Home Equity Loan Vs. HELOC Closing Costs and Fees
Another option for accessing your capital is a home equity line of credit (HELOC). Before discussing how the costs and fees for this job, let’s briefly discuss how a HELOC compares to a home equity loan.
You can think of a HELOC as having two distinct phases: a drawdown period and the redemption period. During the draw period, it works much like a credit card. You can withdraw up to the approved amount and you are only responsible for interest payments. You can also refund money to access it later for another project.
After a certain number of years at the start of the loan, the repayment period begins. At that point, the balance freezes and you can’t withdraw any more money, and you make principal and interest payments over the remainder of the term.
With a HELOC, at the start of the term, you only have to make interest payments. With a home equity loan, you pay principal and interest upfront. One of the advantages of 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 changes interest rates.
Like credit cards, HELOCs tend to have low or no closing costs. However, there are other costs to worry about:
- Annual subscription : As with some rewards-based credit cards, you may be charged a flat fee for an annual fee.
- Transaction fees: With a credit card, the merchant usually pays the transaction fee. With a HELOC, you can pay fees when you withdraw money.
- Inactivity fees: Your contract may state that a fee may be charged if you do not pull your HELOC after a period.
- Prepayment Penalty Fee: you may need to pay a prepayment penalty fee if you pay off your HELOC before a set number of years have passed under the terms of your contract.