What closing costs are included on a Home Equity Line of Credit (HELOC)?
Closing costs pay for all aspects of real estate transactions, including processing, taxes, and fees. The cost of closing on a Home Equity Line of Credit (or HELOC) varies between lenders and can include a range of fees and charges.
The takeaways:
Lenders usually charge closing fees on HELOCs to cover the costs associated with processing your loan
Closing costs are different from lender to lender but can include fees such as appraisal, documenting, application, legal, and more
Compare closing costs between lenders, as well as potential fees and penalties not associated with closing on the loan (transaction fees, annual fees, termination fees, etc.)
Some lenders offer no closing cost HELOCs or promotions, which can save money upfront
A Home Equity Line of Credit is a type of borrowing against the equity you have built up in your home. In contrast to a traditional home equity loan, a HELOC has a maximum credit limit that you can withdraw funds and repay in a manner similar to a credit card. However, because it is a secured loan, interest rates are considerably lower than on a credit card or personal loan.
HELOC closing costs
Closing costs for a HELOC are similar to those for a primary mortgage. HELOC closing costs typically include fees for appraisal, credit check, title search, flood certification, attorney, and recording. These fees can vary depending on the lender and the location of the property. Some lenders may also charge an annual fee for maintaining the HELOC account. It is essential for borrowers to carefully review the terms and fees associated with a HELOC before agreeing to it. Shopping around and comparing loan fees and costs - which can be upfront or annual - to determine which HELOC makes the most sense for you.
It's also worth noting that some lenders may offer to waive or reduce these fees as part of a promotional offer, so it's important to shop around and compare offers from different lenders.
What fees are included in HELOC closing costs?
Lenders charge fees for covering the upfront costs of your loan. Sometimes these are included in your monthly payments over the length of the loan, and other times they are added to your principal balance at the start of the loan.
It is important to factor in these fees when considering a HELOC as they can add up and increase the overall cost of borrowing against your home equity. Some of the fees you might see HELOC lenders charge include:
Origination fee
An origination fee is charged for starting your loan in their financial system and for maintaining service on your loan. The amount of the origination fee varies depending on the lender and the type of loan. It is usually a percentage of the loan amount, typically ranging from 1% to 5%. The origination fee is sometimes added to the loan balance, which means that the borrower will end up paying interest on the fee as well.
Appraisal fee
An appraisal fee is a charge that is paid for evaluating the value of a property. Traditionally this has been done by a professional appraisal, but some modern lenders such as Figure are turning to computer algorithms (or automated valuation models/ AVMs). This property valuation will be used to determine how much equity you have in your home and your maximum HELOC credit limit.
The appraisal fee is necessary to ensure that the property is accurately valued and that all parties involved in the transaction have a clear understanding of its worth. In-person appraisals cost about $200-500 and are usually paid at the time of closing. Automated valuation models are significantly lower cost, but may not take into account details of the home.
Application fee
A HELOC application fee is a fee often charged by lenders at the time of application or included in closing costs. This fee can vary depending on the lender but is typically around $100-$200. The application fee covers the cost of processing your application.
Credit report fee
This is a fee the lender pays to credit agencies to check your credit score to determine your creditworthiness. The amount of the fee can vary depending on the lender, but it is usually a flat fee ranging from $50 to $100. It is important to note that this fee is separate from other fees associated with a HELOC, such as appraisal fees and origination fees. It is also important to shop around to find a lender with reasonable fees and terms before applying for a HELOC.
Title search fee
Lenders will need to confirm that you are the rightful owner of the property before finalizing your loan. A title search fee is a charge that a lender may impose on a borrower when opening a HELOC. This fee is meant to cover the costs associated with conducting a title search to ensure that the property being used as collateral for the HELOC has a clear title. A title search fee can vary depending on the lender, location, and complexity of the title search.
Recording fee
A recording fee is paid to the county or local government for recording the new lien against your property. These fees are typically charged by the recorder's office and are based on the amount of the loan and the state in which the property is located. The purpose of recording a HELOC is to protect the lender's interest in the property and to ensure that the borrower is the rightful owner of the property.
Notary fee
A notary fee covers the cost of notarizing documents, and verifying and authenticating your HELOC documents. Notary fees vary depending on the state and the notary you choose to work with. Contemporary lenders such as Figure provide remote, online notaries (in states where it is allowed) to simplify the process and reduce costs.
Documenting fee
A document fee is charged for writing, underwriting, and reviewing the loan documents agreement. This covers all paperwork and legal documentation required when opening a HELOC and document preparation. While these fees can vary depending on the lender and the location, it's important to factor them into the overall cost of obtaining a HELOC.
Attorney fee
This is a fee to cover the cost of having an attorney review your loan agreement. These fees can vary depending on the attorney and the specific circumstances surrounding the HELOC.
No closing-cost HELOC
Some lenders offer no-closing cost HELOCs and home equity loan, and others will offer "no closing cost" promotions. These can be a viable option, but be aware of other charges. This can include an early repayment/prepayment penalty, termination fee, inactivity fee, transaction fees, or oversized annual fees.
In order to simplify the borrowing process, Figure rolls all fees and charges, including annual fees and closing costs, into one origination fee. This covers all costs related to closing and servicing the HELOC loan.
The bottom line:
The bottom line is that there are typically various closing costs associated with a HELOC, including application fees, credit check fees, title search fees, recording fees, notary fees, document fees, and attorney fees. These costs can vary considerably depending on the lender and geographical location. Shop around for a lender that offers reasonable terms and fees before applying for a HELOC to get the best terms for your needs. Additionally, some lenders offer "no-closing cost" HELOCs and home equity loans, but it is important to be aware of other fees that may apply.
