A Home Equity Line Of Credit (HELOC) is a line of credit, meaning borrowed money against your home's equity at a variable interest rate and not a fixed interest rate. That means the amount you owe from the credit line will vary from month to month, like credit card debt. The minimum monthly payments you have to pay will also change.
A home equity line of credit offers you access to a specified amount of money, but you do not have to use any of it. At any time, you can pay off any remaining balance owed against your home equity line of credit. Most home equity loans have a set term—when the repayment period is up, you must pay off any remaining HELOC payments and pay interest accrued from the home equity loan.
If you pay off your home equity loan balance early, your lender may offer you the choice to close the line of credit or keep it open for future borrowing. It’s possible to have an equity line of credit with a zero balance.
Managing a Zero-Balance Equity Line of Credit
Deciding Between Closing or Maintaining Your Line of Credit
Upon settling the balance on your home equity loan before the repayment period concludes, you're often presented with a choice: to end the equity line of credit or keep it accessible for potential future use. This decision requires careful consideration of various factors, including potential fees and your future financial strategy.
The Case for Closing Your Home Equity Line of Credit
Evaluating the Benefits of Closing Home Equity Lines
You cannot sell your home, get a second mortgage, etc. while the home equity line of credit is open. The line of credit includes a lien against your property, which must be released (by closing the HELOC) before you can transact on the property.
Sometimes, a mortgage lender will charge an annual fee for an open home equity line of credit. If you pay off your home equity loan early and don’t want to pay the annual fees and get a second mortgage, then closing the home equity line of credit can be a good idea.
The Advantages of Keeping a Home Equity Line of Credit Open
Credit Score Benefits and Future Borrowing Flexibility
If your home equity loan has a zero balance, your credit score will benefit in two ways.
One, your average “length of credit history” will be increased every month the HELOC remains open. This accounts for 15% of your FICO score.
Maintaining a revolving credit line with a zero balance can positively impact your credit score in two significant ways: by extending the average length of your credit history and offering potential for a better credit utilization ratio and a great debt to income ratio.
Since there are compelling reasons for both closing and keeping a HELOC open, this will have to be an individual decision based on each borrower’s circ*mstances. Our certified HUD-approved housing counselors can help you decide what to do when your HELOC reaches zero balance.
The decision to close or keep an HELOC open after paying it off is highly personal and depends on individual financial situations and goals. Professional advice from a housing counselor can be invaluable in navigating this decision, providing personalized insights and recommendations based on your unique circ*mstances and future financial objectives.
Whether you're leaning towards closing your line of credit or keeping it open for future flexibility, our financial counselors are here to provide the guidance you need to make the best decision. Reach out today for expert guidance tailored to your specific situation.
Article written by
Melinda Opperman
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.
If you pay off your home equity loan balance early, your lender may offer you the choice to close the line of credit or keep it open for future borrowing. It's possible to have an equity line of credit with a zero balance.
If you don't have a solid estimate—or you need access to money over an extended period (for college tuition or a home renovation, for instance)—a Heloc may be the better option, as it will allow you to withdraw money as needed, up to your credit limit.
It was just two short years ago that several major banks stopped offering HELOCs or home equity lines of credit. Wells Fargo and JP Morgan Chase were the most notable lenders who cited an uncertain economy in the early days of the Covid-19 pandemic as the rationale for hitting the pause button on home equity loans.
While having an unused HELOC can be advantageous in many ways, it's essential to be aware of the potential costs. Some HELOCs come with annual fees or maintenance fees, which you might still have to pay even if you don't use the credit line. The fees you could incur, even with an unused HELOC, include: Inactivity fees.
You'll pay the cost upfront, and your lender may charge an annual maintenance fee to keep your credit line open if you don't use it. But the more significant downside is foreclosure risk. If you use part of your HELOC to cover an emergency and then default on repayment, you could lose your home to foreclosure.
Either way, a HELOC can get you out from under, as it generally offers a lower interest rate than unsecured loans, and certainly a lower rate than your credit card's APR. So it's a good choice for paying off credit cards or consolidating other types of high-interest debt.
Watch out for balloon payments: If you don't manage your HELOC monthly payments properly, you could be hit with a large “balloon payment” at the end of your repayment period. This large payment can trap you in a cycle of debt if you can't pay it off or, worse, could result in losing your home.
Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $403 for an interest-only payment, or $472 for a principle-and-interest payment.
The biggest risk of a HELOC in 2024 is that your interest rate could rise, and your payments with it. This might strain your budget or cost you much more than you planned.
Is it a bad time to get a HELOC? No.In fact, it could be a very good time. While HELOC rates are higher than they used to be, they are at historically normal levels.
If the market has taken a downturn and the value of your house has diminished, your equity is affected as well. When this happens, your lender can enforce a HELOC reduction so that your borrowing limit is based on just the equity that remains.
Your monthly payment depends on how much you've borrowed from your HELOC. If you have a zero balance, there is no payment due. However, if you max out your line of credit, your payment will increase substantially.
It's not a good idea to use a HELOC to fund a vacation, buy a car, pay off credit card debt, pay for college, or invest in real estate. If you fail to make payments on a HELOC, you could lose your house to foreclosure.
However, HELOCs have variable interest rates, which means you might pay more in interest as rates fluctuate, and your home is the collateral, so if you don't repay what you borrow, you could lose your home.
Most HELOCs are secured by the equity in your home and start with a low variable interest rate. The amount you owe will be based on the amount of the loan that you use. If you do not use any amount of your HELOC you will not owe any money; however, some lenders may charge an inactivity fee on an unused HELOC.
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