A home equity loan and a home equity line of credit are two options for a homeowner to tap their home equity to finance such big-ticket expenses as home improvement projects or to pay down credit card debt.
Financing a remodeling project through a home equity loan or HELOC can be costly, however, due to a slate of fees similar to those associated with taking out a mortgage. But these fees will vary depending on the lender, so it’s a good idea to shop around before signing anything.
Here’s what you need to know about the closing costs and fees associated with home equity loans and HELOCs.
What are typical home equity loan and HELOC closing costs and fees?
Whether you’re applying for a home equity loan or HELOC, there will be costs and fees that should be calculated into the total cost of the loan. Average closing costs may be slightly lower than with a traditional mortgage; a good rule of thumb is to budget for 2% to 5% of the total loan amount.
Here’s a list of typical fees and expenses involved in closing a loan. Note that you may be able to negotiate the rates on some of these with your mortgage lender.
- Appraisal fee: This fee is paid to the mortgage lender to obtain an estimate of the property’s value and to ensure it’s priced fairly and reflects current market conditions. The average cost for this fee is between $300 and $450.
- Origination fee: This fee is required to start a new loan application process, the cost of which varies by lender. It can be either a percentage of the loan -- typically between 1% and 8%, based on the quality of your credit score -- or a flat fee.
- Document prep, attorney and notary fees: The paperwork involved for a loan needs to be reviewed by a notary and a lawyer. An additional fee might be paid to the county for a recording fee and could cost up to $50.
- Credit report fee: This fee is also paid to the lender to have your credit history and score checked. The fee typically ranges between $10 and $100.
- Title fee: Lenders will check to see if there are any liens or tax claims to the property because your home is being used as collateral. Expect the fee to cost between $100 and $450.
- Insurance costs: These costs may not be upfront, and some of them can be paid monthly, but they typically include flood insurance if a policy was not already underwritten, along with title and property insurance.
- Taxes: Local laws or lenders may require the payment of taxes. In some areas, the taxes can cost between 1% and 3% of the loan amount.
- Points: One way to lower interest rates is to pay fees upfront which are called “points.” One point is usually equal to 1% of the loan amount. Most HELOCs, however, don’t offer points.
What are additional closing costs and fees for a HELOC?
Choosing a HELOC means possibly budgeting for at least four additional fees. Not all lenders charge these fees, so take the time to shop for those who have the least.
Here are the four most common type of additional fees:
- Annual fee: This fee is similar to one paid for a credit card and is charged each year you have the loan even if you don’t take out any money from the line of credit that year. Some lenders charge an annual fee of between $50 and $75.
- Transaction fee: Each time you draw down from the HELOC, a fee is assessed similar to an ATM fee. Not all lenders, however, charge this fee.
- Inactivity fee: A “non-usage” fee could be assessed by the lender if no transactions occur during a certain period.
- Early termination fee: Paying off the HELOC before its due date could result in an early cancellation fee.
What is a no-closing-cost HELOC?
A few lenders offer HELOCs without any closing costs, but such no-closing-cost HELOCs are rare and only available in certain states. One such lender is Associated Credit Union in Peachtree Corners, Georgia. The credit union will pay up to $400 in closing costs at closing. To qualify for this no-closing-cost feature, the HELOC must be for a primary residence for homeowners who have a credit score of at least 680.
Homeowners may save some money by not paying closing costs, but lenders often pay only a portion of the overall costs. Homeowners should consider the interest rate given for the HELOC instead of only considering the credit given for the closing cost. If the amount of the credit is low and the interest rate is higher, a homeowner would pay more money over the life of the loan.
How to reduce the closing costs on your home equity loan
Shopping for a home equity loan can yield you the best interest rate and closing costs. Fees and closing costs vary by lender, so shopping for the best rate should be part of your consideration along with interest rates and points.
Several other factors can affect closing costs. Homeowners can start by lowering their debt-to-income ratio by such means as paying down credit card debt when it’s possible or obtaining a second income to boost their annual income.
Receiving rates from multiple lenders also gives you an opportunity to determine which ones are more open to negotiations on closing costs. Negotiating with a lender may or may not work, but it doesn’t hurt to ask.
Lenders typically allow homeowners to borrow up to 85% of the equity in the home. Some lenders will go as high as 90%, but will also increase the interest rate. Borrow the amount you need to update your kitchen or refresh your bathroom or even pay down high interest debt, but get a loan only for the amount you need so you can afford the monthly payments. Getting a loan for a higher amount than what you need can adversely impact your budget.
The bottom line
Borrowing from your home equity can be an ideal solution to pay for pricey remodeling projects which, in turn, can add value to your home. You can calculate how much you can borrow by using a home equity loan calculator to factor the closing costs and overall expense of the loan.
Before you start the application process, first obtain a list of all the closing costs from a lender so you can compare them with other lenders. Tapping into your home equity can be an easy and potentially inexpensive way to receive money, especially if you don’t have the cash on hand to pay for a large renovation project. Closing costs can add up quickly, so be sure to determine how much they are and ask lenders if they’re amenable to negotiating better terms on a loan.