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Getting any home loan involves two words borrowers dread: closing costs.
But unlike first mortgages, home equity lines of credit offer savvy consumers more ways to save a buck. And some people may even end up paying no closing costs at all if they're willing to wade through the multitude of offers out there and gather a few documents ahead of time, experts say.
"Putting myself in the consumers' shoes, I would probably shop around," says Doug Pullin, first vice president for consumer lending at Commercial Federal Corp. "Often times there are institutions that charge few or no closing costs, and then also consumers could watch for special promotions."
HELOC closing easier than first mortgage
The first mortgage closing process can seem like a chore, with its full-blown appraisals, real estate agent fees, points, private mortgage insurance, and other assorted pleasures.
But securing a home equity line is usually a much less complicated affair. Consider the appraisal, for example, which makes up a sizable portion of the expense of obtaining a regular home loan. With home equity lines, a rigorous review process is seldom required and an appraisal may not even be required, lenders say.
First Chicago NBD Corp. will accept any certified appraisal performed during the last two years, rather than one done at the bank's behest, according to Pete Reed, a first vice president in the direct consumer lending department. And Pullin says Commercial Federal, based in Omaha, Neb., will sometimes rely on copies of municipal appraisals used for assessing taxes.
Appraisal may be minimal
Lenders may even go a step further, requiring no appraisal at all for a low risk loan or only a "drive-by" evaluation in which somebody takes a picture of the property and deems it in suitable condition.
"It's essentially a short cut that some lenders are comfortable using," says Fritz Elmendorf, a spokesman for the Consumer Bankers Association in Arlington, Va.
"They've already looked at your credit history, you've been in the house for a while, you've been employed for a while and you've been paying your other bills, so they don't feel its necessary to go through your home."
Lenders may also want to confirm that the homeowner has flood insurance. There is a cost involved in the search for documentation, but home equity line borrowers may be able to avoid paying by photocopying a recent flood insurance statement to prove they have coverage, Pullin says.
Keep costs down
Lenders may waive all closing costs for borrowers who open a larger line, "activate" a line by putting a balance on it right away, or keep a line open for an extended period of time. By shopping around borrowers may even find a lender who will waive closing costs without setting special requirements. They are responding to a cutthroat lending environment.
First Chicago, for instance, doesn't charge closing costs. And as part of a five-month promotion, Reed says the bank has been rebating the first month's worth of interest on customer lines, up to $500.
"Large numbers of banks routinely waive all or some closing costs as part of promotions ... which would be a great deal since there's an average of at least $300 of expenses," says Elmendorf.
If the lender does decide to charge upfront fees, however, there isn't much a borrower can do to avoid some of the costs.
Title insurance
The title search, while often the smallest expense at $25 to $75, is one service consumers can seldom influence. It involves the bank hiring a company to search municipal records in order to informally establish that the borrower does in fact own the house in question.
A lender may also require title insurance, which goes a step further by guaranteeing that ownership and identifying other lenders with a claim on the property. Borrowers have a slim chance of dodging that if they seek home equity lines from their original lenders within 12 months of the original mortgage date, Pullin says.
Title insurance policies generally run around $200, according to Dan Stephen, senior vice president for consumer asset management at UnionBanCal Corp. But the price can vary with several factors, including the size of the loan and the percentage of the property's overall worth being extended as credit, or loan-to-value ratio.
Much like credit cards, home equity lines also can have ongoing charges to cover the bank's cost of carrying them on their books. Commercial Federal borrowers, for instance, typically pay $50 in annual maintenance fees, Pullin says. And Reed says First Chicago reserves the right to charge its $300 in closing costs retroactively if customers terminate the lines before 12 months pass.
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