Primary and secondary mortgages incur many of the same closing costs. However, a home equity line of credit, or HELOC, usually has relatively lower closing costs due to its comparatively smaller loan amount. HELOC fees vary by lender, but you can typically expect to pay 2 percent to 5 percent of the original balance or loan limit in closing costs. Consider this average closing-cost range to determine whether a HELOC is the right method for accessing your home's equity.
Works Like a Revolving Credit Card
You can use a HELOC to pay for home improvements, large purchases and unforeseen expenses. Unlike a home equity loan or traditional second mortgage, you pay only the interest on amounts you draw from the line of credit. HELOCs typically offer better interest rates than unsecured credit cards because your home acts as collateral for the line of credit. You can pay down a line's principal balance in advance to replenish the credit line for future use.
Average HELOC Balance Hits Record Highs
Growth in HELOC use and balances tends to correlate with rises in home equity. Over the past decade, the average HELOC balance has been rising steadily, from $27,351 in 2008 to $31,619 in 2010 and $61, 639 in 2017. The amount you borrow will obviously impact the amount of closing costs. Based on the average closing costs of 2 percent to 5 percent, a borrower can expect to pay approximately $1,300 to $3,250 for a HELOC balance of $65,000, for instance.
Closing Costs Associated With a HELOC
The following fees are part of a HELOC's closing costs:
- Application fee paid to the lender for initial HELOC application and credit review.
- Appraisal fee to an appraiser or lender to have the home's value estimated.
- Lender origination fee to the lender as a flat fee or a percentage of the loan amount, such as 1 percent.
- Title search fee to a third-party title company to research property liens.
- Document preparation fee to the lender for drafting the HELOC loan documents for signing.
- Attorney, title agent or escrow agent fee for handling the settlement or loan closing.
Negotiate Closing Costs or Get a No-Closing-Cost HELOC
Most closing costs are negotiable. You can shop around for third-party services, such as escrow and title. Some HELOCs don't require a full appraisal, which typically costs around $300. Instead, the lender may allow a simpler, cheaper version, such as an automated valuation model -- also known as an AVM -- or a real estate broker price opinion -- sometimes referred to as a BPO. A lender may also waive or cover the cost of a home appraisal as an incentive for the borrower to take out a HELOC. Typically, the better your income, credit and home equity, the more lenders will negotiate closing costs to compete.
Somewhat of a misnomer, no-closing-cost HELOCs involve closing fees, but the lender covers them on the borrower's behalf. This typically involves a higher interest rate to the borrower. In general, HELOC closing costs are paid one of two ways:
- The fees are financed into the new HELOC balance.
- The borrower pays them out of pocket at closing.
- LendingTree: How Much Are Home Equity Loan Closing Costs?
- ValuePenguin: Home Equity Loans and HELOCs: Average Closing Costs
- Realtor.com: Get the Best HELOC by Asking These 7 Questions
- Landmark Credit Union: Home Equity Line of Credit (HELOC)
- PenFed. "Home Equity Line of Credit." Accessed June 12, 2020.
- PenFed. "Membership Disclosures." Accessed June 12, 2020.
- U.S. Bank. "Home equity FAQs." Accessed June 12, 2020.
- U.S. Bank. "Home Equity Line of Credit (HELOC)." Accessed June 12, 2020.
- Bank of America. "Home Equity Assumptions." Accessed June 12, 2020.
- Connexus Credit Union. "Home Equity Loans & Lines of Credit." Accessed June 12, 2020.
- Connexus Credit Union. "Connexus Membership." Accessed June 12, 2020.
- Bank of the West. "Important Terms: Equity Choice Line of Credit." Accessed June 12, 2020.
- Bank of the West. "Home Equity." Accessed June 12, 2020.
- TD Bank. "Home Equity Line of Credit Rates." Accessed June 12, 2020.
- TD Bank. "Home Equity Line of Credit." Accessed June 12, 2020.
- IRS. "Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) 2." Accessed June 12, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.