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A home equity line of credit (HELOC) is a great way to fund ongoing projects over several years. But sometimes plans change, and you need to end your HELOC sooner than intended. So what happens in that scenario?
You may be charged a HELOC prepayment penalty. Not all HELOC lenders charge these fees, and they often only apply in the first few years after taking out the line of credit. We’ll explore these penalties in more detail below.
Key Points
• Some lenders charge a prepayment penalty if you pay off your HELOC ahead of schedule.
• HELOC prepayment penalties may also be called early closure fees or early termination fees.
• HELOC prepayment penalties usually only apply within the first two or three years of opening a HELOC.
• HELOC early closure fees are usually a small percentage of the credit limit or a modest flat rate (under $1,000).
• Despite the prepayment penalty, it’s often worth paying off your HELOC early.
• Not all HELOCs have these fees, so it is possible to find a HELOC without a prepayment penalty.
What Is a HELOC Prepayment Penalty?
A HELOC prepayment penalty is a fee charged by some lenders if you pay off your HELOC early, usually within the first two or three years of opening the line of credit. Some lenders may label this penalty as an early closure fee or early termination fee.
HELOCs typically have draw periods from 3 to 10 years and repayment periods that last 10 to 30 years. At their longest, HELOCs might take up to 40 years to be resolved. Fortunately, prepayment penalties usually apply only in those first few years.
The most common reasons for paying off a HELOC so early into its timeline include:
• Refinancing your mortgage: If mortgage rates suddenly drop and you’re locked into a high rate, refinancing can look really attractive. But if you have an open home equity line of credit, you might not be able to refinance. You must get approval from your HELOC lender before you can refinance; if the lender declines, you’ll have to pay off and close the line of credit before you can move forward.
• Selling your home: Similarly, you typically must close your HELOC when you sell your home. While you can use the proceeds from the home sale to pay off the HELOC (much like you use them to pay off the remainder of your mortgage), you might still be charged a HELOC prepayment penalty if you sell your home and close the HELOC shortly after opening it.
• Intentionally eliminating the debt: Finally, you may want to voluntarily pay off your HELOC early if you only borrowed a small amount and can repay it quickly, or if you’re focused on aggressively paying down debts after something changes in your finances. Even if this results in an early HELOC closure fee, you might save thousands of dollars in interest and ongoing fees over the next several years.
Pro tip: While many lenders charge prepayment penalties for home equity lines of credit, you have the right to cancel within the first three days after the account is opened. By law, the lender must cancel the loan at your request and refund any upfront costs you paid — and you can’t be charged an early termination fee for the HELOC in that scenario.
Why Do Lenders Charge HELOC Prepayment Penalties?
Lenders charge a wide range of HELOC fees to ensure the lending product remains profitable. When lenders set the interest rate for your HELOC, they’re playing the long game. That is, they’re anticipating that you’ll keep the HELOC open for the agreed-upon length of time — and over that amount of time, your ongoing interest payments make it profitable for the lender to offer you the HELOC.
When you pay off your HELOC early, the lender makes less profit. To protect against that, many lenders charge a HELOC prepayment penalty. (Incidentally, there may also be a home equity loan prepayment penalty if you happen to have a home equity loan vs. a HELOC.)
Some lenders advertise that they cover the HELOC closing costs on your behalf. Closing costs for a HELOC usually range from 2% to 5% of the total available credit limit, so choosing a lender that pays those costs for you can save you a lot of money. But read the fine print: Many lenders use early closure fees to recoup these costs if you close your HELOC shortly after opening it.
Recommended: What Is a Cash-Out Refinance?
When Does a HELOC Early Payoff Penalty Apply?
By now you’re probably wondering, Is there a penalty for paying off a HELOC early in all cases? The answer is no. HELOC early payoff penalties typically apply within the first two to three years of opening the HELOC, but this varies by lender. When considering a lender for a HELOC, read the loan disclosures carefully to find mention of the early payoff penalty — both how much you’d owe and for how long it applies.
Typically, you’ll find the duration written in months (e.g., 24 months, 36 months) instead of years — keep that in mind if doing a search for the disclosure documents on your computer.
How Much Is a Typical HELOC Prepayment Penalty?
HELOC prepayment penalties vary by lender. Some lenders charge a percentage of the loan amount (usually between 1% and 5%), while others charge a flat amount (usually a few hundred dollars). Review your HELOC disclosures to understand how much you’ll pay if you close your home equity line of credit early.
