In some states you have to pay tax when certain kinds of documents are filed with the county clerk of court. People recording these documents place a stamp on each page of the document, and you have to pay a documentary stamp tax on a per-recorded-document basis. Home equity loans and lines of credit are among the types of documents that are subject to this tax.
Documents used to transfer real estate such as warranty and quit claim deeds are normally subject to document stamp tax. Recorded mortgages and lien placements are other kinds of real estate related documents that are subject to the tax. Home equity loans are a type of mortgage, and therefore you have to pay the documentary stamp tax whenever you take out a home equity loan, but only if your state imposes such a tax.
The amount that you pay for documentary stamp tax depends on the amount of your home equity loan or line. In Florida, you pay $0.35 in doc stamps for every $100 of your home equity loan balance. This means that on a $100,000 loan you must pay $350 in document stamp taxes. Florida law limits document taxes to $2,450 on most kinds of documents, but there are no limits on the taxes for mortgage documents. However, few people have home equity loans that would cost more than $2,450 in document stamp taxes. The taxes are calculated similarly in other states.
States raise revenue to pay for schools and other essential services by assessing a variety of different taxes that can include documentary stamp taxes. Revenues created through real-estate-related taxes tend to decline during recessions because falling home prices make loans harder to obtain. Consequently, states often raise the documentary stamp tax to make up for lost revenue. Conversely, when home prices are rising, some states lower the documentary stamp tax to reduce the government surplus.
When you take out a home equity loan or line of credit, you are required to pay the documentary stamp tax at closing. Many lenders cover this cost and your other out-of-pocket closing costs. However, home equity loans that have no closing costs usually include a clause that allows the lender to bill you for these waived closing costs if you pay off your loan before the end of the loan term. If this happens, the lender adds the amount of the closing costs to your loan payoff quote.