Want to pay off your home equity line of credit (HELOC) early? (2024)

FAQs

Want to pay off your home equity line of credit (HELOC) early? ›

You can pay off your HELOC early, but be mindful of pre-payment fees, if any. HELOCs allow you to make interest-only payments during the draw period, then you can make principal and interest payments later.

Also referred to as an 'early closure' or 'early termination fee,' this penalty is typically a percentage of the outstanding balance or a flat fee. While closing a HELOC early may incur a penalty, it can also save thousands of dollars in interest and improve your debt-to-income ratio.

Extra Principal Payments: Making payments beyond your monthly obligation can quickly decrease your principal balance, thus boosting your equity. Refinancing Your HELOC: Securing a lower interest rate through refinancing can reduce your payments, allowing you to allocate more funds toward the principal.

Pay your HELOC off with a home equity loan

A steady monthly payment, a fixed interest rate and potentially a longer repayment period may make this an affordable option for you. Keep in mind that if you go this route, you may increase the amount you pay in interest overall.

HELOCs generally have a variable interest rate and an initial draw period that can last as long as 10 years. During that time, you can make interest-only payments. Once the draw period ends, there's a repayment period, during which interest and principal must be paid.

Yes. In fact, thousands of homeowners pay off HELOCs with cash-out refinancing each year. Many choose refinancing as a HELOC repayment option because they are worried that their variable interest rates will suddenly skyrocket, since it's probably based on the current prime rate.

Despite the elevated rates, a home equity loan or a HELOC may still be a smart option, especially if you need the money to make home renovations or repairs. The interest on the loan can be tax-deductible in that case (if you itemize deductions on your tax return).

There are many ways to refinance out of your current HELOC, including refinancing into a fixed-rate home equity or personal loan, a new HELOC or a cash-out refinance. If you're finding it difficult to make payments on your HELOC, contact your lender to assess what options are available to you.

Will HELOC Rates Go Down in 2024? The Federal Reserve is expected to cut interest rates several times in 2024, which could lead to a change in HELOCs' benchmark rates and cause their interest rates to go down as well. However, there's no guarantee that rates will go down—it depends, in part, on whether inflation drops.

Now let's calculate the monthly payments on a 15-year fixed-rate home equity loan for $20,000 at 8.89%, which was the average rate for 15-year home equity loans as of October 16, 2023. Using the formula above, the monthly principal and interest payments for this loan option would be $201.55.

What is the payment on a $25,000 home equity loan? ›

For this example, we'll calculate the monthly cost for a $25,000 loan using an interest rate of 8.75%, which is the current average rate for a 10-year fixed home equity loan. Using the formula above, the monthly payment for this loan would be $313.32 (assuming there are no extra fees to calculate in).

HELOC loan limits vary by lender and depend on how much equity you have. Most lenders will let you borrow up to 80% of your equity, or $80,000 for every $100,000. Some will let you borrow up to 90%. If you don't have excellent credit, you may not be able to borrow as much.

If you've paid off your account and have a $0 balance, you can either close your account or you can keep it open for future use (as long as you're within your draw period).

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.

As with other forms of borrowing, a HELOC balance must be repaid with accrued interest. Some lenders allow you to pay off your HELOC early, but others charge a fee, known as a prepayment penalty if you chose to close out the loan early or carry a zero balance.

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. More important, they could be on their way down soon.