What sets the price of a home equity line

Two homeowners can borrow against equity in similar homes and still end up with different prices. The gap comes from a short list of pricing factors that every lender uses in some mix. This guide names each factor, explains who controls it and shows where to look for it in a disclosure.

Key takeaways

The price of a home equity line comes from four parts: an index, a margin, fees and closing costs.
The index belongs to the market, while the margin belongs to the lender.
Your equity, your debt and your credit history can all move the margin a lender offers.
Fees and closing costs sit outside the rate, so they need their own line on any comparison.

Four parts, two owners

A home equity line of credit, often called a HELOC, is priced by four parts. Two of them follow the market. Two are set by the lender and the paperwork.

The index is a published benchmark that rises and falls with general lending conditions.
The margin is a fixed number of percentage points added to that benchmark.
Fees are charges for opening, keeping or closing the line.
Closing costs pay for the third-party work needed to place a lien on your home.

Keeping these apart makes a disclosure easier to read. A single headline number can hide any of the four.

The index: a number nobody negotiates

The index is a public figure. A lender picks which one to use and then follows it. A common choice is the prime rate, which is a benchmark that banks publish and that tends to move when the central bank changes its policy.

Because the index is the same for every borrower who chooses it, it tells you little about whether one offer is better than another. What it does tell you is how your cost can change after you sign. If the index goes up, your rate goes up by the same amount.

Look in the agreement for three details: which index applies, how often the rate is reset, and what the highest allowed rate is.

The margin: where lenders differ

The margin is added to the index to produce your rate. It stays the same for the life of the line unless the agreement says otherwise. Two lenders tied to the same index differ only by their margins, which makes the margin the cleanest figure to compare.

A margin of zero or a negative margin is rare, and a lender who offers a low one often makes it up somewhere else, such as a higher annual fee. Read the margin and the fee schedule together.

What moves a margin up or down

Lenders set a margin by weighing risk. They usually look at the same few items.

Combined loan-to-value. This is everything secured by the home divided by its value. More equity left over after the new line generally means a smaller margin.
Credit history. A longer record of on-time payments tends to support a smaller margin.
Debt compared with income. Lenders compare monthly obligations with monthly income.
The size of the line. A larger limit can price differently from a smaller one.
How the home is used. A main residence, a second home and a rental can each be priced on its own terms.

These are the lender's inputs, not a judgment about any one person. Two applications that look alike on paper can still be priced differently by two lenders.

Fees outside the rate

Fees do not appear in the rate at all. They show up as separate lines, and some repeat each year.

An application or origination charge, paid once.
An annual fee for holding the line, which may apply even when the balance is zero.
A transaction charge on each draw, in some agreements.
A fee for closing the line within a set number of years.

A line with a small margin and several fees can cost more than a line with a larger margin and none. Add the fees to the interest before you decide which is cheaper.

Closing costs, one by one

Closing costs cover the work done by people other than the lender. Because the line is secured by your home, the lender needs proof that you own it, that no one else has a prior claim and that it is worth enough to support the credit.

Appraisal: a professional opinion of the home's value, sometimes replaced by an automated estimate.
Title search: a review of public records for existing claims against the property.
Title insurance: a policy that protects the lender if a claim turns up later.
Recording: a government charge for placing the new lien on the public record.
Attorney or settlement work: required in some places and not in others, and rules vary by state.

Where to find each part in the paperwork

A reading checklist.

Index and margin: the rate section of the agreement.
Maximum rate and reset schedule: the same section, often in smaller print.
Fees: the fee table, which lists amounts and when each applies.
Closing costs: the estimate the lender gives you before closing.

If a figure is missing from the paperwork, ask the lender to point to it in writing.

Questions that separate the parts

Which index does the line follow, and how often does the rate reset?
What is the margin, and can it change after the line opens?
Which fees are charged once and which repeat?
Which closing costs do you pay, and which does the lender pay?
If the lender covers some costs, what do I owe if I close the line early?

Answers written down are easier to compare than answers remembered. Put each lender's answers in the same table so a difference in one part is easy to see.

About this guide. Westbury Solutions wrote this as general background on how a home equity line is priced. Nothing here is a quote or an offer, and the terms you are shown will depend on the lender, the property and your own finances.

Margin, index, fees and closing costs: what sets the price of a home equity line