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Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our home equity reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, different types of home equity options and more — so you can feel confident when you make decisions as a borrower or homeowner. Bankrate logo
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo
Taking out a home equity loan can seem like a good idea if you need access to funds, but be aware – prepaying the loan early often incurs fees called prepayment penalties. As a borrower, it pays to understand how these penalties work so you can make the smartest financial decisions.
What Are Prepayment Penalties?
Also known as early repayment or early termination fees prepayment penalties are charges imposed by the lender when you pay off a home equity loan ahead of schedule. These fees compensate the lender for interest they would have earned had you continued making payments for the full loan term.
Prepayment penalties typically range from 1% to 5% of the outstanding loan balance. Instead of a percentage some lenders charge a flat fee – usually a few hundred dollars.
When Do Prepayment Penalties Apply?
Lenders can charge prepayment penalties during the draw period or later in the repayment phase.
The Draw Period
With a home equity line of credit (HELOC), the draw period is when you can access available funds. It usually lasts 5-10 years. If you pay off and close the HELOC during the draw period, especially within the first couple of years, the lender may impose a prepayment penalty.
The Repayment Phase
Once the draw period ends, the repayment phase starts. Now you can no longer withdraw money and must pay back the outstanding balance with interest in monthly installments over 10-20 years. Prepayment penalties can apply if you pay off the loan early in this stage as well. Many lenders specify fees are charged if closed within the first 3-5 years of the repayment period.
How Can You Avoid Prepayment Penalties?
Here are some tips to avoid or minimize prepayment penalties on a home equity loan:
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Shop around for lenders – Some don’t charge early repayment fees at all or only within the first few years. This is key if you plan to prepay.
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Consider a HELOC over a loan – HELOCs typically have lower or no penalties, making them better if you might prepay. You’ll only pay interest on the amount withdrawn.
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Read the fine print – The loan agreement should disclose any prepayment penalties. Don’t sign anything you don’t fully understand.
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Ask about waiving fees – It never hurts to negotiate with the lender, especially if you have a hardship. Extenuating circumstances may warrant a penalty waiver.
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Pay slowly if you must – If your loan has unavoidable penalties, minimize the impact by making extra payments gradually over time rather than prepaying in a lump sum.
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Refinance with another lender – You may be able to refinance into a new loan with lower or no prepayment penalties, essentially resetting the clock.
What Are the Pros of Prepaying a Home Equity Loan?
While prepayment penalties are a drawback, paying off your home equity loan early does have advantages:
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Interest savings – Prepaying eliminates more interest charges compared to sticking with the full loan term. This saves you money.
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Increased home equity – Extra payments let you build equity faster. This gives you access to more cash-out funds in the future if needed.
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Better debt-to-income ratio – Eliminating the monthly loan payment lowers your DTI, which helps qualify you for future loans with better rates.
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Peace of mind – Being debt-free gives financial freedom and eases stress. No more loan payments is a psychological weight off your shoulders.
Key Takeaways
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Prepayment penalties compensate the lender for lost interest if you pay a home equity loan early. They typically range from 1% to 5% of the remaining balance.
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These fees usually apply if you prepay in the draw period or early in the repayment phase. Review your loan agreement for specifics.
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Avoiding penalties involves shopping lenders, comparing loans vs. HELOCs, reading the fine print, negotiating waivers, and making gradual payments.
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Despite potential fees, prepaying a home equity loan can save interest, build equity faster, improve your DTI, and give peace of mind.
While prepayment penalties make early repayment of home equity loans less advantageous, being aware of them allows you to make smart decisions and minimize their impact. Weigh the pros and cons carefully as you manage loan repayment.
When do lenders charge prepayment penalties?
While the exact timing may vary from one lender to another, there are typically specific points during the HELOC’s lifecycle when a lender will charge an early payoff penalty.
- During the draw period: The draw period of a HELOC is the time during which you can borrow from your credit line. It typically lasts five to 10 years. If you decide to close the HELOC during this period — especially within the first two years — lenders may charge a prepayment penalty, says Chad Gammon, a financial planner with Arnold and Mote Wealth Management in Iowa City, Iowa. “This fee compensates for the interest they won’t earn because the line of credit is terminated before they expected,” he says.
- Within the repayment period: The repayment phase is the timeframe when you are no longer allowed to borrow money and must repay the outstanding balance in amortized monthly installments. The repayment phase can last anywhere from 10 to 20 years. It’s possible to incur a HELOC early payoff penalty if you repay the loan in full before the term ends. “Some lenders specify that if you pay off and close the HELOC within a certain number of years from the start of the repayment period — often within the first three to five years — a prepayment penalty may apply,” says Gammon. “This time frame should be explicitly stated in your loan agreement.”
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- • Home affordability
- • First-time homebuying
Calendar Icon 26 Years of experience Linda Bell is a senior writer on Bankrates Home Lending team, producing content around HELOCs, financing home renovations, home equity loans and more.
- • Certified Mortgage Underwriter, National Association of Mortgage Underwriters
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- • Homeownership/Home Improvement
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Calendar Icon 31 years of experience Troy Segal is a senior editor for Bankrate. She edits stories about mortgages and home equity, along with the finer financial points of owning and maintaining a home.
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Chloe Moore, CFP®, is the founder of Financial Staples, a virtual, fee-only financial planning firm based in Atlanta and serving clients nationwide.
At Bankrate, we take the accuracy of our content seriously.
“Expert verified” means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced.
Their reviews hold us accountable for publishing high-quality and trustworthy content.
Bankrate is always editorially independent. While we adhere to strict , this post may contain references to products from our partners. Heres an explanation for . Our is to ensure everything we publish is objective, accurate and trustworthy. Bankrate logo
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our home equity reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, different types of home equity options and more — so you can feel confident when you make decisions as a borrower or homeowner. Bankrate logo
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo
Can I Pay Off Home Equity Loan Early? – CreditGuide360.com
FAQ
What happens if you pay off a home equity loan early?
But how does paying back a HELOC work? Paying off debt sooner means you’ll owe less in interest over the life of the loan, which saves you money.
What is the downside of a home equity loan?
What is the monthly payment on a $50,000 home equity line of credit?
Can you pay off a home loan early without penalty?
Yes, you can pay off a US residential mortgage at any time. There is no penalty.