HELOC Loan Prepayment Penalties

Some HELOC Loans Have Repayment Penalties

A home equity line of credit (HELOC) is a way of accessing the equity 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.

Because these types of loan are secured by an asset (your home), they tend to have better interest rates than credit cards or personal loans, especially if you have a low credit score. The downside is that if you fail to pay back the money you’ve borrowed within the specified timeframe, you could lose your home to foreclosure.

HELOCs can offer several advantages, but they 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, but they function in the same way.

  • Many HELOC loans have no early repayment penalties, but some do.
  • Lenders charge a prepayment penalty in part to recoup the loss of the interest they would have earned if you had paid your loan through the full term.
  • Before agreeing to the terms of a HELOC, read the fine print and consider consulting a professional advisor.

Understanding HELOC Loans

To understand why some HELOC loans have closing costs, consider the history of these loans. When they were first conceived of in the 1980s, they worked in much the same way as a credit card as revolving loans. They used a borrower’s home equity to secure the loan.

At one time, some states had laws that made HELOCs illegal as revolving loans. According to some state laws, if a borrower had paid off their loan then the lender had to release the lien on their house. Other state laws prohibited mortgages that didn’t have an explicit term. In order to be legal nationwide, HELOC agreements had to be written with a payoff date. The end result was that HELOCs could have prepayment penalties.

Lenders set prepayment penalties because they want to protect their profits. A lender makes money on the loan through interest that is paid by the borrower each month along with payment toward the principal. If you close a HELOC loan early, the lender won't earn its expected interest profit. So, lenders try to recoup some of this lost interest with a prepayment penalty.

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

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

HELOCs are structured as a multi-year 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 home equity line of credit, then pay it down and close it before the period specified in your loan terms. 

In other cases, 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 who 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 HUD-approved or find a HUD-approved housing counselor by visiting HUD’s website or calling HUD’s housing counselor referral line (800) 569-4287.

Can I Repay a HELOC Loan Early?

You can repay a HELOC loan 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.

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. Ensure you read the fine print and consider consulting a professional advisor.

Can I Avoid HELOC Prepayment Penalties?

It depends on the terms of your loan. You should make sure you read the fine print before taking out a HELOC to avoid any surprises. Talk to a U.S. Department of Housing and Urban Development-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 you are being offered.

Article Sources
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  2. Experian. "Selling Your Home With a Second Mortgage."

  3. Consumer Financial Protection Bureau. "§ 1026.40 Requirements for Home Equity Plans."

  4. Consumer Financial Protection Bureau. “My Lender Offered Me a Home Equity Line of Credit (HELOC). What Is a HELOC?