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

Borrowers often wonder if they can pay off their home equity line of credit (HELOC) early. The short answer? A resounding yes, because doing so has many benefits.

If you're making regular payments on your HELOC, you may be able to pay off your debt sooner, so you’re paying less interest over the life of the loan. You also decrease your loan to debt ratio, which is attractive to lenders. Of course, you’ll want to check with your lender to ensure you won’t incur a prepayment penalty. And like anything else, you’ll want to do your due diligence and run the numbers to make sure it makes sense for your budget.

In order to determine the right approach, you'll first need to understand how a HELOC is paid off. Then you can set up a solid repayment plan.

Since you’ve already got a HELOC, chances are you know the ins and outs of your loan terms. If you don’t, or need a refresher, here are the basics: If you have a home equity line of credit, repayment operates like a credit card — you draw from the line up to the line amount (just like the credit limit on your credit card). Typically, you’re only required to make interest payments during the draw period, which tends to be 10 to 15 years. You can also make payments toward the principal during the draw period. When you pay off part of the principal, those funds go back to your line amount. It’s important to understand that most home equity lines of credit tend to have variable interest rates, while home equity loans are fixed. Sometimes borrowers can negotiate with the lender about getting a fixed rate for the remainder of the loan repayment period. When the draw period ends, which is usually 10 years, you enter the repayment period, during which time you begin paying back the remaining principal on your HELOC, plus interest.

Potential borrowers should always look at the APR versus the Prime Rate for these loans. The APR is a variable combination of the Prime Rate and the markup calculated by the lender based on the creditworthiness of the borrower and their loan-to-value ratio, or LTV. If the value of the loan is higher than the value of the property, the lender will adjust its APR accordingly. On the other hand, the Prime Rate is a universal interest rate set by the Federal Reserve, which is the basis for the lender’s APR calculation. Banks adhere to the Truth in Lending Act that requires financial institutions to list the APR, in addition to the Prime Rate and any additional fees.

Evaluate your budget to see how much you can allot toward repayment of your HELOC. Are you concerned about how much interest you’ll pay over the life of your loan? Go back to your budget to see if there’s more room to make additional principal payments during the draw period.

Be sure to alert your lender that the extra payments should be applied to the principal.

Some lenders will charge prepayment penalties if you pay off your loan in the first three to five years of the repayment plan. Whether you plan to pay off your HELOC when you sell your home, are refinancing, or experience a financial windfall, a prepayment penalty could be an unexpected charge. Most prepayment penalties are about 2% of your loan balance, but the amount varies by lender. Make sure you check with your lender before you decide to pay off your loan early, so you don’t get caught off guard.

Typically you won't face a prepayment penalty for contributing a small amount above the required monthly payments, but you should read your loan agreement carefully and discuss the terms with your lender before making a decision.

Good for you! As you know, paying off a loan will maintain a healthy credit score and give you a psychological boost. But if you later decide to take on a new renovation project, or wedding bells are in the air, getting another HELOC may help. But remember, not all HELOCs are created equal. Lenders offer many options for this popular loan. In fact, Citizens offers FastLine, an award-winning* digital HELOC experience. Citizens FastLine^® enables borrowers to apply quickly and get funds in as little as three weeks.

And even if it’s not another HELOC your seeking, we’re here to help you reach the goals on your financial adventure, every step of the way.

Learn more about HELOCs

*Best HELOC from a bank award, Bankrate, 2023