It is possible to get a HELOC that doesn’t charge any application or closing fees because HELOCs were primarily designed to work more like credit cards, except of course, that you would need to put up your home equity as collateral.
First, there are the application and closing costs, then there’s the interest on the amount you draw from the line, plus other expenses down the line. Here are the most common fees tied to a home equity line of credit:
- Application Fee. This is a standard fee that lenders charge, often just to pick out the serious buyers from those who are merely shopping around. It is also therefore not uncommon for banks or creditors to refund this fee upon closing of the loan.
- Appraisal Fee. It is important for lenders to appraise the value of a property to determine the loan amount a potential borrower is entitled to. However, many lenders are willing to absorb the cost of having your home appraised, or utilize the automated valuation model (AVM) which is a computerized estimate of a property’s value.
- Closing Costs. Closing fees include title, escrow, notary, recording and payoff fees. As with other charges levied on a borrower, the bank can choose to waive these costs altogether, or charge a fixed, lower amount.
- Annual Maintenance Fee. Just like a regular credit card, maintenance fees for a HELOC are charged every year, regardless of whether the line has been used or not. The usual cost is about $50 to $100 per annum.
- Account Maintenance or Check Writing Fees. For homeowners who are assigned a checking account to which loan proceeds are credited when withdrawals are made, it’s important to be aware of any fees that come with the account or with check issuances. Some banks do charge these but there are also those that don’t.
- Non-Usage Charges. While HELOCs can be a practical “reserve” cash source used only when an emergency or dire need arises, this could also cost even if unused. Some lenders charge borrowers who don’t utilize their available HELOC.
- Penalty for Early Payment. You never get charged if you pay your credit card in full, do you? The same should be true if you choose to fully settle your HELOC balance even before the repayment period is up.
- Interest. The interest on a HELOC is by far, the biggest expense associated with the home equity credit loan. Still, while paying interest is necessary, there are certain terms that you can negotiate with your financial institution that can save you more than a few dollars over the duration of your HELOC:
- Lower APR. The effective interest rate should not be that far off from the prime rate on which the HELOC interests are based on. Choose a bank that offers lower add-on margins. It’s possible for those who have excellent credit to be given APRs equal to prime rates, or with 0% margin.
- Less frequent interest repricing. You can better manage your payments if the interest rate changes are less frequent. Look for a creditor that is able to offer quarterly, not monthly, rate changes.
- Lifetime cap on interest rates. Because HELOC rates are usually variable unlike the fixed rate of a conventional home equity loan, there is always the risk that your rate could suddenly jack up to such high levels. Shop for a HELOC that clearly states a worse case scenario. That way, you would always have an idea of the maximum rate you would need to pay.
- Lower Introductory Rate. Also called “teaser” rates, most banks offer an introductory rate that’s significantly lower than the usual APR. While going for the lowest possible rate would be the most obvious option, consider also the interest rate that will be applicable once the introductory period is up.
As you can see, the list of possible costs that could come with a HELOC is lengthy. But you don’t have to be burdened with all these fees. What you need is a good idea of which costs are necessary, and which can be avoided. Do your research in advance and carefully evaluate all the risks and the costs involved before making your decision.