Home Equity Loan Vs. HELOC Closing Costs And Fees
Another option for accessing your equity is a home equity line of credit (HELOC). Before we get into the way the costs and fees for this work, let’s briefly discuss how a HELOC compares to a home equity loan.
You can think of a HELOC as having two separate phases: a draw period and the repayment period. During the draw period, it works much like a credit card. You can draw out up to the amount you are approved for and you’re only responsible for the interest payments. You can also pay money back to access it later for another project.
After a number of years at the beginning of the loan, the repayment period starts. At this time, the balance freezes and you can no longer take money out, and you make payments of both principal and interest over the remainder of the term.
With a HELOC, at the beginning of the term, you only have to make interest payments. With a home equity loan, you pay principal and interest from the beginning. One of the advantages to a home equity loan is the availability of fixed rates. HELOCs tend to have variable rates like credit cards, so your monthly payment isn’t necessarily consistent, especially if the Federal Reserve is moving interest rates.
Like credit cards, HELOCs tend to have low or no closing costs. However, there are other fees to worry about:
- Annual fee: As with certain rewards-based credit cards, you may be charged a flat amount for an annual fee.
- Transaction fee: With a credit card, the retailer usually pays the transaction fee. With a HELOC, you may pay a fee when you take money out.
- Inactivity fee: Your contract may stipulate that a fee can be charged if you don’t draw on your HELOC after a period.
- Prepayment penalty fee: you may have to pay a prepayment penalty fee if you pay off your HELOC before a defined number of years has passed under the terms of your contract.