Can You Pay Back a HELOC Early?

HELOC Draw Period vs. Repayment Period

A HELOC is a revolving credit line that allows you to borrow money up to your credit limit during a yearslong draw period. Once the draw period ends and the repayment period starts, you can no longer access the credit line. Instead, you must pay back any money you've borrowed plus interest.

The HELOC Draw Period

A HELOC's draw period typically lasts from five to 10 years. During that time, you can borrow money whenever you want to, up to the credit limit set by your lender. As soon as you borrow money, you'll typically be required to make monthly payments to cover the interest on the amount borrowed. These interest-only payments are generally small and continue throughout the draw period.

Depending on the terms of your HELOC, you may also be able to make larger payments during the draw period that go toward your principal balance. Any extra amount you can put toward your balance during the draw period will help reduce your payments during the repayment phase.

Some HELOCs do not allow principal repayment during the draw period or charge prepayment penalties for repaying your balance early. Check with the lender or review your HELOC documents to see whether your lender charges a prepayment penalty. Depending on how much interest you can save by paying off your balance early, it may be worth the tradeoff of paying a prepayment fee.

If you pay off your HELOC in full during the draw period, your credit line will close at the end of the draw period with no balance owed. Be sure to follow your lender's procedures for designating that extra payments are credited toward your principal balance rather than toward interest.

The HELOC Repayment Period

After the draw period ends, your credit line closes, and you'll no longer be able to borrow from the HELOC. At this point, the repayment period begins. If your HELOC has a balloon payment, you'll have to repay all the money you borrowed plus interest in one lump sum. However, most HELOCs give you a 20-year repayment period to pay off your balance and accrued interest. Compared to the interest-only payments you made during the draw period, your monthly payments will rise significantly now that you're paying off the principal balance in addition to interest charges.

Even if you couldn't put extra money toward your HELOC payments during the draw period, you can pay off your debt faster by adding extra money to your monthly payments during the repayment period. As with early payments in the draw period, be sure to check whether there is a prepayment penalty. Also make sure to properly indicate that any extra payments should go toward your account's principal, not its interest.

Do HELOCs Have Prepayment Penalties?

HELOCs that are considered "high-cost mortgages" are subject to federal regulations under the Home Ownership and Equity Protection Act (HOEPA), which includes restrictions on prepayment penalties. A HELOC falls into the high-cost category if the APR as of the date when the interest rate is set exceeds the Average Prime Offer Rate (APOR) for comparable transactions on the same date by over 8.5 percentage points. Prepayment penalties for a HELOC meeting this definition can't be charged a prepayment penalty more than 36 months after account opening or for more than 2% of the amount that is prepaid.

When you pay off your credit line early, lenders lose the profit they would have made had you paid off the HELOC over time, with interest. To recoup these losses, lenders sometimes assess an early termination or early closure fee if you pay off your HELOC and close the account within a certain time frame, such as 24 months or 30 months after opening your credit line. A lender may offer HELOCs with no closing costs, but if you terminate the HELOC early, you'll be charged a fee equal to the closing costs waived when you opened your credit line. Some lenders charge a percentage of your credit line, while others charge a flat fee. For example, US Bank charges an early closure fee of 1% of your original credit line (up to a maximum of $500) for accounts closed within the first 30 months.

Benefits of Paying Off Your HELOC Early

If your lender allows it, paying off your HELOC early offers several benefits.

• You can reduce your loan costs. Paying off your line of credit early will lower the amount of interest you pay over the repayment period. This could mean substantial savings, especially if you have a variable-rate HELOC that could cause your payments to rise.
• You'll free up cash. Repaying your line of credit early gives you more money you can put toward other financial goals, such as saving for retirement or a child's college education.
• You'll ease stress. Carrying debt can be stressful, especially when the debt is a HELOC that's secured by your home. Failing to repay what you've borrowed could cost you your house. If you're concerned your financial situation may change for the worse in the future, paying your HELOC off early—while you have the funds to do so—can put your mind at ease.

The Bottom Line

Whether paying off your HELOC early is a smart move depends on your financial situation. If the interest rate on your HELOC is lower than the interest on other debt you're carrying, it may make more sense to put any extra money toward higher-interest debts, such as credit card debt, than toward early HELOC repayment. Your credit utilization ratio is a key factor in your credit score. However, unlike other types of revolving credit, HELOCs don't count toward your credit utilization when calculating your FICO^® Score^☉ (the credit score most commonly used by lenders). Therefore, tackling credit card debt first will have a bigger positive effect on your credit score.