Where To Find Zero-Closing-Cost HELOC Lenders
No, HELOC closing costs are not 2-5% of the loan amount, despite what you’ve seen in your latest Google search.
Closing costs for a line of credit (that you pay) are often $0 if you find the right lender that pays all or most of the costs.
In fact, that’s one of the major advantages of a HELOC. You avoid the big closing cost bill of a full refinance.
Still, you might run into HELOC lenders that charge closing costs. A lender wanting you to pay thousands in fees is probably not one you should choose.
Where To Find Low-Closing-Cost HELOC Providers
Local credit unions are a good place to start your search. Some credit unions are not-for-profit, meaning lower fees for banking services.
You can also check large, nationwide banks. They may offer low- or no-closing-cost HELOCs to attract and retain customers and cross-sell other financial products.
While you can check your favorite mortgage company or broker, they typically don’t make much money from HELOCs. They may attempt to charge closing costs or convince you to do a cash-out refinance instead.
The key is to shop. Get two or three low- and no-cost lenders on your list.
Then, it’s time to dig deeper to discover hidden costs.
Appraisal: A Common HELOC Fee
When you find a no-closing-cost HELOC lender, they still might charge one fee: the appraisal.
Most lenders will attempt an “AVM” or automated valuation model. This is a computerized appraisal for which there’s often no fee. These reports tend to be conservative because no human is looking at the home.
But you may need a full appraisal costing $500 to $700 or more in these situations: you’re trying to borrow 100% of your home’s equity, you have a unique home, it's in a rural area, or there's not enough data for an AVM.
But it’s worth talking to a few lenders to see if one can use a free AVM.
Other Potential Costs
Some lenders offer no-cost HELOCs but charge fees later.
Annual fee: HELOCs often come with an annual fee similar to a credit card. Even if you carry a zero balance, you may pay $100 or more each year.
Early closure fee: Some people use a HELOC as a bridge loan or for another short-term purpose. But if you close your HELOC within a few years, the lender may charge an early closure fee to recoup some of its costs.
Recording charges: The county in which the property lies charges a fee to record the new lien on its books. The lender may pay this fee upfront – typically around $100 – but require that you pay it when you terminate the HELOC.
County and state taxes: Some states and counties charge a refinance tax, “intangible” tax, or document stamp tax even if you don’t draw money from the HELOC at closing. The borrower usually pays for these.
Free Isn’t Always a Good Deal. Check The Interest Rate
No closing costs are a good thing – except when you pay a high interest rate in lieu of fees.
Lenders may charge a high rate to recoup closing costs. On a standard primary mortgage, this is easier to see. But HELOC rates are different.
HELOC interest rates are variable and typically based on the prime rate. Your rate is quoted as “prime minus one-half” or “prime plus one.” The variance from prime is based on your credit score, loan-to-value, and other factors.
So when choosing your HELOC, try to find one close to prime or below.
If you have to pay for an appraisal and a few other fees for “prime minus one-half,” it’s probably a better deal than paying “prime plus two” for no closing costs.
$100k HELOC with Closing Cost | $100k No-Closing-Cost HELOC | |
Closing Costs | $1,000 | $0 |
Example HELOC Spread | Prime minus 0.5% | Prime plus 2% |
Example Prime Rate | 8% | 8% |
Example HELOC Rate | 7.5% | 10% |
Interest-Only Payment | $625 | $833 |
Months to Recoup Costs | 5 | n/a |
In the above example, it only took five months to recoup the $1,000 in closing costs, thanks to the lower rate.
Do a side-by-side comparison of your options using the above template. It might pencil out to pay closing costs instead of a taking a higher rate.
Prime rate is roughly the federal funds rate plus 3%. So if the Federal Reserve is in a hiking cycle, your rate will rise. If they are cutting rates, your HELOC rate will drop.
It helps to know the Fed’s trajectory before taking out a HELOC.
Getting Your Best HELOC
Like many financial products, comparing HELOCs is more difficult than shopping for consumer items. There’s more fine print and potential costs – and the stakes are high.
Start your HELOC with a reputable lender to use this financial tool effectively.
Tim Lucas is the editor and Lead Analyst for MortgageResearch.com. Tim spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. He has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, and more.
