Applying for a home equity line of credit offers a flexible way to tap into the equity you have built up in your home. With a HELOC there are both up-front costs and the potential for ongoing fees or surprise expenses. The fees on HELOC loans vary from bank to bank, so some shopping around could save you a significant amount of money.
Equity Line Setup Costs
The bank will require an appraisal on your home to determine how much equity you have and the potential limit on your line of credit. You get to pay the appraisal costs, and you also will usually pay an application fee to the bank. This fee is the cost to have the bank check your credit before deciding whether to offer you a HELOC and what rate you will pay. When you sign the HELOC papers, there may be closing cost similar to the charges to get a first mortgage. According to the Federal Reserve Board guide on HELOCs, these cost may include title search fees, mortgage filing fees, insurance and taxes.
What's the Real Interest Rate?
After you have paid the up-front fees and have your HELOC, the costs do not stop there. Potentially the biggest expense with a home equity line will be the interest you pay on any outstanding loan balance. The rate you end up paying may be much higher than the initial rate quoted when you applied for the line. Banks typically promote HELOCs with relatively low "teaser" interest rates that are in effect only for a limited initial period of time on the line of credit. The important rate is the actual rate you start paying on a HELOC when the teaser rate period expires a few months after approval. The contract rate could be much higher than the teaser and subject to rate increases if market rates go up.
Account Maintenance Fees
Along with paying interest on any money you use out of your HELOC, you may be charged other fees to keep the line of credit active. Some banks charge an annual maintenance fee. The annual fee may be an option offered with a lower interest rate, so you need to decide which option would cost you less: the fee plus lower rate or no fee and a higher interest rate. Additional possible costs are an extra charge each time you draw from the line and an extra penalty if you do not draw out at least a minimum amount and keep a certain outstanding balance.
Closing Out Your Equity Line
The HELOC contract may require you to keep the line open for a minimum amount of time, such as three or five years. If you want to close out the HELOC earlier, you could be hit with a large cancellation fee. For example, the Bank of America website's page discussing home equity lines states that this fee could be in a range of $500 to $1,000.
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