There are 5 costs associated with both traditional mortgages from a bank as well as home equity loans from alternative lending sources. The only out of pocket expense, is the home appraisal. In most cases, the remaining costs outlined below, are included in the new mortgage amount.
Interest rates – interest rates for equity mortgages vary greatly. The rate is set depending on the amount borrowed in comparison the home value and overall credit history. Today, interest rates for 1st mortgages start at 6.95%-9.95% and 2nd mortgages from 9.95%-12%.
Yes, lower interest rates may exist. But be careful, lower rates usually mean higher fees or closed term mortgages. It’s important to work with a Mortgage Advisor who can explain all aspects of the loan, including the fine print.
Fees – home equity lenders offer short term financing of 1-2 years. They are hoping you will pay back the loan within that time frame. If not, don’t worry, as long as the loan has been paid on time, the lender will offer you a new term.
Since most borrowers are short term clients, the lender needs to charge a fee to cover the administrative costs of setting up and managing the mortgage funds.
Banks don’t charge fees for their mortgages because they recoup their costs on monthly bank account fees, credit cards, loans, and other service fees. Their mortgage loans are also amortized over 25-30 years. The interest they earn plus their product fees, amounts to much more than a home equity loan.
1st mortgage fee’s range between 2%-4% of the loan amount and 2nd mortgages around 4%-5%.
It’s important to note that the mortgage arrangement fee is split with the mortgage brokerage. Unlike banks, alternative lenders do not pay the broker directly. Instead the fee is shared between both parties.
Home Appraisal – an independent home appraisal will be required upon approval by the lender. This is how the current market value of your home is determined and ultimately, the loan amount. The cost is around $350 for homes valued less than $1m. Above $1m the appraisal prices are around $400-$450. If your home is located in a rural area, the costs could be higher.
Legal – the services of a lawyer or notary are required to complete the mortgage registration. With Home Equity Loans, the borrower pays for their own lawyer/notary as well as the lender’s. The bill will range between $2000-$2500.
Penalty – an early payout penalty may be charged by your existing lender. This will be taken into consideration when determining if a 1st or 2nd home equity mortgage is suitable for you.
Here is an example of what a loan looks like after all costs have been deducted.
$100,000 home equity loan
- 2,000 arrangement fee 2%
- 2,000 legal
$96,000 issued to the borrower
The home appraisal with an estimated costs of $350 was paid out of pocket.
If you have any questions about the costs associated with an alternative mortgage or would like to run a scenario by us, please give us a call at 604-334-8993 or email us at info@goatmortgages.ca
