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Rising home values over the last several years have created a windfall of equity for millions of American homeowners, making home equity lines of credit (HELOCs) an increasingly attractive option for financing everything from home renovations to debt consolidation. With the average homeowner now sitting on over $300,000 in tappable equity, and with average HELOC rates lower than many borrowing alternatives, tapping into this resource seems like an obvious move for those needing to borrow money.
However, what appears straightforward on the surface often becomes complicated once you dig into the fine print. While HELOCs are marketed as flexible, low-cost borrowing options, and while they certainly can be, the reality is that there are a number of related fees that can significantly increase the total cost of this type of borrowing. These charges can range from predictable upfront costs to surprise fees that catch borrowers off guard years into their loan.
The problem is that many borrowers focus solely on the advertised HELOC rate, overlooking the potential fees that can add to their borrowing costs over time. Those fees can turn what was once an affordable borrowing option into an expensive debt, so it’s important to know what to watch for before you sign on the dotted line.
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6 HELOC fees that could increase the cost of borrowing
If you’re planning to open a HELOC soon, make sure to keep an eye out for the following:
Application and processing fees
Most lenders charge an application fee to process your HELOC request, which typically amounts to a few hundred dollars. This fee covers the cost of reviewing your application, pulling credit reports and the initial underwriting work. Some lenders waive this fee as a promotional offer, particularly for existing customers or those with strong credit profiles.
To minimize this cost, shop around with multiple lenders and ask specifically about HELOC application fee waivers. Credit unions and community banks often have more flexibility in waiving fees for members or local customers. Online lenders may also offer competitive fee structures to attract borrowers away from traditional banks.
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Appraisal and property valuation costs
Before approving your HELOC, lenders need to determine your home’s current market value. Professional appraisals typically cost between $300 and $400, though it depends on your location and property size. However, some lenders may accept automated valuation models (AVMs) or broker price opinions (BPOs) instead, which can reduce this cost.
You can potentially avoid appraisal fees by working with lenders who offer appraisal waivers for borrowers with excellent credit and lower loan-to-value ratios. Some banks also provide free appraisals as part of promotional packages for new HELOC customers, which is part of why shopping around is so important.
Annual maintenance and inactivity fees
Many lenders charge annual fees simply for keeping your HELOC account open, regardless of whether you use it. But what’s perhaps even more frustrating are the inactivity fees, which some lenders impose if you don’t draw funds from your line of credit within a specified period (typically 12 months).
These ongoing fees can make a HELOC expensive even when you’re not actively borrowing. So, it can benefit you to look for lenders that don’t charge annual fees or negotiate fee waivers as part of your loan terms. Some lenders waive these fees if you maintain other accounts with them or meet minimum usage requirements.
Closing costs and title work
Unlike some other forms of borrowing, HELOCs generally come with closing costs similar to those for a mortgage. These can include title searches, title insurance, recording fees and attorney fees, potentially adding a few thousand dollars to your upfront costs. The exact amount varies significantly by state and local requirements. Some lenders offer “no closing cost” HELOCs, but it’s important to read the fine print carefully. These lenders may build the costs into a higher interest rate or require you to pay closing costs if you close the line of credit within a certain timeframe.
Early termination penalties
If you pay off and close your HELOC within the first few years, many lenders will impose early termination fees. This penalty exists because lenders need time to recoup their upfront costs in setting up your credit line. To avoid this fee, you should plan to keep your HELOC open for at least the minimum required period, even if you pay down the balance early. Some borrowers keep a small balance or make occasional small draws to avoid triggering inactivity fees while staying past the early termination penalty period.
Transaction and access fees
Some lenders charge fees for each time you access your funds, whether through checks, online transfers or ATM withdrawals. These transaction fees can add up quickly if you frequently access your line of credit in small amounts. To avoid this extra cost, be sure to choose lenders that offer free transactions or have minimal fees for your preferred access method. Many online lenders and credit unions offer fee-free HELOC transactions as a competitive advantage over traditional banks, so be sure to weigh what those lenders offer as part of your search.
The bottom line
While HELOCs can be valuable financial tools for accessing your home’s equity, the various fees associated with these products can significantly impact their cost-effectiveness. With careful planning, though, you can minimize these fees and make the most of your home’s equity.
So, before committing to any HELOC, be sure to calculate the total cost of borrowing, including all fees, not just the interest rate. You should also take the time to compare offers from multiple lenders, negotiate fee waivers where possible and consider whether the convenience and flexibility of a HELOC justify the additional costs.