How to Find a HELOC Without a Prepayment Penalty
Not every lender charges a fee for paying off your HELOC early. When researching HELOCs, you can prequalify with multiple lenders to compare your options. While the starting rate and the max credit limit are two important factors to consider, you should also be comparing all the fees, including:
• Application fees
• Appraisal fees
• Annual fees
• Account inactivity fees
• Withdrawal fees
• Fixed-rate conversion fees
• Prepayment penalties
Choose the best lender for your needs. If you think there’s a scenario in which you’ll pay off the credit line fast, prioritize a lender without a HELOC early payoff penalty.
Can You Negotiate a HELOC Prepayment Penalty?
Yes, it’s possible to negotiate a HELOC prepayment penalty, either before you sign or after the loan has been processed. While there’s no guarantee that a lender will agree to waive or lower the HELOC fee, it’s always worth asking.
Recommended: How to Refinance a HELOC
Benefits of Paying Off a HELOC Early
If a HELOC comes with prepayment penalties, why would you ever want to pay it off early? There are actually quite a few potential benefits, including:
• Less money spent on interest: By closing a HELOC much sooner than the contract stipulates, you could save yourself thousands of dollars in interest. This might be well worth an early closure fee that’s a few hundred dollars.
• Less money spent on fees: Some HELOCs have annual fees. If you end the HELOC early enough, the prepayment penalty could be smaller than the total amount you’d spend in annual fees. Similarly, some lenders charge fees for inactivity (i.e., you don’t make any draws from the line of credit in a set time period); if you don’t intend to use the HELOC again, it may be worth incurring the prepayment penalty once instead of ongoing inactivity fees.
• Lowering your debt-to-income ratio: If you need to lower your debt-to-income (DTI) ratio to get approved for another loan, it might be worth wiping out your outstanding HELOC debt.
• Freeing up your monthly budget: Some HELOC repayment periods last 20 to 30 years. That’s a long time to make regular payments toward your balance (and those payments could increase if your rate is variable). If you have the cash now and want more spending flexibility over the next decade-plus, it could be worth paying off and closing the HELOC.
• Refinancing or selling your home: Finally, if you want to refinance your home to lock in a lower rate or sell your home because you want (or need) to move somewhere else, closing the HELOC to do so is likely well worth the small early payoff fee.
The Takeaway
Do HELOCs have prepayment penalties? Yes, sometimes. Many lenders charge a HELOC prepayment penalty when you pay off and close your home equity line of credit ahead of schedule, but usually only within the first few years. In many cases, the fee may be worth it because paying off your HELOC early could save you money on interest and annual fees in the long run and could free you up to refinance or sell your home.
SoFi now offers flexible HELOC options to turn your home equity into cash. Access up to 85% of your home equity, or $350,000, to finance home improvements or consolidate debt. Competitive interest rates and repayment terms up to 20 years could result in lower monthly payments versus other loans. And the online application process is quick and convenient.
FAQ
Do all HELOCs have prepayment penalties?
Not all HELOCs have prepayment penalties, so it is possible to find a HELOC without a prepayment penalty. You can use online loan marketplaces to limit your search to lenders without these fees, or do your own research to find lenders without HELOC prepayment penalties. SoFi HELOCs, for example, do not come with prepayment penalties.
Is there a penalty for paying off a home equity loan early?
There is sometimes a penalty for paying off a home equity loan early, much like HELOC prepayment penalties. It all depends on the fine print in the lender’s disclosures. If you think you’ll be able to pay off your home equity loan quickly, limit your search to lenders that don’t charge early termination fees, or find a home equity loan with a short term that’s in line with your ideal schedule.
How long does a HELOC prepayment penalty period typically last?
HELOC prepayment penalty periods are usually only the first two to three years after the HELOC is opened. However, this varies by lender, so you should always read the disclosures carefully before signing the loan contract.
Can paying off a HELOC early hurt your credit score?
Closing a HELOC early could potentially lower your credit score. When you close a HELOC, you could reduce your average age of credit, and you will likely lower your available credit and reduce the diversity of your credit mix. All of these are factors that can impact your credit score.
What is the difference between a HELOC early closure fee and a prepayment penalty?
A HELOC early closure fee is another term for prepayment penalty. Some lenders may consider an early closure fee a type of prepayment penalty, different from a closing cost recapture — a fee, charged when you close your HELOC within a set number of years, that pays back the closing costs the lender originally paid on your behalf. Generally speaking, though, the terms are used interchangeably.
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