
Home equity is how much value of your home that you own outright and is usually expressed as a percentage. For example, if you have a property with a market value of £300,000 and your existing mortgage is £150,000, then you have 50% equity in your property.
To calculate home equity you simply take away your mortgage balance from the home’s value. Don’t make the mistake of using the home’s value when you bought it, as this may have changed over time.
Your home equity can increase through monthly payments on your mortgage or by the property value. It can also decrease if your property loses value.
What is a home equity loan?
A home equity loan is a loan that allows you to borrow a lump sum against your home equity. Most lenders offering home equity loans will allow the homeowner to borrow up to a maximum of 80-85% of the equity they have in their home. The percentage is known as a loan to value ratio, i.e. the amount of loan you need against the value of the collateral. If you do not keep up with monthly payments the lender could initiate foreclosure and force you to sell the property to repay.
So, if you have £100,000 equity in your home, you may be able to borrow as much as £85,000. People use these loans for many reasons, not limited to home improvements, debt consolidation or even paying off some of their mortgage. But just because you have equity doesn’t mean you’re guaranteed to get a home equity loan. Lenders will still need to assess your finances, including your debt to income ratio and your credit score.
You can usually search and apply for these loans from high-street banks, online-only banks, building societies and online lenders.
The benefits of a home equity loan
Equity loans are a solid option that affords many benefits. The main benefits of using a home equity loan are:
- Fixed interest rate
These loans usually have a fixed rate of interest rather than variable interest, meaning you will know exactly how much your monthly payments will be (principal and interest) every month. This is seen as a benefit by some people who prefer to know exactly what to budget for.
- Lower interest rates
Home equity loan rates are typically lower than other loans, especially unsecured personal loans. You can avoid high-interest debt with an equity loan because you are using the equity in your home as collateral. The lender can recover the amount you owe easier and can therefore offer lower interest rates on average.
- Access larger credit
A home equity loan can enable you to access much bigger credit than what personal loans and credit cards can offer. Depending on your home value and how much equity you have, you may be able to get a loan worth hundreds of thousands of pounds.
What is the current interest rate on home equity loan repayments?
The first cost of a home equity loan is the interest rate you pay on the loan amount. Each monthly payment over the life of the loan will include the loan interest you have agreed to pay. On average – but subject to change – the interest rate you will pay on a home equity loan is between 2% and 9.9%.
This means a home equity loan of £25,000 could cost you between £500 and £2,475 in total. The amount of interest you have to pay will be determined by your finances, the length of your repayment period and even your credit score. It’s important to shop around and see what different lenders offer.
Home equity line of credit (HELOC) repayments
A HELOC also allows you to access a loan based on home equity, with some key differences:
- Instead of a lump sum, you receive a line of credit that you can access a bit like a credit card. You are given a loan term to withdraw the money called a draw period.
- You usually only start making payments to clear the outstanding balance/debt once the draw period ends, rather than straight away.
- The amount you borrow is subject to variable interest rates rather than fixed interest payments.
Because a HELOC will let you borrow over time with a credit line and uses a variable rate, there is no way of saying if the interest payable will be less or more than the interest payments on a home equity loan. However, they will be comparable in many cases and likely to be lower than the loan equivalent and unsecured credit options.
A HELOC may also include a fee if you choose to close the credit line earlier than agreed.
What is the downside of a home equity loan?
The main downside of a home equity loan is that the loan could cause you to lose your home if you do not pay it back. Yet, most people manage to take out these loans and capitalize on lower interest without any issues.
The other downside of a home equity loan is the fee you must pay at the end of the loan, known as the closing costs. We’ve explained what this fee is and how much it is likely to cost if you decide to take out a home equity loan.
Home equity loan closing costs
A home equity loan closing cost is a fee payable by the borrower at the end of the loan. These types of fees are also common when you use a HELOC or even a mortgage. They generally cover administration processes to record that the loan has ended, including adding it to your credit report.
It’s important to be aware of these costs because it may wipe out potential savings you make on lower interest. You’ll need to include these costs in calculations when you compare home equity loans and other credit options.
How much is closing costs on a home equity loan?
The closing costs on a home equity loan and HELOC can vary between different lenders. It has been reported that the average fee you should expect to pay at the end of the loan will be equivalent to 2-5% of the total amount of money the lender let you borrow.
So, if you took out a loan for £40,000 then you can expect a closing fee of between £800 to £4,000. Some lenders may charge less than this.
Do no closing cost home equity loans exist?
Yes, it is possible to find lenders offering a home equity loan without the need to pay any additional costs and fees. However, these lenders have usually factored the costs that would normally be payable into a higher fixed rate of interest, so you end up paying around the same anyway.
This may not always be the case and you might be able to find a great deal by taking the time to look for loans – and having an excellent credit score.
Other home equity loan fees
When a lender decides to offer you an equity loan, they must know the accurate valuation of your property. To get this valuation they complete an estate agent appraisal. The lender may or may not cover the cost of this appraisal or they may pay it but factor in this cost to other costs.
Is there a minimum amount for a home equity loan?
Lender regulations have not set a minimum loan amount for home equity loans. However, some lenders may have themselves imposed a minimum amount you can borrow using this method. Some will only allow you to take out these loans for a minimum of £10,000. If you need less than this then a home equity loan may not be the most advantageous solution.
And remember, if there is a minimum amount then your home’s equity will need to be more than this to suffice a lender loan to value ratio up to 80-85%. For example, a £10,000 loan will require you to have at least £11,770 in equity – but probably more.
Are home equity loans worth it?
Home equity loans allow applicable homeowners to secure large credit with a lower interest rate than they’re likely to find elsewhere (pending approval and a good credit score). They can be worth it for people needing large credit for specific purposes, such as home renovations and big-ticket purchases.
However, it is essential that anyone considering these loans is aware of the associated costs and fees of a home equity loan, not limited to the closing costs. These additional expenses may make a home equity loan unworthwhile compared to other loans, especially those that do not put your property on the line.
There is no straight yes or no answer and if a home equity loan is worth it will be determined entirely by personal circumstances and alternative options.
Alternatives to a home equity loan
If you’ve decided that this source of credit is not right for you, there may be alternative options at your disposal, such as:
- Remortgaging – another way to leverage equity with cash-out refinancing
- Secured loans – another way to find lower interest rates secured against other assets, such as vehicles
- Unsecured loans – with an excellent credit report you may be able to find competitive rates, albeit for smaller amounts
- Credit cards – as above
- Reverse mortgage – an option for seniors who do not plan to leave their property to a beneficiary when they die. They can access money and not have to make repayments.
Learn more about utilising your home’s equity here!
For more information on these types of secured loans and answers to the most common questions surrounding them, read our other MoneyNerd guides!
You can search your equity loan questions on our homepage and uncover scores of relevant and easy-to-read articles. You don’t need a finance degree to understand these loans with us.