How much do home equity loans and HELOC closing costs cost?

A home equity loan and one home equity line of credit (HELOC) are two options for an owner to operate their home equity to finance such major expenses as home improvement projects or to pay off credit card debt.

Financing a renovation project with a home equity loan or HELOC can be costly, however, due to a list of fees similar to those associated with taking out a mortgage. But these fees vary by lender, so it’s a good idea to shop around before signing anything.

Here’s what you need to know about closing costs and fees associated with home equity loans and HELOCs.

What are typical closing costs and fees for home equity loans and HELOCs?

Whether you are applying for a home equity loan or HELOCthere will be costs and fees that should be calculated in the total cost of the loan. Average closing costs can be slightly lower than a traditional mortgage; a good rule of thumb is to budget 2-5% of the total loan amount.

Here is a list of typical fees and expenses involved in closing a loan. Note that you may be able to negotiate the rates for some of them with your mortgage lender.

  • Assessment fees: These fees are paid to the mortgage lender to obtain an estimate of the value of the property and to ensure that the price is fair and reflects current market conditions. The average cost of these fees is between $300 and $450.
  • Assembly costs: This fee is required to start a new loan application process, the cost of which varies by lender. This can be a percentage of the loan, usually between 1% and 8%, depending on the quality of your credit score, or a flat fee.
  • Preparation of documents, lawyer and notary fees: The documents necessary for a loan must be examined by a notary and a lawyer. Additional fees could be paid to the county for registration fees and could cost up to $50.
  • Credit application fees: This fee is also paid to the lender to have your credit history and score checked. Fees generally range between $10 and $100.
  • Title fees: Lenders will check to see if there are any liens or tax claims on the property because your home is being used as collateral. Expect fees to cost between $100 and $450.
  • Insurance costs: These costs may not be upfront, and some of them may be paid monthly, but they generally include flood insurance if a policy has not already been purchased, as well as title and property insurance.
  • Taxes: Local laws or lenders may require the payment of taxes. In some areas, taxes can cost between 1% and 3% of the loan amount.
  • Points: One way to lower interest rates is to prepay a fee called “points. A point is usually equal to 1% of the loan amount. However, most HELOCs do not offer points.

What are the additional closing costs and fees for a HELOC?

Choosing a HELOC means possibly budgeting for at least four additional costs. Not all lenders charge these fees, so take the time to shop around for those with the lowest fees.

Here are the four most common types of additional fees:

  • Annual subscription: These fees are similar to those paid for a credit card and are charged each year that you have the loan, even if you do not withdraw money from the line of credit in that year. Some lenders charge annual fees between $50 and $75.
  • Transaction fees: Each time you withdraw from the HELOC, a fee similar to ATM fees is assessed. However, not all lenders charge this fee.
  • Inactivity fees: A “non-use” fee may be imposed by the lender if no transaction takes place for a certain period.
  • Early Termination Fee: Reimbursing the HELOC before its due date may incur an early cancellation fee.

What is a HELOC with no closing costs?

A few lenders offer HELOCs with no closing costs, but these HELOCs with no closing costs are rare and only available in certain states. One such lender is Associated Credit Union in Peachtree Corners, Georgia. The credit union will pay up to $400 in closing costs at closing. To qualify for this no-closing-cost feature, the HELOC must be for a primary residence for homeowners who have a credit score at least 680.

Homeowners can save money by not paying closing costs, but lenders often only pay a portion of the overhead. Homeowners should consider the interest rate given for the HELOC instead of just considering the credit given for closing costs. If the loan amount is low and the interest rate is higher, the owner will pay more money over the life of the loan.

How to lower your home loan closing costs

Buying a home equity loan can get you the best interest rate and closing costs. Fees and closing costs vary by lender, so finding the best rate should be part of your thinking along with interest rates and points.

Several other factors can affect closing costs. Homeowners can start by reducing their debt ratio by means such as pay off credit card debt when possible or to obtain a second income to increase their annual income.

Receiving rates from multiple lenders also gives you the flexibility to determine which ones are most open to negotiating closing costs. Negotiating with a lender may or may not work, but it doesn’t hurt to ask.

Lenders typically allow homeowners to borrow up to 85% of home equity. Some lenders will go as high as 90%, but also increase the interest rate. Borrow the amount needed to update your kitchen or freshen up your bathroom or even pay off high-interest debt, but only get a loan for the amount you need so you can afford the monthly payments. Getting a loan for more than you need can negatively impact your budget.

The bottom line

Borrowing against your home’s equity can be an ideal solution to pay for expensive renovation projects which, in turn, can add value to your home. You can calculate how much you can borrow by using a home equity loan calculator to factor in closing costs and overall loan expenses.

Before you start the application process, first get a list of all closing costs from a lender so you can compare them with other lenders. Tapping into your home’s equity can be an easy and potentially inexpensive way to receive cash, especially if you don’t have the cash on hand to pay for a large renovation project. Closing costs can add up quickly, so be sure to figure out how much they are and ask lenders if they’re willing to negotiate better terms for a loan.

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