Home equity loans and lines of credit can be useful for major home renovations, major life expenses and debt consolidation, thanks to the flexibility and low rates they offer. However, due to the increased expense associated with originating home equity products and their relatively low rates, these loans usually entail closing costs. The average closing costs on home equity loans and HELOCs can sum up to 2% to 5% of your overall loan cost.
While not as expensive as primary mortgages, closing costs on a home equity loan can still make up a significant portion of your costs. We've included an itemized breakdown of these closing costs and how much you should expect to pay for each.
- Do Home Equity Loans and HELOCs Have Closing Costs?
- How Much Are Closing Costs for Home Equity Loans and HELOCs?
- How Do Closing Costs on Home Equity Loans and HELOCs Compare to Primary Mortgages?
- What Closing Costs are Unique to Home Equity Loans and HELOCs?
Do Home Equity Loans and HELOCs Have Closing Costs?
As with other mortgage loans, there are closing costs associated with both home equity loans and home equity lines of credit (HELOCs). Loosely defined, closing costs can refer to any fee incurred when originating, underwriting, closing and recording a loan. The term "closing cost" generally does not include any prepaid items, such as funds used to establish an escrow account for property taxes and homeowners insurance premiums. These are required to be paid by the homeowner outside of the mortgage closing. However, certain lenders also advertise no-fee HELOCs and home equity loans which require no cash due at closing.
One of the benefits of home equity products is that many lenders offer to reduce the closing costs on these loans with lender credits, or may elect to waive them altogether in some instances. Oftentimes, lenders may have already baked their costs into your rate quote, despite advertising them as a no-cost home equity product. In any case, these "no-cost" loans don't require any cash at closing, unlike primary mortgage loans.
Keep in mind that penalties may be incurred on home equity loans, if you pay off the loan during the initial restriction period. These prepayment restriction periods usually last between a few months to a couple of years and are put in place to ensure a minimum return on investment for the lender. Not all home equity loans feature prepayment penalties, especially if you've already paid upfront lender fees at closing, so it's a good idea to check with your loan provider to understand the rules for prepayment.
HELOCs feature a similar setup, and many of them will charge early account closure fees or penalties if you decide to close the credit line early. However, these restrictions are usually temporary, and the restriction period on account closures can vary from a few months to three years of opening the line. While these fees can be avoided, it's another thing to keep in mind if you're thinking about opening a HELOC but have plans to sell your home in the near term.
How Much Are Closing Costs for Home Equity Loans and HELOCs?
The average closing costs on a home equity loan or HELOC will usually amount to 2% to 5% of the total loan amount or line of credit, accounting for all lender fees and third-party services. These may be covered by the lender under "no-fee" HELOCs and home equity loans, however keep in mind that lenders may have already baked these fees into the interest cost of your loan. Remember to compare APRs, and not interest rates alone, when reviewing offers from multiple lenders.
The most common closing costs on home equity loans and HELOCs include:
- Application fees are viewed as an initial commitment to doing business. They go toward offsetting advertising and marketing costs for the lender.
- Processing and underwriting fees cover the lender's administrative costs of creating the loan and seeing it through to closing.
- Appraisal fees cover the cost of the appraiser's inspection. This is done to establish the fair market value of the property securing the loan, and it's also used to calculate your loan-to-value ratio.
- Title and escrow fees cover the title search, including title insurance and the administrative costs of signing, notarizing, delivering and recording loan documents. Certain states may also have attorney's fees if their services are required.
- County recording fees are assessed by the county to update public records as they pertain to property ownership.
|Closing Cost||Average Cost|
|Credit report fee||$17-$75*|
|Processing and underwriting fees||$200-$500|
|Full appraisal fee||$475-$1,000+|
|Appraisal review, desk review or drive-by fee||$150-$350|
|Tax service fee||$85-$100|
|Flood certification fee||$10-$20|
|Title search and title insurance policy fees||$1,000-$1,500|
The total amount of your settlement and recording fees will depend on whether any attorney fees are charged and the number of pages being recorded. Whether or not you're required to have an attorney present at closing will depend on your state of residence.
How Do Closing Costs on Home Equity Loans and HELOCs Compare to Primary Mortgages?
Closing costs on home equity loans and HELOCs are usually lower than closing costs for primary mortgages. This is due, in part, to the relatively small loan sizes on home equity loans and HELOCs when compared to standard mortgages. According to the Federal Housing Finance Agency, the average mortgage loan amount in the U.S. is $312,900 (as of April 2018), while home equity loan products are capped at a maximum loan amount of $250,000 for most lenders.
Additionally, home equity loans and HELOCs don't require down payments, as they’re based off the existing equity you hold in your home. As a result, they have more lenient underwriting requirements since less money is at stake. For example, underwriters may only require a desk appraisal, or drive-by appraisal instead of a full appraisal, as is required for a primary mortgage.
Here's a side-by-side comparison of common closing costs and how they're featured across different loan products:
|Closing costs||Home equity loan||HELOC||Purchase (primary loan)||Refinance (primary loan)|
|Processing and underwriting||X||X||X||X|
There are a few notable exceptions to the chart, as cited below:
- If an appraisal has been completed within six months, that report may be accepted and reviewed by the home equity lender, possibly requiring only a review fee rather than the full appraisal fee.
- Flood certifications are required by most home equity lenders.
- Title searches and policies are required by most, but not all lenders. You may be able to save on costs by using your existing title company rather than relying on the lender's selection, although not all lenders will allow you to do this.
- Attorneys are required to be present for mortgage transactions in certain states.
What Closing Costs are Unique to Home Equity Loans and HELOCs?
While home equity loans don't feature anything drastically different from a standard mortgage, there are several fees specific to HELOCs that aren't actually considered closing costs and aren't included for primary mortgages. They are worth noting when considering your borrowing options and have been cited below. The actual fees will vary among lenders, so remember to read your loan documents carefully.
- Annual membership/account maintenance fees are charged by lenders to keep your home equity line of credit open. These can vary from as little as a $5 membership fee to as much as a $250 annual account maintenance fee.
- Transaction fees may be charged for withdrawals from your HELOC, although these vary by lender. They can be fixed or based on a set percentage of your withdrawal.
- Early payoff or early termination fees can be charged if you close the account prior to a specified date. Certain types of HELOCs are structured with step-wise prepayment penalties of 5% at three years, 4% at four years, 3% at five years and no penalty after that. Other HELOCs use a single penalty percentage over a set number of years instead.
- Nonuse or inactivity fees may be charged if the line isn't being utilized. These can vary from small account maintenance fees of $5 to monthly or annual service fees of $50 or more.
- Minimum balance fees may be charged if you're required to maintain a certain loan amount at any given time. These fees are typically set at the beginning of the loan and range from $15 to $100 on larger lines of credit.