Can You Pay Back a HELOC Early?

Can You Pay Back a HELOC Early?

Yes, you can pay off a HELOC before the repayment term ends. Whether that's the right move, however, will depend on your financial situation and if your lender will charge you a fee for paying off your balance early.

How Do HELOCs Work?

A HELOC is a revolving credit line that lets you tap your home equity on an as-needed basis. Home equity refers to the amount of your home you actually own, and it's calculated by taking your home's appraised value and subtracting what you owe on your mortgage.

A HELOC is similar to a credit card in that you can withdraw up to your credit limit, and you'll only pay interest on the amount you borrow. Interest rates on HELOCs tend to be lower than credit cards, and you can also expect a higher credit line: HELOCs typically allow you to borrow up to 85% of your equity.

Learn more: What You Need to Know About HELOCs

HELOC Draw Period vs. Repayment Period

The initial phase of a HELOC is called the draw period. When the draw period ends after five to 10 years, the account will transition into the repayment period.

Draw Period

• How long it typically lasts: Five to 10 years
• What you need to know: You can borrow as much or as little as you want during this time, up to your credit line. Payments made during the draw period typically go toward interest, though your lender might direct a portion toward the principal.

Repayment Period

• How long it typically lasts: 20 years
• What you need to know: Your line of credit will close at the end of the draw period, and you'll begin repaying your HELOC balance. That includes the amount you borrowed plus interest. Your interest rate will likely be variable, meaning that it can change from month to month depending on market conditions. Some HELOCs require one large balloon payment to pay off your balance in full after the draw period ends.

Learn more: Best Ways to Use a HELOC

Example of HELOC Repayment

Let's say your HELOC credit line is $100,000. Your draw period lasts five years, and during this time, you borrow $10,000 per year. You also make interest-only payments. When the draw period expires, your repayment period begins and your principal balance is $50,000. You'll have 20 years to repay that balance. Your lender charges a variable interest rate, which they'll calculate by taking an index, like the prime rate, and adding on their own margin.

Assuming an initial interest rate of 7%, your monthly payment would be around $388. But keep in mind that your rate—and monthly payment—could go up or down over time. A higher rate means that you'll pay more interest over the life of the HELOC. Even if the rate stays relatively stable, paying off your balance early could save you thousands of dollars.

Learn more: How Do HELOC APRs Work?

Do HELOCs Have Prepayment Penalties?

It's possible for a HELOC to charge a prepayment penalty (sometimes called an early closure fee), though many don't. Every lender is different, but the penalty may kick in if you pay off your balance within 24 to 36 months. As for the penalty amount, some lenders charge a percentage of the original credit line; others charge a flat fee. HELOC prepayment penalties are commonly $450 to $500.

Pros and Cons of Paying Off Your HELOC Early

Closing out a HELOC early has benefits and potential downsides. Here are some important things to consider before speeding up repayment.

Should You Pay Off Your HELOC Early?

Paying off your HELOC early might make financial sense if you:

• Have room in your budget for higher payments
• Have a healthy emergency fund
• Don't have a lot of high-interest debt
• Feel comfortable with how much you're saving for other financial goals
• No longer want your home to serve as collateral for the HELOC

How to Pay Off Your HELOC Early

Consider these tips if you want to eliminate your HELOC sooner rather than later:

• Draw less from your HELOC. The less you borrow with your HELOC, the less you'll have to repay when the draw period ends. Only borrow what you really need, and, if possible, make additional payments toward principal during the draw period.
• Cut out unnecessary expenses. To put more money toward HELOC repayment, consider canceling streaming services, memberships and subscriptions you don't use. Meal planning and negotiating your bills could also create more space in your budget.
• Use cash windfalls to your advantage. You can put work bonuses, tax refunds and side hustle income toward your HELOC balance.
• Reevaluate your budget. A new budgeting method could make it easier to manage your money. For example, the 50/30/20 budget or zero-based budgeting might be a better fit for your spending personality.

The Bottom Line

If you have a HELOC, or are thinking about getting one, know that it's possible to pay it off early. Even if there's a prepayment penalty, the cost may be worth the long-term savings. But you'll want to consider the big picture before making a decision—especially if accelerating your payments will cause stress or derail your other financial goals.