Home equity loans with no closing costs: How to get one

Home equity loans are indispensable tools to help you achieve a better life, whether you’re consolidating debt, sending your loved ones to college, or sprucing up your home with that dream farmhouse kitchen. They’re remarkably affordable, offering some of the lowest rates of any loan product on the market, along with tax-deductible interest on most home improvements. There’s just one caveat: the upfront costs are rather high. 

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This can create a bit of a catch-22: you’ll typically need to pay up to 5% of the loan amount in cash in order to unlock access to the loan funds. Many homeowners can’t afford that much, part of the reason why they’re borrowing money in the first place. Luckily, there are options for no-closing-cost home equity loans, but you’ll need to understand how they work to ensure they’re a good fit for your needs. 

No-closing-cost home equity loans: An overview

A home equity loan is a type of second mortgage — and just like your first mortgage, that means you’ll need to go through a more thorough underwriting process than if you took out something like a personal loan. Let’s start by considering what fees you’d normally pay since this can show you what’s involved in the underwriting process.

Typical home equity loan fees

You can expect to pay between 2% and 5% of your total loan amount, spread across various fees for different parts of the underwriting process. Here’s what you can expect to pay for a typical home equity loan, according to Experian:

• Notary fee: $50 to $200
• Appraisal fee: $349
• Origination fee: Varies by lender
• Title search fee: $75 to $200
• Credit report fee: $30 to $50
• Loan recording fee: $15 to $50
• Document preparation fee: Varies by lender and location

How do no-closing-cost home equity loans waive these fees?

A lender offering a no-closing-cost home equity loan doesn’t wave their magic wand and eliminate all of those fees for free. Instead, they’ll pay some or all of those closing costs for you and shift those costs elsewhere, whether that’s by rolling those charges into your overall loan amount or charging a higher interest rate. 

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One way or another, you’ll still pay those closing costs, but with creative financing techniques. This makes for a more expensive home equity loan because you’re essentially financing those closing costs, too, rather than paying them in cash like most lenders require. Your monthly payments and total interest costs over the life of the loan will be higher. 

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For example, let’s say you borrow a $100,000 home equity loan charging a 10% interest rate, with closing costs equal to 5% of the loan amount (i.e., $5,000). If your lender offers the option to roll those closing costs into the loan, you’ll instead borrow $105,000. 

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Your loan payments would then be $66 higher each month, and by the time you pay off the debt, you’ll have paid an additional $2,929 in interest. That’s not cheap, but it does mean you can potentially get a home equity loan without closing costs today, when you need it, rather than waiting until you’ve saved up to prepay these charges.

Lenders who offer no-closing-cost home equity loans

One of the downsides of no-closing-cost home equity loans is that fewer lenders offer them. They’re a bit riskier for lenders to make because, statistically speaking, people who can’t afford the closing costs on a home equity loan may have a harder time repaying their loan later if they don’t have enough savings to weather any financial difficulties. 

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That said, it’s still possible to find no-closing-cost home equity loan options with many national and online banks and credit unions. Here are some popular choices at the time of this writing:

• Discover Bank: This online bank is better known for its credit cards, but it offers banking services, too. You’ll need at least 90% equity in your home to qualify for loan amounts from $35,000 to $300,000, with loan term lengths ranging from 10 to 30 years.
• Bank of America: J.D. Power rated BofA as the fifth-best home underwriter in 2023. It offers a home equity line of credit (HELOC) rather than a home equity loan, but if you’d prefer access to flexible funds instead, this could be a good fit. 
• Navy Federal Credit Union: You’ll need to be associated with the military (or related to someone who is) in order to join Navy Federal, but it offers competitive rates on home equity loans with no required closing costs. It’s also a top-ranked lender for customer service, according to J.D. Power.

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Don’t forget to check with banks and credit unions in your local area since they may also offer good choices for a home equity loan without closing costs. 

How to apply for a no-closing-cost home equity loan

Applying for a home equity loan with vs. without closing costs isn’t really different. However, since no-closing-cost home equity loans can be a bit more expensive and aren’t as common, it’s worth emphasizing a few points along your funding journey. 

1. Gather financial documents

Save digital copies of your most recent financial statements, such as from your bank account, pay stubs, investment accounts, tax returns, homeowners insurance, and mortgage. Lenders will request copies of your ID, too, such as your passport or driver’s license. This can speed up the application process and help you assess your own eligibility for a home equity loan. 

