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Leveraging your home equity through a home equity loan or home equity line of credit (HELOC) can help you fund large projects or expenses. If you have a major home renovation or planned expense and don’t have cash on hand, competitive rates might make borrowing from your home equity an appealing option.
Before moving forward with this financing approach, remember that home equity loans and lines of credit come with expensive fees that you’ll need to factor into the loan’s total cost. While the average closing costs for a home equity loan or line of credit may be lower than the closing costs of a standard mortgage, it can range between 2 percent to 5 percent of the total loan amount. Learn more about home equity loan closing costs and how to reduce them.
What are home equity loan and HELOC closing costs and fees?
Home equity loans and HELOCs have some features in common, including many of the fees you might see at closing. While some lenders offer no-closing-cost HELOCs, you may be required to pay a fee or reimburse your financial institution for those costs if you pay off and close your HELOC within a certain time frame.
- Origination fee: Some lenders charge an origination fee up front. Amounts vary by lender but may be either a flat fee or a percentage of the amount you borrow.
- Appraisal fee: Lenders may require that a home appraiser determine the value of your property. Generally, this costs between $300 to $450.
- Credit report fee: As a part of any credit-based lending process, lenders check your credit score and report. This typically incurs a fee between $10 and $100 per credit report.
- Insurance costs: This may include flood insurance costs if you don’t already have a sufficient flood policy, as well as property insurance and title insurance.
- Document and filing fees: Document preparation incurs fees, and professionals such as attorneys and notaries must review the paperwork. For example, a county recording fee might be up to $50.
- Title fees: Since the home is 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 to the property from another entity. This fee is typically about $100 to $450, depending on your area.
- Taxes: You might have to pay taxes, depending on your local laws or lender requirements. Costs vary; some areas require taxes between 1 percent and 3 percent of your loan amount.
- Points: Some lenders let you pay up-front fees known as “points” to lower your interest rate. Each point is 1 percent of your borrowing amount. Most HELOCs don’t have points.
Other HELOC expenses
There are other possible HELOC-specific expenses to consider that aren’t part of closing costs. These fees can vary depending on the lender, and some may not charge them at all:
- Annual fees: This is a recurring fee for each year of an open account. The fee is charged regardless of whether you draw from the line of credit during the year.
- Transaction fee: Not all lenders charge this fee, but if yours does, you’ll pay a fee every time you draw from the HELOC.
- Inactivity fee: HELOCs that have no transactions for a certain period of time might incur an inactivity fee.
- Early termination fee: If you pay your HELOC off and close the account before the term in 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 how much you end up paying.
How to reduce your home equity loan closing costs
Closing costs can be expensive, but there are steps you can take to reduce these costs on your home equity loan:
- Reduce your debt-to-income ratio. By paying off other consumer debt, such as unsecured credit cards, you’ll be in a stronger position to receive more closing cost options. For example, if you have less debt and a higher credit score, a lender might offer to add your closing costs to the loan principal so you have no immediate out-of-pocket costs.
- Shop around with multiple lenders. Comparing closing costs among lenders can help you find the most affordable home equity loan option for you.
- Negotiate with lenders. Don’t be timid about negotiating on home equity loan costs and fees. These added charges are often more flexible than the lender might let on. If a lender is unwilling to budge on its closing fees, consider working with a different lender.
Some lenders may offer low or no closing costs, which is why it’s important to compare closing costs and rates when shopping lenders. Taking this extra time and planning ahead could result in paying less out of pocket for your home equity loan.
The bottom line
To explore whether borrowing against your home’s equity is right for you, see how much you might be able to borrow by using a home equity calculator. This starting point can help you better understand how the fees mentioned above might affect your total borrowing costs.
If you’re ready to move forward 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 something is missing, bring it up with your lender before signing the paperwork.