Because home equity loans and home equity lines of credit (HELOCs) are secured by an asset — a home — they often come with lower interest rates than unsecured forms of borrowing. As a result, many homeowners choose to tap into their equity to fund home improvement projects, pay down debt or cover other expenses.
While a low interest rate is attractive, borrowers need to make sure they also understand the full costs of borrowing when considering loan options. One thing consumers should familiarize themselves with is the closing costs associated with home equity loans and HELOCs.
Both home equity loans and home equity lines of credit tap into a borrower’s home equity, but they operate a little differently. With a home equity loan, homeowners borrow a specific dollar amount with an interest rate and payment that, in most cases, remain fixed throughout the loan.
A HELOC on the other hand, is a line of credit, much like a credit card, and it usually has a variable interest rate. The monthly payment is based on the interest rate, as well as how much you borrow during the draw period of the loan, and it can change drastically throughout the life of the loan.
Because these two products differ, the costs associated with them often vary as well.
Common home equity loan closing costs
Many of the closing costs associated with a home equity loan are similar to those that accompany taking out an initial mortgage. Typically, borrowers can expect the following fees as a part of closing on a home equity loan.
- Origination fee: This is the cost of initiating the loan. Origination fees vary between lenders. Some do not charge any at all, while others may charge as high as $125. Other lenders may charge an application fee instead of an origination fee.
- Appraisal fee: To determine the value of your home, lenders may acquire an appraisal from a third party; this typically ranges from about $300 to $400, but can be higher or lower depending on the location, property and type of appraisal used.
- Credit report fee: Some lenders will charge you for checking your credit. This may cost around $25.
- Title search: Lenders will have a title search run to identify any issues of ownership or rights to your property. This charge can be anywhere from $75 to $100.
- Title insurance: Depending on the amount borrowed or if there are potential title issues with the property, your lender may require title insurance. The amount of the premium is based on the size of the loan and can vary widely, from a dozen to a few thousand dollars.
- Floodplain determination fee: Lenders may order a search to determine whether your property is in a flood zone and will require flood insurance.
- Tax stamp fee: Depending on your local municipality, there may be a fee for recording the loan for tax purposes. This charge typically depends on the amount of your loan.
- Notary fee: Some lenders may have an in-house notary at no charge while others will use a third party.
- Attorney or document preparation fee: Depending on if a lawyer is used for the closing of your loan, the cost to document the loan could range from $100 to $400 at some banks.
In totality, expect to pay anywhere from 2% to 6% of your loan amount in closing costs. If you are borrowing $50,000 in home equity, this would mean anywhere from $1,000 to $3,000.
Your exact costs will depend on your state, county and lender, the type of property and amount borrowed. Your lender will provide you with a loan estimate detailing all the fees and their estimated amounts.
Additional home equity loan costs
In addition to the fees for initiating and closing on your loan, be sure you examine the other costs associated with home equity loans including the interest rate, prepayment penalty, hazard or flood insurance, and any additional fees your lender may charge.
Common home equity line of credit closing costs
Depending on the lender, a home equity line of credit may have many of the same closing costs as home equity loans.
- Origination fee
- Appraisal fee
- Credit report fee
- Title search
- Title insurance
- Floodplain determination fee
- Tax stamp fee
- Notary fee
- Attorney or document preparation fee
Just as with home equity loans, consumers who take out a HELOC can expect to pay 2% to 6% of the loan amount in closing costs.
“For a typical home equity [line of credit] closing, closing costs would range from as low as $100 up to $2,000 or more,” according to Russell Randolph, senior vice president and head of consumer direct lending solutions at SunTrust.
Another example: Bank of America estimates their closing costs, which they cover on behalf of the customers, to generally range from $456 for a line of $25,000 up to $23,879 for a $1,000,000 line. That represents about 2% of the loan amount, though your fees may be higher depending on your loan specifics.
Additional home equity line of credit costs
Home equity lines also come with other charges that contribute to the cost of borrowing. In addition to the interest rate, of course, consumers should consider a HELOC’s annual fee, minimum withdrawal requirements, prepayment penalty and any insurance needs required by the lender.
Additionally, lenders who provide the option to “lock-in” or convert a variable interest rate to a fixed rate may do so at a higher interest rate or may charge you for canceling the lock.
How to minimize closing costs
When planning to take out a home equity loan or HELOC, consider the following to keep your costs down.
- Find a no-closing-cost loan or HELOC. Some lenders, such as SunTrust and Bank of America, cover the closing costs on their HELOCs or waive them altogether, which can provide significant savings to borrowers. But typically, it comes with stipulations.“We will absorb the costs on behalf of the client at closing,” Randolph told MagnifyMoney. However, customers must keep their line of credit open for at least three years. “If the client were to close early, then there would be a proration of the expense passed back to the client,” he said. Make sure you know what your lender requires.
- Roll closing costs into the loan. Some lenders allow borrowers to finance the closing costs. While this does reduce your out-of-pocket expenses, keep in mind you will be paying interest on the closing costs, which will cost you more in the long run.
- Shop around for the best rate. Keep down the overall costs of borrowing by shopping around for the best interest rate.
- Only borrow what you need. “Some of [the closing costs are] driven by the size of the line of credit that is being assigned,” Randolph said. Help keep your costs to a minimum by borrowing only the amount you need.
- Take advantage of lender discounts. Many lenders offer savings on their rates and fees if you open up a checking or savings account, set up automatic payments for the loan or meet other requirements.
- Explore loan products with no closing costs. Depending on your purpose for borrowing, some products that do not have closing costs may meet your needs.
- Personal loans. Unsecured personal loans can be an effective alternative to tapping into your home equity. Unlike home equity products, they do not put your home in jeopardy if you have difficulty affording the payment.Keep in mind, however, that personal loans typically come with higher interest rates than home equity loans. They also lack the flexibility of being able to withdraw additional funds on demand, like you can with a HELOC. Some personal loans may still have an origination or application fee, as well as a credit check.
- Credit card balance transfer. If your need to borrow money includes paying down debt or funding a large purchase, using a credit card with a promotional 0% APR or low introductory rate could be a good alternative.
There are no closing costs, but balance transfers usually carry a fee. This option also avoids putting your home in jeopardy, but you could end up paying a significantly higher interest rate once the introductory period ends.
When exploring other options, give some thought to the purpose of the loan. For example, if you plan to borrow money strictly for home improvement, keep in mind that you will lose the tax advantage that comes with home equity products if you choose a personal loan or credit card.
Find the best fit for your needs
When comparing home equity loans and lines of credit, the closing costs are just one piece of the puzzle. As Randolph noted, “The closing costs are an important thing to look at, but only after you’ve found the best fit [and] the best borrowing solution to meet the need.”
Be sure to take the time to research your borrowing options and potential lenders. “Once you’ve found the right borrowing solution, you can compare providers in terms of whether or not there’s an application fee or origination fee, whether or not the lender will pay closing costs, or if there are other types of fees associated with the line or loan,” Randolph advised.