With a HELOC, you are extended a credit limit for the draw period, when you make only interest payments, then you pay back the principal during the repayment period. HELOCs do offer homeowners several benefits, but they have closing costs to consider. Let’s learn more about what fees you can expect and how they compare to fees on your primary mortgage.
Are There Closing Costs on a HELOC?
HELOCs are similar to mortgages in that they hold your home’s equity as collateral to secure the lending. And as with a mortgage, you’ll likely face closing costs including fees for applying, home appraisal, title search, credit report, or filing. Typically, the total cost of the fees will range from 2% to 5% of the total limit of the line of credit.
No-Closing-Cost HELOCs
Some lenders offer HELOCs with no closing costs. However, you should compare these products with alternative options because they may have higher APRs. After all, whether a HELOC has closing costs or not, the lender must get the same services, such as title searches, credit reporting, and sometimes a home appraisal.
Other HELOC Fees
Other fees that can come into play over time to pay for the continued need to maintain a HELOC. They can include:
Annual fees: You may have a yearly fee to keep the HELOC open, but not every lender charges one. Transaction fees: Lenders can charge a fee each time you make a withdrawal from the line of credit. Inactivity fees: If you don’t use the HELOC, your lender may charge an inactivity fee.Cancellation fee: Some lenders charge for terminating a HELOC early, typically in the first three years.
Is a HELOC or Home Equity Loan More Expensive?
HELOCs and home equity loans have similar expenses, but they are not the same. With a home equity loan, you receive a lump-sum payment and your loan typically has a fixed APR. In contrast,a HELOC is a revolving line of credit with a variable interest rate that can change over time. Depending on the interest rate changes, a HELOC could be more expensive over the long run. “The largest cost associated with your home equity loan is the interest you pay on the borrowed funds,” Rob Cook, vice president and head of marketing at Discover Home Loans, told The Balance via email. “Your interest rate will vary by lender and is often based on your FICO, loan amount, lien position, and combined loan-to-value. It is important that you understand how those rates work and how they affect your monthly payment before you close on your loan.” If you want to prepare for unpredictable expenses over time, such as ongoing home improvements, you may find a HELOC’s flexibility worth it. If you have a project with a fixed expense, a home equity loan may be a better option.
How To Find the Best HELOC Rates
HELOC applications are usually fairly straightforward, but consider the kinds of closing costs, APR, and ongoing fees you’ll have with different lenders. Look for a lender with competitive APRs and fees that align with your goals. For example, if you know you want to pay down your HELOC quickly, you may get a bigger benefit from a no-prepayment-penalty HELOC. Or if you won’t use your HELOC for a while, you might want to avoid HELOCs with inactivity fees. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
