HELOC Prepayment Penalties (2024 Guide) (2024)

Paying back your home equity line of credit (HELOC) early may sound like a good idea, but some HELOCs have a fee if you do so. Your HELOC has a set time period, and ending your account early could trigger a prepayment penalty.

However, you may be able to reduce or eliminate these prepayment penalties if you work to strategically pay back your HELOC with careful timing. You can even negotiate with your lender to get rid of these penalties in some situations.

Let’s explore where these penalties come from and the best ways to avoid them.

What Is a HELOC Prepayment Penalty?

Prepayment penalties, also known as early termination fees, are fees that lenders can charge when you pay off a loan early. They’re not common with personal loans, but they are often a provision of a HELOC.

When you take out a HELOC, your loan terms include two phases: A draw period, and a repayment period. In the draw period, often five to 10 years, you can borrow from the credit line and make interest-only payments. Then comes the repayment period, when you start making monthly payments towards the amount you borrowed, as well.

With HELOCs, prepayment penalties can be fairly common. HELOCs are designed to be multi-year agreements, and lenders anticipate gaining interest throughout the life of the loans. The lender makes money by charging you interest, so if you close your HELOC early, there is no balance left to pay interest on. The lender can use a prepayment penalty to make up for some of its lost revenue. In particular, HELOCs paid off and closed during the draw period tend to trigger prepayment penalties.

Prepayment penalties vary based on the terms of each HELOC, but they are generally 1%–5% of the loan. Some lenders may have a maximum cap for the penalty.

>> Related: What is a HELOC draw period?

When do Lenders Charge HELOC Prepayment Penalties?

Lenders can charge HELOC prepayment penalties at various times during the life of the loan agreement. Prepayment penalties most commonly occur if you close the HELOC before the draw period ends and before the repayment period begins.

If you pay off the full balance of the HELOC well before the repayment term ends, a penalty may be triggered as well, but this is less common. Some lenders may also apply prepayment penalties if you make extra lump-sum payments toward the HELOC’s principal balance during either the draw period or the repayment period.

How to Avoid HELOC Prepayment Penalties

Before signing any paperwork for a HELOC, review the loan terms to see if a prepayment penalty applies to you, and when the penalty would kick in.

If you sign your HELOC paperwork and notice that there are prepayment penalties or other terms that you don’t agree with, you have the legal right to back out of your loan using the three-day cancellation rule. With this rule, you have three business days to give written notice that you are canceling your HELOC.

Revisit these terms if you’re planning to pay off your HELOC early. There may be certain windows when you can close your account without penalty, meaning that it’s possible that by strategically timing your payoff, you may be able to avoid any prepayment penalties. Consult with your lender if you have any questions or uncertainty.

You may also be able to avoid penalties by either modifying or refinancing your HELOC. You may be able to modify your HELOC with your current lender to a lower interest rate. Or you may choose to refinance your HELOC balance with a fixed-rate home equity loan or a new HELOC. A new HELOC would close your existing HELOC and start a new draw period.

>> Related: Learn more about refinancing a HELOC

Strategically Timing Your HELOC Payoff

You may be able to reduce or avoid prepayment penalties if you strategically time the payoff of your HELOC loan. An ideal time to do this is as the draw period ends: at this point, lenders have already collected interest for a large portion of the draw period, and they may be more likely to decrease the penalty amount.

Some HELOCs require you make a “balloon payment” when the draw period ends. This is a large lump-sum payment that covers the entire principal.

If you aren’t required to make a balloon payment, it still may be beneficial to pay off your HELOC at this point. The prepayment penalty you would face may be lower than the interest you would pay to keep the loan open. For example, if the prepayment penalty is $300, but the interest you would pay is $500, then it may make sense to pay back your HELOC early.

Keep in mind that the opposite can be true as well — the prepayment penalty could be much higher than the interest you would pay. In this case, it may be beneficial to keep the HELOC open to avoid the penalty.

Negotiating HELOC Prepayment Penalties

You can often negotiate a HELOC’s terms to reduce or potentially eliminate prepayment penalties. As you explore your HELOC options with different lenders, ask the lenders if they can negotiate these.

If you already have a HELOC, you may still be able to get your prepayment penalties amended. For example, your lender may let you extend the draw period. In other cases, if you have to close out your HELOC early due to extenuating circ*mstances, such as divorce, your lender may be willing to reduce or waive the penalty. You may also be able to lower your penalty by offering to move other accounts to this lender.

It’s always worth being persistent with lenders so you can secure the best loan terms possible. If the lender isn’t budging on negotiating, try escalating to a manager or supervisor to see if they will work with you. If they are still reluctant, seek out other lenders to see if their terms are better.

The Bottom Line

Deciding to pay off a HELOC early is a personal choice that is dependent on your financial situation. If you’ve taken out a HELOC, it can be tempting to pay back the line of credit early. However, if your HELOC has a prepayment penalty, you’ll have to decide if it’s worth it to pay the fee or to keep the HELOC open. If the interest that you’ll pay is more than the prepayment penalty, it may be worth paying off your HELOC early. Paying it off toward the end of the draw period may be another way to avoid or decrease your penalty.

Choosing a HELOC from a lender that doesn’t have prepayment penalties is one definitive way to avoid these fees. As always, before signing any official paperwork, be sure that you fully understand all the fees and penalties that are in place. If you have questions or concerns, consult your lender or a financial professional.

If these fees and penalties made you rethink getting a HELOC, check out our lists of the best home equity rates and home equity lenders.