HELOC Loan Prepayment Penalties

Some HELOC loans have repayment penalties

Fact checked by Amanda Jackson

A home equity line of credit (HELOC) is a way of accessing the equity that you’ve built up in your home. With a HELOC, you use your home as collateral for a line of credit. The amount of credit available to you depends on factors like the amount of equity in your home, your credit score, and your debt-to-income (DTI) ratio.

HELOCs can offer several advantages, but they have costs to consider. For example, if you want to pay the balance off early, you could face penalties. Though these charges may not always be labeled as a prepayment penalty, as they are with home equity loans, they function in the same way.

Key Takeaways

• A HELOC is a way to access the equity you’ve built up in your home, using your home as collateral.
• HELOCs usually have lower interest rates than other types of loans, but the downside is that you could lose your home to foreclosure if you fail to repay the loan.
• Most HELOCs have no prepayment penalties, but some lenders may charge a prepayment penalty to compensate for the loss of the interest they would have earned if the loan had been paid through the full term.
• Before agreeing to a HELOC’s terms, you should read the fine print to learn about any prepayment penalties and consult a professional advisor if necessary.

Understanding HELOC Loans

To understand why some HELOC loans have closing costs, we must look back at their history. When HELOC loans were first conceived in the 1980s, they worked as revolving loans, using the borrower’s home equity to secure the loan.

Some states had laws that made HELOCs illegal as revolving loans: if a borrower paid off their loan, then the lender had the obligation to release the lien on their house. Also, mortgages that didn’t come with an explicit term were prohibited in some states. To be legal nationwide, HELOC agreements had to come with a specific payoff date. As a result, the consensus was that HELOCs could have prepayment penalties.

Lenders set prepayment penalties as a way to protect their funds. A lender makes money on the loan through interest paid by the borrower each month throughout the loan term. If a HELOC loan is closed early, the lender won’t earn the expected profit generated by the interest. In other words, lenders use prepayment penalties to compensate for lost interest.

Important

Some people turn to a HELOC to consolidate high-interest debt. However, if you are having trouble paying your bills, consider the downsides. If you cannot make your HELOC payments, you could put your home at risk of foreclosure.

HELOC Prepayment Penalties

Some HELOC loans have some kind of prepayment penalty or a fee associated with paying off your HELOC early.

HELOCs are structured as multiyear contracts, and you can be charged a flat fee when you close your account, regardless of your account balance. This fee will apply if you open a HELOC, then pay it down and close it before the period specified in your loan terms. 

In other cases, the lender’s terms will allow them to recapture closing-cost fees from HELOC borrowers who close their credit line within a specified period, often within two to three years, after the loan begins. Lenders might document the waived closing costs or charge a flat fee that approximates the original costs.

HELOC loans can vary significantly in this regard. Be on guard for unscrupulous lenders that will charge high fees as you read the fine print. The federal Truth in Lending Act (TILA) requires lenders to disclose all the terms and costs of their home equity plans, including prepayment penalties.

You should also seek expert help if you are unsure if a loan is right for you. You can check whether a housing counselor is approved by the U.S. Department of Housing and Urban Development (HUD) or find a HUD-approved housing counselor by visiting HUD’s website or calling HUD’s housing counselor referral line at (800) 569-4287.

Do HELOCs Have Prepayment Penalties?

Most HELOC loan agreements won’t mention prepayment penalties. However, some HELOC loans will charge fees that are essentially an early repayment penalty. Make sure that you read the fine print, and consider consulting a professional advisor before paying off the HELOC early.

Can I Repay a Home Equity Line of Credit (HELOC) Early?

You can repay a home equity line of credit (HELOC) early, but you might have to pay penalties. You should check your loan agreement to see if early repayment penalties apply to you, and whether they will make paying back your loan early more expensive.

Can I Avoid HELOC Prepayment Penalties?

It depends on the terms of your loan. Make sure to read the fine print before taking out a HELOC to avoid any surprises. Talk to a U.S. Department of Housing and Urban Development (HUD)-approved housing counselor if you are unsure whether this type of loan is right for you.

The Bottom Line

Many HELOC loans have no early repayment penalties. However, some loans may have these kinds of fees. It’s important to read the fine print before agreeing to a HELOC and to seek expert advice if you are unsure about the terms that you are being offered.