A Guide to HELOC Closing Costs

If you’re looking for a way to turn the equity in your home into usable cash, you may be considering a home equity line of credit (HELOC). Unlike a home equity loan, in which you receive the entirety of the loan at once, HELOCs offer homeowners a revolving line of credit to utilize during the draw period. Similar to a credit card, your line of credit has a limit based on the amount of equity available in your home. You can draw funds from your HELOC as you need them and only have to pay back the amount you use.

It's not hard to see why homeowners in need of funds for home improvements, debt consolidation, and more are drawn to HELOCs. Before you sign on the dotted line though, it’s important to understand the up-front costs of taking out a HELOC. In this article, we’ll answer all of your questions regarding HELOC closing costs, fees, and ways you may be able to reduce them.

What are HELOC closing costs and fees?

As with any other type of mortgage loan, HELOCs have closing costs and fees that cover expenses associated with closing the loan. These fees are incurred during the originating, underwriting, and closing process. On average, typical HELOC closing costs are about 2%-5% of the total line of credit. (But these fees are not added on top of the total loan cost.)

Some lenders advertise no-fee HELOCs with no cash due at closing, unlike primary mortgage loans. Oftentimes, though, these lenders have wrapped their closing costs into your rate quote, despite their “no-fee” advertising. Many lenders also offer to reduce costs and fees on their HELOC loans with lender credits.

It’s also important to be aware that some lenders have prepayment penalties. These penalties are typically applied in the case that the HELOC is paid off prior to 5 years. They usually range from 3% to 5%.

Common types of HELOC closing fees

It’s important to restate that even in cases of lenders offering “no-fee” HELOCs, many of the typical fees are automatically baked into the interest cost of your loan. If you’re reviewing multiple quotes or offers from different lenders, be sure to carefully compare the Annual Percentage Rates (APRs). Specific fee rates will vary by lender.

The most common closing costs and fees associated with HELOCs include:

• Application fees
• Processing and underwriting fees
• Appraisal fees
• Notary fee
• Title and escrow fees
• Transfer taxes (if applicable)
• County recording fees

It’s important to be aware that some fees are unique to HELOCs, so pay attention to terms like:

• Account maintenance or annual fees — charged by some lenders to keep your home equity line of credit open. Cost varies depending on your lender.
• No-use or inactivity fee — may be charged if the line of credit isn’t being utilized. These may come in the form of small maintenance fees or an annual service fee.
• Minimum balance fee — only charged if your lender requires you to maintain a certain loan amount at any given time.

How to reduce closing costs on a HELOC

Some lenders may offer to cover 100% of the closing costs that come with your HELOC. Others may allow you to roll these fees into the loan and your monthly payments. That’s why it is so important to shop around for the right lender before committing to one.

Here are a few strategies that can help you save when you start shopping for a HELOC:

1. Shop around for a lender — interest rates, terms, and closing costs will vary by lender, so it’s vital to get quotes from multiple lenders to compare. This way, you can be sure you’re getting the best HELOC for your needs.
2. Improve your credit score — unless you have a perfect score already, it’s always worth taking the time to improve your score prior to applying for a loan. The higher your score, the better your potential rates will be.
3. Negotiate the closing costs with lenders — whether or not you can negotiate closing costs will depend on the lender. However, it’s worth inquiring if a lender will consider covering a portion of the fees or how you might get some of your closing costs waived when taking out a HELOC.
4. Apply for “no-fee” HELOCs — when you’re deciding on a lender, you can opt to apply with those who offer “no-fee” HELOC options. Note: many lenders who advertise “no-fee” HELOCs have actually rolled those fees into the total loan amount and you may end up with higher monthly payments in the long run.

Is a HELOC right for you?

A HELOC is a great tool for homeowners who want to turn their home’s equity into usable funds. If you’re looking to make some home improvements, need repairs, or want to consolidate debt, you may want to consider applying for a HELOC.

At the end of the day, the right loan for you will depend on your unique needs. If you’re hesitating because of the potential closing costs, know that taking the time to research different lenders can help you find the best rate and terms available.