Costs to Obtain a Home Equity Line

What is a Home Equity Line of Credit?

From the lender's standpoint, there isn't much difference between a purchase money mortgage, home equity loan, or home equity line.

The standard services will be required to protect the lender's interest. Potential services and their associated fees include:

• Property appraisal.
• Loan application. The fee may not be refundable if you are turned down for credit.
• Loan origination fees (points). One point equals 1 percent of the credit limit.
• Attorney, title and escrow, mortgage document preparation, recording documents, property and title insurance.
• Annual membership or maintenance fees.
• Transaction fee for drawing on the credit line.

Establishing a home equity line (plan) can be expensive. If you incur substantial fees to set up the plan, and draw only a small amount against it, the cost of borrowing can be unreasonable. If you plan to use your credit line frequently, the costs of obtaining the equity line will be spread over larger and larger amounts, effectively reducing the cost of the plan.

Because the lender's risk is lower for secured loans compared to unsecured loans, the interest rate on your equity line should be low compared to other, unsecured loans.

Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit. (Be careful--the APR is based on the assumption that you're borrowing the maximum amount.)

The interest you save could offset the initial costs of obtaining the line. Shop around before signing loan documents. Some lenders may offer zero-point/fee equity lines.

However, in today's market, more and more lenders are "footing" the closing cost in lieu of prepayment penalties. This can be advantageous if you plan to keep the line for 3 or more years. Shop around to see who is offering the best rates and the best closing cost.

Keep in mind the lenders are only requiring that you pay the interest on a HELOC, so they are betting that you will only pay interest and pay the principal in full at a later date.