A HELOC offers a flexible way to access your home equity, but it isn’t free. Similar to a traditional mortgage, you’ll pay closing costs—typically between 2% and 5% of the loan amount—depending on the lender and the amount you borrow. So, the closing costs on a $50,000 HELOC would likely be between $1,000 and $2,500.
Here’s a closer look at HELOC closing costs, how they’re determined and ways to minimize them to keep more hard-earned money in your pocket.
What is a HELOC, and How Do HELOCs Work?
Also known as a home equity line of credit, a HELOC is a revolving line of credit that works like a credit card. You can borrow from it, make payments and borrow again up to the credit limit during the draw period. In most instances, it’s between five and 10 years and requires interest-only payments.
Once the draw period ends, the balance becomes payable over a set period of up to 20 years. You can expect higher payments since the monthly amount you pay will cover both principal and interest. The interest rate is also variable, so your monthly payment amounts and interest costs will fluctuate over the repayment period.
The credit limit you receive is based on your home equity or the amount you own outright, among other things. Most lenders let you access up to 85% of your equity. To illustrate, if you owe $250,000 on your home and it’s valued at $425,000, you may be eligible for a HELOC of up to $111,250 ($425,000 * .85 – $250,000).
Your home is used as collateral to secure the HELOC since it acts as a second mortgage. So, falling behind on loan payments could prompt the lender to foreclose on your home.
Breakdown of HELOC Closing Costs
Below is a breakdown of closing costs you’ll incur when taking out a HELOC.
Application Fees
You’ll typically pay an application fee to cover the costs of the initial checks and underwriting of the loan. If you plan to apply for a HELOC with your spouse, both parties may incur this fee. It typically costs $15 to $75 per applicant.
Credit Report Costs
The lender will also retrieve a copy of your credit reports from the three major credit bureaus – Experian, TransUnion and Equifax – to assess your creditworthiness. Expect to pay between $35 and $100 in credit report costs.
Appraisal Fees
A professional home appraisal is required to determine your home’s current market value. Lenders use this figure to compute the amount of equity you have in your home to set a HELOC limit. Most homeowners pay between $350 and $800 in appraisal fees.
Title Search and Insurance
Before the HELOC closes, a title search confirms that there are no legal issues with or claims to the property. It usually costs around 0.5% of the loan amount. A title search is also required to shield both you and the lender against claims against the property should they arise in the future.
Attorney Fees
Attorney fees cover the legal work needed to finalize and close your HELOC. The costs vary by location but typically range from $200 to a little over $1,000.
Recording Fees
These fees cover the costs of recording the new HELOC with the courts so the lien is properly documented. Recording fees can range from $25 to $50, depending on where you live.
Documentation Fees
You’ll also pay a fee to cover the cost of preparing, handling and distributing all the paperwork associated with the HELOC. Most borrowers pay between $200 and $500 in documentation fees.
Other Hidden Costs and Fees
Closing costs aren’t the only expenses associated with HELOCs. Here are some additional hidden costs and fees to be aware of.
Annual Maintenance Fees
Many lenders charge annual maintenance fees on HELOCs, which could be anywhere from $50 to $75 annually. It’s a small price to pay to access the flexibility a HELOC provides, but the costs could add up over time if you have a lengthy draw period.
Transaction Fees
You could also be charged a fee for each HELOC-related transaction. Some lenders charge between $5 and $25 for each transaction, whether it’s a withdrawal or payment.
Early Closure Penalties
HELOCs have draw periods of up to 10 years, and lenders expect you to keep the account open during this time. However, if you close it early, you could be subject to a penalty.
Inactivity Fees
Dormant HELOCs can also cost you, especially if they sit for an extended period. Lenders who assess this fee charge between $50 and $100 annually if transactions aren’t made.
Factors Influencing HELOC Closing Costs
Are you wondering how closing costs on HELOCs are calculated? Below are the specific factors that influence this figure.
Loan Amount
The bigger the HELOC, the more you’ll pay in closing costs. As previously mentioned, homeowners pay an average of 2% to 5% of the loan amount.
Borrower Creditworthiness
A higher credit score can help you save on closing costs. But if your credit score is on the lower end, you pose more of a risk to the lender, and they may assess higher fees.
Property Location
Property appraisal fees and title search fees vary by state. Depending on the property’s location, you could pay far more or less to cover these costs.
Lender Policies
Different lenders have different policies that can affect your closing costs.
Some lenders might offer lower fees as part of a promotion, while others might charge more to process your loan during the underwriting phase.
Tax Implications of HELOC Closing Costs
It’s also worth understanding how HELOC closing costs could influence taxes.
Tax Deductibility
You could get a break at tax time if you use the funds pulled from a HELOC to cover certain home-related expenses. More specifically, if you cover expenses used to buy, build or substantially improve the property that secures your HELOC, the interest you pay on those funds could be tax-deductible.
So, when you file your federal tax return, you could benefit from a reduced taxable income and keep more of your hard-earned money in your pocket. Keep in mind that you must keep detailed records of how you use the HELOC funds so your tax preparer can determine if you qualify for the tax deduction.
That said, HELOC closing costs alone are not deductible. Consult with a reputable tax professional to learn more about HELOCs, tax deductions and which expenditures qualify.
Recent Tax Law Changes
Tax laws changed in 2017 and impacted how much you can deduct on HELOCs. Again, the IRS specifies that the interest paid on HELOCs is only deductible at tax time if they are used for home improvement purposes or to purchase, construct or significantly improve your home.
Under the previous rules, up to $100,000 in interest was deductible on HELOCs not exceeding $1 million (or $500 million for married taxpayers filing separately). This benefit applied no matter how the loan proceeds were used.
The HELOC limit is now $750,000 (or $375,000) and only applies to the previously stated expenses. But you can also deduct up to this amount in interest.
If your HELOC was taken out before the change, you might still be covered under the old rules.
How to Minimize HELOC Closing Costs
If you’re concerned about HELOC closing costs, consider these strategies
Comparison Shopping
Don’t settle for the first lender you find. Shop around and compare fees to find the most affordable option. Pay attention to application fees, appraisal costs, underwriting fees and title insurance fees.
Negotiation Tactics
Some closing costs are negotiable. So, don’t be afraid to ask your lender for a better deal. They may also be willing to offer fee concessions, promotions, discounts or waivers to earn your business.
How Do HELOC Closing Costs Compare to Other Loan Types?
You could pay up to 6% in closing costs if you take out a home equity loan. However, the cap for traditional mortgages is typically 5%.
Conclusion: Is Getting a HELOC Worth It?
Although you’ll pay closing costs when securing a HELOC, it could be a smart financial move. You get the flexibility of having access to a pool of cash to withdraw from as needed, and you only pay interest on the amount you borrow.
You’ll also make interest-only payments on most HELOCs during the draw period, which makes payments more affordable on the front end.
Since the amount you can access is based on your home equity, your borrowing power may be substantially higher than it would be with a traditional loan.
Keep in mind that the interest rate is variable, so the monthly payments and borrowing costs will fluctuate over time. Still, if you have an ongoing expense or want access to a pool of cash, a HELOC could be worth it.
Frequently Asked Questions (FAQs) About HELOC Closing Costs
Yes, some lenders let you roll closing costs into the principal balance.
