Leveraging the equity in your home through a home equity loan or home equity line of credit (HELOC) can help you finance big projects or expenses. If you have major home renovations or planned expenses and are cash-strapped, competitive rates could make borrowing against your home equity an attractive option.
Before you go ahead with this financing approach, keep in mind that home equity loans and lines of credit come with steep fees that you’ll need to factor into the total cost of the loan. Although the average closing cost of a home equity loan or line of credit may be lower than the closing cost of a standard mortgage, it can vary between 2 percent to 5 percent of the total amount of the loan. Learn more about home equity loan closing costs and how to reduce them.
What are the fees and charges for home equity loan and HELOC closing?
Home equity loans and HELOCs have some features in common, including many of the fees you might see at closing. Although some lenders offer HELOCs with no closing costs, you may have to pay a fee or reimburse your financial institution for these fees if you pay off and close your HELOC within a certain time frame.
- Creation costs: Some lenders charge origination fees up front. The amounts vary by lender, but can be either a flat fee or a percentage of the amount you borrow.
- Expert fees: Lenders may require a real estate appraiser to determine the value of your property. Generally, it costs between $300 and $450.
- Credit application fees: As part of any credit-based loan process, lenders check your credit score and report. This usually incurs a fee between $10 and $100 by credit file.
- Insurance costs: This may include flood insurance costs if you do not already have a sufficient flood insurance policy, as well as property and title insurance.
- Application and file fees: Preparing the documents incurs costs and professionals such as lawyers and notaries must review the documents. For example, county registration fees can be up to $50.
- Title fees: Since the home is being used as collateral for a home equity loan or HELOC, lenders will arrange a title search to see if there are any liens or claims on another entity’s property. These fees are usually around $100 to $450, depending on your region.
- Taxes: You may have to pay taxes, depending on your local laws or lender requirements. Costs vary; some regions require taxes between 1% and 3% of your loan amount.
- Points: Some lenders let you pay an upfront fee called “points” to lower your interest rate. Each point corresponds to 1% of the amount of your loan. Most HELOCs do not have points.
Other HELOC expenses
There are other possible HELOC-specific expenses to consider that are not part of closing costs. These fees can vary by lender, and some may not charge them at all:
- Annual fees: This is a recurring charge for each year of an account opened. The fee is charged whether or not you draw on the line of credit during the year.
- Transaction fees: Not all lenders charge this fee, but if yours does, you will pay a fee each time you withdraw from the HELOC.
- Inactivity fees: HELOCs that have no transactions for a certain period may incur inactivity fees.
- Early Termination Fee: If you pay off your HELOC and close the account before the end of your agreement, the lender may charge an early cancellation fee.
Read your loan documents and ask your lender about other HELOC costs that could potentially affect the amount you end up paying.
How to lower your home equity loan closing costs
Closing costs can be high, but there are steps you can take to reduce these costs on your home loan:
- Reduce your debt to income ratio. By paying off other consumer debt, such as unsecured credit cards, you’ll be in a better position to receive more closing cost options. For example, if you have less debt and a higher credit score, a lender may offer to add your closing costs to the principal of the loan so that you don’t have any immediate disbursements.
- Shop with multiple lenders. Comparing closing costs between lenders can help you find the most affordable home equity loan option for you.
- Negotiate with lenders. Feel free to negotiate home equity loan costs and fees. These additional fees are often more flexible than the lender might suggest. If a lender is unwilling to budge on their closing costs, consider working with another lender.
Some lenders may offer low or no closing costs, which is why it’s important to compare closing costs and rates when researching lenders. Taking that extra time and planning ahead could mean you pay less out of pocket for your home equity loan.
The bottom line
To find out if borrowing against your home equity is right for you, see how much you could borrow using a home equity calculator. This starting point can help you better understand how the fees mentioned above can affect your total borrowing costs.
If you’re ready to go ahead with a lender, ask for an itemized list of closing costs. Check that the list includes verbal agreements regarding closing costs and that these agreements are included in your loan agreement. If anything is missing, talk to your lender before signing the documents.