Home equity loans and home equity lines of credit (HELOCs) often charge closing costs, though it's possible to obtain both without them. On loans and lines of credit that do come with closing costs, you can expect to pay between 2% and 5% of the loan amount, depending on the lender.
Here's what you need to know about how closing costs work on a home equity loan or HELOC and how to avoid them.
What Are Closing Costs?
Home equity loans and HELOCs work differently, but both allow you to borrow against the equity you have in your home, and they both carry some of the same closing costs.
These costs, many of which are similar to mortgage closing costs, are typically charged when you close your loan. However, the types of fees you're charged and the amount can vary by lender. Here are some of the fees to watch out for as you compare different options:
- Origination fee: This fee is charged to cover the lender's cost of originating the loan or line of credit. It can be a flat fee or a percentage of the loan amount or credit line.
- Appraisal fee: This fee costs $349 on average, according to HomeAdvisor, and is paid to a professional appraiser who provides an appraisal of the home's value.
- Credit report fee: This fee can range from $30 to $50, and lenders charge it to cover the cost of checking your credit when you apply.
- Title search fee: The fee can range from $75 to $200, depending on where you live. Lenders run a title search to ensure that there aren't any other liens or claims on the property.
- Document preparation fees: Attorneys are often used to prepare the documents for your loan or line of credit, and their fees can vary based on where you live.
- Loan recording fee: Your county recorder or other local official will typically charge a $15 to $50 fee to cover the cost of recording the new lien on your home in the public record.
- Notary fee: Some lenders may charge an additional fee of $50 to $200 to have a notary public verify and notarize your loan documents.
Additionally, some HELOCs can charge an ongoing annual fee, a transaction fee every time you take a draw from your credit line and even an inactivity fee if you don't use the line of credit often enough. All of these fees can vary, so it's important to read the fine print for proper comparison.
How to Avoid Closing Costs on a Home Equity Loan or HELOC
Depending on your situation, there are a couple different ways you can avoid closing costs on your home equity loan or HELOC, or at least get them reduced:
- Apply for a loan or HELOC with no closing costs. Some lenders offer both home equity loans and HELOCs without closing costs. These options can be appealing if you don't have the cash to pay for upfront costs or you want to save as much money as possible. Keep in mind, though, that some of these options may come with a penalty if you close your HELOC or pay off your home equity loan within a predetermined period.
- Shop around. As with any other financial product, it's critical that you shop around and compare offers from multiple lenders before settling on one. This process can help you find not only the lowest closing costs but also the best interest rate. You may even be able to use an offer from one lender to negotiate lower costs with another.
- Pick another option. Depending on what you plan to do with the money, you may be able to avoid closing costs by simply choosing another form of financing. For example, personal loans typically charge higher interest rates, but they often don't require collateral, so you don't risk losing your home if you can't repay, and some lenders don't charge upfront fees. Additionally, a balance transfer credit card may be a better choice if you're looking to consolidate credit card debt and pay it off interest-free, though there's typically an upfront fee of 3% to 5% of the transfer amount.
The important thing is that you take the time to research all of your options before applying so you can maximize your savings. As you compare offers, be sure to weigh upfront costs against long-term expenses.
For example, if one HELOC charges $500 less in closing costs than another but has a $100 annual fee while the second option has none, you may be better off with the second choice if you plan to use the HELOC for longer than five years. As you run the numbers and incorporate other loan options, you'll have an easier time picking the right one for you.
Build Your Credit to Maximize Your Savings
Having good credit won't necessarily lower your closing costs, but it can help you qualify for better interest rates on a home equity loan or HELOC. A lower interest rate can potentially save you much more over the long term than lower upfront costs.
Start by checking your credit score and credit report with Experian to assess the health of your credit file, then focus on the areas that need some work to improve your credit. This may include paying down your credit card balances, paying off collection accounts, making all payments on time going forward and ensuring the information on your credit report is accurate.
Depending on your situation, this process can take time, but if you don't need to borrow immediately, the effort can pay off in the long run.