What Are the Closing Costs Associated with a HELOC?

When considering a Home Equity Line of Credit (HELOC), you should be prepared for associated closing costs and fees. This guide will provide a transparent breakdown of all the potential costs you might encounter, from a lender's fees to home appraisal expenses and annual charges.

By the end of this article, you will have a clear understanding of the total costs of a HELOC, so you can budget accurately and make a confident financial decision. If you have other questions, check out our HELOC FAQs: Costs, Benefits, and Uses.

What Are the Fees Associated with a HELOC?

A HELOC is a powerful financial tool, but it's important to understand the full picture of its costs. Beyond the interest you pay on the amount you borrow, a HELOC comes with a variety of fees, which can be broken down into three main categories:

Upfront Fees: This is a single fee that is paid to a third party to begin the process. The only upfront fee is typically a home appraisal fee.

Closing Costs: These are fees you pay when your HELOC transaction closes. They include the lender fee, broker fee, and legal fees for registering the loan against your property.

Ongoing Fees: These are fees charged on a regular basis to maintain the account. The most common is an annual fee, which you pay each year regardless of whether you are using the line of credit.

Situational Fees: These fees are only charged in specific circumstances, such as a wire fee if you need funds transferred or an inactivity fee if you do not use your line of credit for an extended period.

How Much Is a Home Appraisal for a HELOC?

A home appraisal is a non-negotiable step in the HELOC application process. It is the lender's way of verifying the current market value of your property, which is the foundation of your loan amount. Your available equity is determined by your home's appraised value, so the appraisal is a cornerstone of the entire process.

The cost of a home appraisal for a HELOC in Ontario typically ranges from $400 to $500. This is an out-of-pocket expense that is paid by the borrower. The appraisal is performed by a licensed third-party professional, ensuring an objective and accurate valuation. While some lenders may offer to cover this cost, you should be wary of any hidden fees or a higher interest rate that might be used to recoup the expense.

What Is a Lender's Fee for a HELOC?

A lender's fee, also known as an origination fee, administration fee, or a processing fee, is charged by the lender to cover the costs of underwriting and processing your loan application. This fee compensates the lender for their time and resources in assessing your financial profile and setting up your line of credit.

Lender fees are highly variable and are typically structured as a percentage of the total credit limit.

Major Banks: While they may not have a traditional lender fee, they may have a registration fee or other minor costs associated.

B Lenders: For B lenders, the lender's fee is typically 2% of the HELOC limit.

Private Lenders: Private lenders generally have higher fees, ranging from 2% to 4%, depending on the complexity of your file and the risk they perceive. For example, a loan with a lower LTV and a stronger financial profile would be on the lower end of that range.

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Do HELOCs Have an Annual Fee?

Yes, some HELOCs come with an annual fee, which is a cost for simply having the line of credit available to you. This fee is charged once a year, regardless of whether you are actively using the line of credit.

Most Lenders: Most major banks and B lenders do not charge an annual fee.

Private Lenders: It is common for private HELOCs to have a renewal fee after a two-year term. This fee is sometimes similar to a lender's fee and is designed to cover the costs of renewing the loan and re-evaluating your file.

It's important to factor this into your total cost of borrowing, especially if you plan to keep the line of credit open for an extended period.

Are HELOC Closing Costs Negotiable?

This is a great question, and the answer is that some closing costs are negotiable, but it depends on the specific fee and the lender.

Generally, closing costs are divided into two categories, and a mortgage broker is your best resource for negotiating on your behalf.

Lender-Specific Fees: These are fees charged directly by the lender, such as the origination or administration fee. Because these are set by the lender, there is often some room for negotiation, particularly if you have a strong financial profile or if you are working with a mortgage broker.

Third-Party Fees (Generally Not Negotiable): These are fees paid to external parties and are typically not negotiable. This includes costs such as the home appraisal fee, legal fees for the loan registration, and title search fees. Because these professionals—such as appraisers and lawyers—are independent, their fees are non-negotiable.

While it is always worth asking about negotiation, the best way to ensure you get the lowest overall costs is to work with a mortgage broker who can help you compare all the options and find a HELOC with the most favorable terms for your unique situation.

Are HELOC Closing Costs Tax Deductible?

This is a very specific and important question, as it can have a significant impact on the total cost of your HELOC. The short answer is: it depends on how you use the funds.

In Canada, interest on borrowed money is generally tax-deductible only if the borrowed funds are used to earn income. This rule applies to HELOCs.

Deductible Use (Income-Generating): If you use the funds from your HELOC to invest in income-producing assets, such as stocks that pay dividends, a rental property, or a business, the interest you pay on the loan can be tax-deductible.

Non-Deductible Use (Personal): If you use the funds for personal expenses, such as paying off high-interest credit card debt, home renovations, a vacation, or car repairs, the interest is not tax-deductible.

If you plan to use a HELOC for both personal and investment purposes, it is highly recommended to have a clear paper trail and separate accounts to track the use of the funds. This will help you and your accountant properly track which interest expenses are eligible for a tax deduction. It is always best to consult a tax professional for advice specific to your situation.

What Is the Average APR for a HELOC?

When comparing HELOC offers, you will encounter the Annual Percentage Rate (APR). While the interest rate is the cost of borrowing, the APR is a broader measure of the total cost of the loan over a year, and it includes the interest rate plus most upfront fees.

The average APR for a HELOC can vary significantly in Ontario depending on a number of factors, including the lender, your financial profile, and the loan's position on your property.

Lender Type: The APR will vary greatly between a major bank, a B lender, and a private lender. A major bank will offer the lowest APR, while a private lender will have the highest to reflect the increased risk.

HELOC Position: The APR is also heavily influenced by the position of your HELOC on your property's title. If the HELOC is your only mortgage, it is in a "first position" and will have a lower APR. If you have an existing first mortgage, the HELOC will be in a "second position" and will have a higher APR because the lender is taking on more risk. A HELOC in a second position is more common but comes at a higher cost.

Because APR includes fees, it is the best single metric for comparing different loan offers. A loan with a lower interest rate may look more attractive upfront, but if its closing costs are high, its APR may be higher than a loan with a slightly higher interest rate but lower fees.

By working with a mortgage broker, you can get a clear breakdown of the interest rate, fees, and APR for various HELOC options, ensuring you get the most transparent and favorable terms.

Closing Costs Associated with a HELOC

Understanding all the costs associated with a HELOC is a critical step in making a smart financial decision. While closing costs and fees are a reality of the process, they shouldn't be a source of confusion. By being aware of potential expenses like home appraisal fees, lender fees, and annual charges, you can budget accurately and choose the right product for your needs.

A mortgage broker specializing in home equity products is your best resource for navigating these costs. We can provide you with a transparent breakdown of all the fees and APR for various lenders, ensuring you get a HELOC with the most competitive terms possible.

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