A Home Equity Line of Credit (HELOC) provides homeowners with funds based on the equity in their homes, which is an excellent way for homeowners to consolidate debt or finance repairs and remodels.
HELOCs come with closing costs and ongoing fees like other home credit products. These costs include fees based on a percentage of your total loan amount, flat-charge fees, and added rates on top of your prime rate. Between these, you could pay thousands of dollars at closing and throughout the life of your loan.
However, that doesn’t mean that opening a HELOC is a bad idea — you just need to consider the pros and cons of a HELOC carefully. You might even be able to avoid closing costs entirely. Here’s a comprehensive guide to HELOC closing costs and fees.
Closing Costs for HELOCs
Closing costs are one-time fees associated with the initiation of a HELOC. Whether or not you pay fees at closing depends on your lender.
Some lenders will allow you to roll closing costs into the loan payment itself, reducing the fees you must pay upfront. Other lenders will want you to pay fees at closing or as part of the application process. Choosing a lender that allows you to roll closing costs into the loan can provide financial flexibility, but paying the fees upfront means you won’t be paying for them throughout the life of the loan.
While the specific fees may vary depending on your lender, here are standard closing cost fees associated with a HELOC:
1. Origination fee
The origination fee covers the cost of processing the loan application and is typically expressed as a percentage of the total credit line. The fee usually goes toward the team working on your loan, such as the loan officer and underwriter.
Origination fees are typically 1% of the total loan amount, but some lenders may charge a flat fee.
2. Appraisal fee
Lenders often require a professional appraisal to assess the current market value of your home, ensuring it aligns with the requested credit limit. Most lenders won’t let you borrow more than 85% of your home’s value, so you can’t skip out on the appraisal.
You usually don’t have to schedule the appraisal, but it will cost you around $300 to $400.
3. Title search and insurance
Title searches ensure there are no outstanding liens or issues with the property title, which is essential since you’re opening a line of credit against your home’s value. Title insurance protects the borrower and the lender against potential ownership disputes from previous owners and can come in the form of owner’s or lender’s title insurance.
Unlike other types of insurance, title insurance is a one-time premium. Depending on the type of title insurance, it’ll cost about 0.25% to 1% of the loan, while title searches will cost a flat fee of $100 to $300 upfront (sometimes more for larger properties).
4. Document preparation or attorney fees
Lenders may charge fees for preparing the necessary documents related to the HELOC, such as contracts and disclosures. This is either done by a document preparation specialist or an attorney.
Some states require legal representation during the closing process. Even in states where it’s not mandatory, some borrowers hire an attorney for added assurance. Still, you usually won’t need both a document preparation and an attorney to review the documents.
These fees can cost 0.5% to 1% of your loan amount, or it could cost you a flat rate ranging from $80 to $350.
5. Credit report fee
Lenders typically pull your credit report to assess your creditworthiness when purchasing a home. A HELOC has higher credit score requirements than a standard mortgage, so your loan team will want to evaluate your credit.
The associated cost may be passed on to the borrower as a service fee, typically under $100.
6. Notary fee
Some states require you to get your loan documents and paperwork notarized by a notary public. This will typically cost between $50 to $100, but costs could easily be lower.
Other HELOC Fees
Apart from the closing costs, borrowers should be aware of the annual or ongoing fees associated with maintaining a HELOC. These fees can add up over time and impact the credit line’s overall cost.
1. Annual fee
Some lenders charge an annual fee for having access to the HELOC, regardless of whether you use the funds. The annual fee will cost $50 to $100, with specific prices varying based on your bank.
2. Interest charges
Interest is the primary cost associated with a HELOC. It accrues based on the outstanding balance, and the rate can vary depending on market conditions and the loan terms.
Your lender will incorporate the fee into your monthly payments, so you won’t have to expect an additional annual fee for interest beyond your usual payments.
3. Inactivity fee
Some lenders charge a fee if the borrower doesn’t use the HELOC for an extended period. This is because lenders make money off of charging interest — if you’re not using your credit line, they’re not making any money from providing you a service. It’s the same reason you get charged prepayment penalties.
Inactivity fees aren’t huge, and your charge should be under $50 — some banks don’t even have an inactivity fee, so check with yours beforehand.
4. Late payment fee
Missing payments can result in late fees, adding to the overall cost of the HELOC. These fees vary by state, but most states charge 5% of the unpaid installment.
5. Conversion fee
Most HELOCs are variable-rate, which means your rate will change based on the current market. If rates are rising, yours will, too. Some lenders will offer conversions to fixed-rate HELOCs, so you can avoid this, but there is usually a fee associated with it.
6. Termination or early closure fee
Lenders usually require you to keep your line of credit open for at least two years. If you decide later on that you want to cancel your HELOC early, they will likely charge you an early cancellation fee. The termination fee can cost you up to 2% of the loan balance, or you might get a flat charge.
» MORE: See today’s refinance rates
A lender primarily makes money on a HELOC by charging a margin. The margin is the amount added to the prime rate to determine your mortgage rate.
For example, if you have a prime rate of 3% and your margin is 0.5%, your actual rate will be 3.5%.
Typically, your margin stays the same throughout your loan. But sometimes, a lender may offer a lower introductory rate with a temporarily reduced margin as an enticement.
After the initial period – generally six months to a year – the regular margin kicks in, adjusting the rate upward, even if the prime rate hasn’t changed. The interest rate is still based on the prime, but you may not know the margin exactly unless you inquire about it beforehand.
Make sure to factor in the margin rate when determining your total HELOC costs and fees, especially if your HELOC margin rate is subject to change after some time — this will affect your regular payments.