2. Check your budget

Review your budget to see what you can easily afford when it comes to making a monthly payment. Check your financial statements to see what, if any, savings you can use to pay closing costs, or whether a no-closing-cost home equity loan option really is the best route for you.

3. Check your qualifications

Comb through your credit reports to make sure they’re accurate, and review your credit score so you know which lenders you may qualify with. Try to estimate how much home equity you have available to borrow against by estimating your home’s current value and subtracting the amount of other debts tied to your home, like the outstanding balance on your mortgage statement. Most home equity loan lenders allow you to borrow up to 80% of your home’s value, minus the balance of your mortgage.

4. Shop for no-closing-cost home equity loan options

Try to get pre-qualified with at least three lenders to see what rates and options they can offer you. You may need to spend extra time in this step in order to find lenders willing to offer no-closing-cost home equity loans, particularly if you don’t have the best credit. Pay special attention to how each lender handles the typical closing cost fees (such as by boosting your rate or tacking those costs onto your loan balance), along with which — if any — closing costs you’ll be expected to pay.

5. Submit a full application

If you find an option you’re comfortable with, go ahead and submit a full application along with the documents that you rounded up in the first step. Stay in touch with your lender throughout the underwriting process, especially if you’ll be required to pay any closing cost fees. This can speed up your loan decision. 

Alternatives to consider

Home equity loans — much less ones that don’t come with any closing costs — aren’t always the optimal choice. Here are some other financing tools to consider, along with when they might be more useful:

• Personal loans: These unsecured loans aren’t tied to your home, and therefore, lenders may charge higher rates — but on the other hand, they’re often much quicker to get and may come with zero fees at all, especially if you have good credit. 
• Cash-out refinance: If you want to swap out your entire mortgage for a lower rate or a different term length (or both) at the same time you borrow additional funds, a cash-out refi might work for you. No-closing-cost cash-out refinances shift costs around in other ways, too, much like no-closing-cost home equity loans. 
• Home equity investment: You’ll still have to pay closing costs with a home equity investment (HEI), but they’ll come out of your investment sum, so you’ll pay nothing out-of-pocket. You can benefit from not having to make any monthly payments until a single payment is due in 10 to 30 years. ‍
• Home equity lines of credit: Some lenders may also offer HELOCs with no closing costs. These are a better option if you want to borrow money over time during a specified draw phase. A HELOC comes with variable rates that can affect your payments. A home equity line – no closing costs or otherwise – will enable you to make smaller interest-only payments before it converts to a full repayment period.

FAQ

What is the downside of a home equity loan?

Home equity loans are attached to the title of your home, much like your first mortgage. If you default on the loan, your lender can foreclose on your home more easily than with an unsecured option like a personal loan. Home equity loans are also slower to get than unsecured options, typically require at least 20% equity, and can cause you to owe more than your home is worth if home prices fall. 

Does a HELOC require closing costs?

Typically, yes. Most lenders require you to pay between 2% and 5% of the HELOC amount in closing costs, although no-closing-cost options exist, just like with home equity loans. 

Does it cost anything to have a home equity line of credit?

Generally, yes. Many lenders charge annual fees to keep your HELOC open, even if you’re not currently borrowing. You may also need to pay draw fees each time you borrow money, and some lenders require minimum draws so that you’re forced to borrow and pay interest. 

Final thoughts

Getting a home equity loan with no closing costs is an attractive proposition, but it’s a bit of a misnomer. You’ll still end up paying closing costs with a no-closing-cost home equity loan; it’s just that you’ll generally pay them in different, more expensive ways. 

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It’s possible to calculate these extra costs directly by using a home equity loan calculator to compare two scenarios: one where you pay the closing costs upfront like normal, and one where you either roll those fees into your total loan amount or pay a higher interest rate. After all, this is how lenders shift the costs around in a no-closing-cost home equity loan. 

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Once you have these two calculator scenarios open in different browser tabs, simply subtract the difference in your monthly payment amount and total interest to see how much extra a no-closing-cost home equity loan will cost you. You can then make an informed decision about whether it’s worth the extra expense or if you’d rather wait and save up or choose a different financing tool. If you’d prefer an option where you pay nothing out of pocket for up to 30 years, you may also wish to consider an HEI from Point. 

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