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A home equity line of credit (HELOC) gives homeowners access to an open-ended line of credit from which they can borrow as needed. However, borrowers can only withdraw funds from a HELOC during its draw period, which often lasts for the first 10 years the account is open.
During this period, borrowers may only need to pay interest on the borrowed amount. After the draw period ends, the HELOC enters a repayment period. Borrowers can no longer withdraw funds and must begin making principal and interest payments.
While often not required, borrowers can repay more than just the interest during the draw period, if the lender allows for it. This can save you money in interest, while enabling you to reinstate the line of credit and borrow more later. Here’s a look at how this works and what to expect.
In this guide:
- Do lenders charge a fee to repay my HELOC during the draw period?
- Can my lender close my HELOC if I pay it off during the draw period?
- Is it cheaper to repay my HELOC during the draw period?
- Should I pay other debt before I pay off my HELOC during the draw period?
Do lenders charge a fee to repay my HELOC during the draw period?
Your lender may let you pay off your HELOC balance early, but many will assess fees.
The most common is an early repayment penalty, and it’s standard if you pay off and close out a HELOC within the first few years of opening the account. The details vary by lender, but this penalty often applies during the first three to five years.
An early prepayment penalty may be a flat rate or a percentage of the total line of credit, depending on the lender. The fee can also change over time. As the draw period progresses, the penalty may decrease.
You’ll want to read your fine print for the specifics, but here are examples we found in our research:
- A $235 fee if you pay off and close your HELOC within the first three years. (BECU, November 2022)
- A requirement to repay your lender for any HELOC closing costs it covered if you close out your HELOC in the first 36 months. (Truist, November 2022)
- A penalty of 1% of your original credit line if you close your account within 30 months of opening it. (U.S. Bank, November 2022)
In truth, this fee is less of a “prepayment penalty” in most cases and more of an “early account closure” fee. Most HELOC lenders won’t penalize you for repaying borrowed funds during the draw period. After all, if you repay the principal balance, you’re clearing your line of credit for additional borrowing.
Since HELOC lenders may cover some or all the fees involved with originating your line of credit—including closing costs, credit checks, application fees, and appraisals—this fee helps recoup costs if you close the account early.
Can my lender close my HELOC if I pay it off during the draw period?
Lenders have the right to close out a line of credit at any time, for reasons laid out in the Truth in Lending Act.
Even if you pay off your HELOC balance during the draw period, your lender is unlikely to close the account without your approval or a direct request. A HELOC is, by design, an open-ended line of credit that you can pull from as needed at any point during the draw period. Whether you withdraw the entire amount in month one or never need to touch a penny is up to you.
But outstanding HELOCs represent a potential risk to lenders, so a lender may opt to freeze or close certain lines of credit to protect itself.
A HELOC lender will only close a line of credit when the account balance is zero. The lender can close the account without your approval if you aren’t using your HELOC and have a $0 balance. It often will if it believes your line of credit is now a more significant risk—if action or inaction on your part causes your property’s appraised value to drop dramatically, for instance.
Is it cheaper to repay my HELOC during the draw period?
When repaying debt, a rule of thumb is: The sooner you can clear out the balance, the less you’ll accrue in interest. So it’s often cheaper to repay your HELOC during the draw period than to wait for the repayment period.
Paying off your balance limits the interest that can accrue. Having a variable interest rate can also help ensure rates don’t rise before you tackle the debt.
Of course, it can make more sense to wait in certain situations. For example, say you would save $350 in interest by repaying your HELOC during the draw period, but you’d also have to pay a $500 prepayment fee. It could make more sense to wait until that penalty period ends.
Keeping a small outstanding balance on your HELOC can help ensure your lender doesn’t close it unexpectedly due to inactivity.
Should I pay other debt before I pay off my HELOC during the draw period?
If you’re like most consumers, your HELOC balance isn’t the only debt you carry. So if you have extra cash during your draw period, does it ever make sense to pay off those debts before tackling your HELOC balance? It depends.
You’ll often want to tackle your highest-interest debt first if you want to pay the lowest amount in interest. Since HELOCs are secured by the equity in your home, they can have lower interest rates than unsecured debts, such as credit cards or student loans. In that case, you may be wise to focus on higher balances.
On the other hand, if you’ve maxed out your limit, you can’t use that line as a financial safety net. Paying off that balance—versus paying off an auto or student loan—can open up your line of credit and give you more flexibility.
If you have additional questions, check out our article on how draw periods work.
Author: Stephanie Colestock