4 Hidden Costs of Home Equity Loans
The true costs of home equity loans can be difficult to determine, based on the promotional efforts of lenders. They may paint an attractive picture of a loan, but a borrower can be assessed hidden or unexpected expenses. The fees can add up quickly.
1. Teaser Rates
You have probably received flyers or promotional material from lenders in the past that make many brash claims like "Borrow $50,000 for $159 per month". When you first look at the flyer, it seems like a phenomenal deal. However, look closely.
Many companies promote a "teaser rates." The loans work very much like adjustable rate mortgages. There are many programs out there that are not good investment for you. Make sure that you read the fine print before you consider any offer.
2. Closing Costs
While every loan will undoubtedly have some sort of closing costs, home equity loans are notorious for having higher costs than normal. Some of these products require as much as 10% of the loan in closing costs. They will roll it into the loan and try to hide it with the promise of getting you the money you need, but overall it is very expensive.
When considering a loan, look at the closing costs separately. Shop around and make sure that you know the going rate for closing costs because it could help you in this situation. If your lender has higher fees than everyone else, do not go with them just because they are a name brand.
3. Tax Deduction
The great thing about a traditional mortgage is that the interest you pay is completely tax deductible. This can be a huge savings to you when you file your taxes and you can consider this as a benefit when purchasing a home. However, not all equity loans are tax-deductible. Many home equity loans being promoted are at 125% loan-to-value ratio. Therefore, the 25% over the value of the home will not be tax-deductible for you. If you do not have much equity in the home, this could amount to the majority of the loan. If you were counting on this to save on your taxes, you could be in for a rude awakening.
Some lenders like to hide fees in the contract and not disclose them until you are ready to sign. This practice is known as "packing" and can eat up your money quickly. Look over the fees that you are being charged and make sure that they are in line with everyone else. If the fee sounds bogus, do not be afraid to ask about it.