With home values at near-record highs, many homeowners are sitting on a piggy bank of tappable home equity — an average of $207,000 per homeowner as of Q1 of 2022, according to data analytics firm Black Knight.
Homeowners with sufficient home equity can use a home equity loan or HELOC to borrow against their equity for home improvements, debt consolidation, or simply a cash infusion to use however they want.
But, it might come with some upfront costs.
“Home equity loans and HELOCs are also considered mortgages,” says Khari Washington, a broker and owner of 1st United Realty & Mortgage. “Many of the same fees that come with primary mortgages apply.”
Even taking closing costs into account, though, a home equity loan or HELOC is still one of the best ways to borrow money right now. Home equity loans and HELOCs typically offer lower interest rates than credit cards and personal loans. They also won’t affect your primary mortgage like a cash-out refinance does — a distinct advantage in a time when mortgage rates are rising and homeowners may be reluctant to let go of a low mortgage rate they locked in a year or two ago. And, if you do your research, you may even be able to find a home equity loan or HELOC lender who will waive some or all of the loan closing costs.
Here’s what to know about HELOC and home equity loan closing costs and how to save money on your loan.
Home Equity Loan Closing Costs and Fees
A home equity loan lets you borrow against your home equity to access large sums of cash at a relatively low, fixed interest rate. But, it can also come with fees and expenses upfront. Average home equity loan closing costs typically range from 2% to 5% of the total loan amount.
Home equity loan costs and fees vary from lender to lender, so shop around. Fees should be disclosed upfront, so ask for a full list of them. Here are some of the common closing costs and fees you can expect when taking out a home equity loan:
- Origination fee — Some lenders will charge an upfront origination fee when you take out the loan. Not all lenders charge this fee, and the fee amount will vary by lender.
- Application fee — You may have to pay an application fee when applying for a loan.
- Appraisal fee — The appraisal will help the lender determine your home’s market value, which is then used to calculate the amount of equity you have in your home and how much you can borrow. Most lenders will let you borrow up to 85% of your home’s value, minus your current mortgage balance, with a home equity loan or HELOC. Appraisal fees can vary depending on what type of appraisal your lender requires.
- Credit report fee — Some lenders charge a fee for pulling your credit report to see your creditworthiness. Make sure to keep your credit score in good standing to receive the lowest loan rate possible.
- Title search fee — Your lender may order a title search to verify that you own the home securing the loan. If there are any liens against the property, they will come up in this process.
- Attorney and notary fees — Any professional fees will be added here if you have a lawyer drawing up the papers or if you need the paperwork notarized.
“The size of the loan partly determines the fees,” says Daniel Milan, managing partner of Cornerstone Financial Services, a financial services firm. “Some lenders will roll all the fees into one flat charge,” he adds. Other lenders may waive some or all of the fees as a way to attract customers. Check your loan agreement for exact details about the fees your lender charges.
If you’re looking for the best rates on a home equity loan or home equity line of credit, be sure to shop around with different lenders. Also, read over your loan documents carefully to make sure you understand all the fees associated with your loan and what they cover.
HELOC Closing Costs And Fees
Home equity lines of credit, or HELOCs, are revolving lines of credit secured by your home’s equity. Unlike home equity loans, HELOCs give you access to an ongoing credit line at a variable interest rate throughout the draw period, rather than a lump sum of cash upfront. You can borrow as much money as you want, whenever you want, during the draw period and pay it back with interest during the repayment period.
HELOCs can come with many of the same closing costs as home equity loans. There may be origination fees, underwriting fees, loan recording fees, and other expenses. Here are some other HELOC expenses to look out for:
- Notary fee
- Title search
- Appraisal fee
- Credit Report fee
- Attorney fees
HELOCs sometimes come with other fees that home equity loans don’t have. These are typically associated with keeping your HELOC open, as a HELOC operates as an ongoing line of credit rather than a single loan disbursed in a lump sum. Here are some common HELOC expenses:
- Annual fees or maintenance fees — These are fees for managing and maintaining your account or keeping your HELOC open, usually charged as a flat fee. Some banks may waive the annual fee if you have an existing relationship with the bank, such as a checking or savings account.
- Cancellation fee or early termination fee — If you pay off and close your HELOC before a certain amount of time has passed, you might be charged a fee. This is more common in cases where the lender waived some or all of the upfront fees on a HELOC.
- Inactivity fee — If your lender requires you to use your HELOC on an ongoing basis, you may owe an inactivity fee if you go too long without withdrawing money from your HELOC.
- Transaction fee — Some lenders may charge this fee every time you withdraw money from your HELOC.
- Minimum withdrawal requirement — Though this isn’t a fee, some lenders may have minimum withdrawal requirements that require you to withdraw (and pay interest on) a certain amount of cash when you first take out your HELOC.
As with home equity loans, HELOC closing costs vary depending on the lender, so shop around to get the best deal.
Before deciding whether a HELOC or home equity loan is right for you, weigh all your options. If you need the flexibility to tap into your home’s equity on an ongoing basis, a HELOC might be a good option. But if you have a one-time expense and don’t want to deal with a variable interest rate, a home equity loan might be your best bet.
How to Reduce Your Closing Costs on Home Equity Loans and HELOCs
Even though closing costs can be common on home equity loans and HELOCs, there are ways to minimize your upfront costs or save money in other ways:
- Shop around with multiple lenders. The best thing you can do to save money on a HELOC or home equity loan is to shop around with several lenders. HELOC and home equity loan rates can vary widely by lender, so you should get rate quotes from different lenders to find the best deal. In addition to looking at the interest rate, make sure you also compare closing costs and the total cost of borrowing. A loan with no closing costs may not be a better deal if it comes with a higher interest rate; similarly, a loan with a low rate might come with upfront fees that increase the total cost of the loan. Use a loan calculator to find the total cost of borrowing and the monthly payment in order to make sure you’re comparing apples to apples when shopping lenders.
- Look for lenders that offer no-closing-cost loans. If you’re more concerned about the upfront costs than the total cost of the loan, many lenders offer no-closing-cost home equity loans or HELOCs. “Some lenders will cover most, if not all, of the costs at certain rates,” Washington says. “Leftover fees can also be rolled into the loan. If a homeowner allows for a slightly higher rate and a prepayment penalty, the rate usually decreases,” he adds. Just be aware that you may have to pay a higher interest rate, which could increase your monthly payment and total cost in the long run, but will allow you to get a loan even if you can’t afford the upfront fees.
- Improve your application to get a lower interest rate. The lowest interest rates are reserved for the most creditworthy borrowers, as they present the least risk for the lender. Before you apply for a home equity loan or HELOC, see if you can improve your credit score. In addition, “reducing your debt-to-income ratio, the percentage that lenders calculate to measure how much they will lend the applicant, can help you save,” says Jason Gelios, a real estate agent at Community Choice Realty in Michigan.
- Negotiate with your lender. Depending on the lender, you may be able to negotiate your closing costs. “Fees such as underwriting, origination, and processing fees aren’t set in stone and can be negotiated with some lenders,” says Washington. Asking your lender to waive or reduce some costs could save you thousands of dollars down the road.