Can I pay off a HELOC early?
Yes, paying off a HELOC early is possible. However, lenders often charge a prepayment penalty fee to customers who pay off and close a HELOC account before the end of the loan term.
Read on to learn more about how to pay off a HELOC early.
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Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
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What are HELOCs and how do they work?
A HELOC is a type of secured loan that lets you borrow money as a line of credit. A line of credit limit is determined by the lender based on several factors, including the equity in your home, your property’s fair market value, and your credit score. Generally, the more equity you have, the higher the amount of credit you’ll be approved for.
A secured loan requires the borrower to pledge an asset as collateral to “secure” the loan. With a HELOC, your home is the collateral securing the loan. This means if you fail to repay the loan the lender can foreclose and take your home.
Getting a HELOC is a straightforward process, and many homeowners benefit greatly from their HELOC. HELOC funds can be used for anything, including making home renovations, paying off high-interest debt, paying for college tuition and even as a down payment on a second home or investment property.
How do HELOC repayments work?
HELOC repayments work differently than repayments on other types of loans.
All HELOCS have a “draw period” (typically 10-15 years) and a “repayment period” (typically up to 20 years). HELOC repayment is divided into two timeframes, a draw period, and a repayment period. Let’s take a closer look at each of these.
Draw period. During the draw period, you can borrow as much of the funds as you need. Payments made during the draw period are calculated as “interest only,” meaning you aren’t repaying the entire loan or the principal amount. Some lenders will allow payments toward principal during the draw period to help make it easier for people to manage their finances by avoiding a large “balloon” payment when the repayment period starts.
Repayment period. After the draw period ends, the HELOC repayment period begins. At this time, most HELOC interest rates will adjust from a variable rate to a fixed rate, and monthly payments will include both principal and interest on the outstanding balance.
When applying for your HELOC your account representative will review with you the repayment policy for your loan.
Advantages of paying off your HELOC early
Because a HELOC is a line of credit, you can take out money as you need it, and you will only pay interest on the amount you borrow. However, HELOCs come with a variable rate that can increase over time. For this reason, there are advantages to paying off a HELOC early.
Reduce the cost of loan. Paying off your outstanding balance means you’ll save money by not paying interest over a longer period.
Free up cash. Eliminating your monthly payments will free up your money for other things, like a vacation or paying off high-interest credit card debt.
Reduce debt-to-income (DTI) ratio. Your
DTI ratio is a comparison between your income and your monthly debt payments. By paying off your HELOC early you’ll have less debt, which could make it easier to qualify for other types of loans and credit.
How to pay off your HELOC early
There are two primary ways to pay off your HELOC early:
- Lump payment. This involves making one payment for the entire balance owed.
- Additional principal payments. Adding extra money “toward principal” when you make your monthly payments will reduce the principal balance that you’re paying interest on.
What are HELOC prepayment penalties?
HELOC prepayment penalties are charged by lenders when someone with a HELOC pays off a loan before the end of the loan term.
Why do lenders charge prepayment penalties?
Lenders make money on the interest they charge on loans. Paying off HELOC early
Results in the lender losing money during the full loan term. A prepayment penalty charged to the borrower compensates the lender lost revenue from your loan.
How much are HELOC prepayment penalties?
Each lender has its own fees and policies; however, HELOC prepayment penalties typically range from 1% 5% of the loan amount. Some lenders will not charge a penalty for paying your loan balance in full, but they will charge a penalty on HELOC accounts that are paid in full and closed.
How to avoid HELOC prepayment penalties
The best way to avoid paying HELOC prepayment penalties is to understand the terms of your HELOC before you sign for the loan. If you know you’ll need the line of credit for just a short period of time or will be selling your home, be sure to ask the lender if there is a pre-payment penalty fee and if so, how much it is.
There are
HELOC pros and cons to consider and it’s possible that a different type of loan, such as a
personal loan, may work better for your financial needs and goals.
Is it possible to negotiate HELOC prepayment penalties?
It may be possible to negotiate HELOC prepayment penalty. Each lender has its own HELOC policy. If you want to pay off your HELOC, it doesn’t hurt to ask the lender to how to pay off a HELOC early and negotiate the prepayment penalty fees.
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Loan Today!