A home equity line of credit, or HELOC, can provide a valuable source of money for major expenses like renovations or home additions. These loans allow you to borrow money at a lower interest rate than you’d typically get from a personal loan because the credit line is secured by your existing home equity.
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.
- HELOCs have closing costs like application fees, title search fees, credit report fees, and other fees.
- In addition to closing costs, HELOCs can incur other fees like maintenance fees or inactivity fees.
- HELOCs that offer no closing costs tend to have higher APRs.
- Compare rates and fee structures among different HELOC lenders to get the best terms.
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.
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.
Depending on your situation, you may want to accept a higher APR to minimize upfront costs, or you may want a HELOC that has a lower APR and requires closing costs.
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.”
Combined loan-to-value (CTLV) is your loan amount plus all mortgages, divided by your home’s value. The lower your CLTV, generally the lower your interest rate.
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.
Frequently Asked Questions (FAQs)
How much of a HELOC can I get?
The amount of your HELOC will be based on a percentage of your equity. Lenders commonly set a limit of 75% of your equity, but some lenders may offer you more than that, possibly even as high as 90% of your equity. Others may offer less than that.
How often can the interest rate change on a HELOC?
A variable interest rate can change as often as monthly on a HELOC. Your lender will provide a disclosure that describes how often the rate can change for your particular HELOC, including any promotional early-interest-rate periods.
How does HELOC repayment work?
During the draw period for your HELOC, you’ll borrow money up to your limit and make minimum interest payments. When the draw period ends, you enter the repayment period, which is when you can no longer take out credit and you must start paying down your balance.
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