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. At the time of publication, the average HELOC balance had risen to $61, 639. In 2008, the average HELOC balance hit $27,351 and grew to $31,619 in 2010. Between 2003 and 2008, HELOC use grew by a total of 80 percent, according to the National Association of Home Builders. Based on the average closing costs of 2 percent to 5 percent, a borrower can expect to pay approximately $1,233 to $3,082 for a HELOC balance of $61, 639.
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.