The Best HELOCs Without Prepayment Penalty

It’s possible to find a HELOC without a prepayment penalty, which can potentially save you thousands of dollars if you want to pay off your line of credit early. Some people don’t realize that HELOC lenders can charge prepayment penalties, sometimes called a cancellation fee, between 1% and 5% of the total loan amount.

Here are the best HELOC lenders that don’t charge prepayment fees, plus answers to many frequently asked questions about the HELOC repayment process.

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Lenders charge prepayment penalties to discourage borrowers from closing their accounts early. After all, those lenders expect to earn interest on the loan for multiple years. However, choosing a lender that doesn’t charge prepayment penalty fees gives you more control over the repayment process.

Can you pay off a HELOC early?

Yes, one part of how a HELOC works is that you can withdraw from your available credit at any time during the draw period, and you can also pay down your balance at any time. The only thing to watch for is a prepayment penalty, sometimes called an early closure, cancellation, or termination fee. Some lenders charge this if you pay off the balance and close the line too soon after opening it, usually within the first few years.

What’s the difference between paying down and paying off a HELOC?

If you pay down your HELOC balance early, it doesn’t trigger a penalty. This is sometimes called an empty-balance HELOC. However, if you close your HELOC account entirely, you may have those early closure fees mentioned above, though it depends on the lender. Checking your lender’s fee schedule will tell you what timing rules apply to your particular account.

Which HELOC has no early payoff penalties?

Working with a lender that offers a HELOC with no early payoff penalty makes sense if you plan to pay your balance early or close the account before the draw period ends. But it’s also important to review other potential fees before deciding.

For example, some lenders that don’t assess prepayment penalties charge origination fees. So it’s essential to understand the loan’s actual cost before signing up.

We researched the best lenders that don’t charge prepayment fees for a HELOC early. Here’s everything to know.

What is a HELOC prepayment penalty?

A prepayment penalty is what some lenders charge if you close your HELOC early. To some lenders, this means closing the account within the first three years of having it or before the draw period ends. Others consider closing it early to be any time before your agreed-upon term ends.

Why do HELOC lenders charge prepayment penalties?

Lenders use prepayment penalties for several reasons:

• To recover potential interest losses: Early loan payoffs mean lenders miss out on expected interest income. Charging a prepayment fee is one way to recoup this cost.
• To deter refinancing: You may be less likely to switch lenders or pay your loan off early if you know you’ll pay prepayment penalties. 
• To offset administrative expenses: Lenders may charge a fee to cover the extra work caused by unexpected early payoffs.

Types of HELOC prepayment penalties

When comparing HELOC lenders, read the agreement carefully to see whether they charge some type of prepayment penalty. Here are some common examples.

Type of HELOC prepayment penalties	How it works	Example charge
Percentage-based early termination fee	Lenders charge a fee based on when you close your credit line. For example, a 5% penalty if you pay off your HELOC in year 1, but only a 1% penalty if you pay it off in year 5.	Closing a $50,000 HELOC: • In year 1 with a 5% penalty = $2,500 • In year 5 with a 1% penalty = $500
Time-based early closure fee	Some lenders may only charge a prepayment penalty if you close the account during the draw period. For example, a lender may charge a 2% prepayment penalty, but only during the draw period. The agreement might say that if you wait until the repayment period to pay it off, there’s no fee.	• Closing a $50,000 HELOC with a 2% penalty during the draw period = $1,000 • Closing the same HELOC in the repayment period = no fee
Closing-cost reimbursement	Some lenders charge you for closing costs they covered if you close the account early. For example, your lender might cover $3,000 in closing costs for you when you took out your $50,000 HELOC, but with the disclaimer that you’d repay the full amount if you closed your HELOC within the first 36 months.	• Closing a $50,000 HELOC within the first three years = $3,000 fee  • Closing the same HELOC after three years = no fee
Flat fee penalty	A lender may charge a flat fee if you close your account early, like a flat $500 instead of charging you a percentage of your remaining balance.	Closing a $50,000 HELOC early = $500 fee
Interest-based penalty	Some lenders charge a prepayment penalty based on the amount of interest over a specific period of time, like three months.	For a $50,000 balance with a 7% interest rate, three months of interest would be $875.

Is a home equity loan prepayment penalty the same as a HELOC?

Prepayment penalties on home equity loans work a little differently from the fees you might see on a HELOC. Since a home equity loan is a fixed installment loan, the penalty usually applies when you pay off the balance early, often within the first few years.

With a HELOC, the more common issue is an early closure or early termination fee if you close the line soon after opening it. The idea is similar, but the triggers and timing aren’t always the same. Always review the lender’s fee schedule so you know which rules apply to your loan type.

The federal Truth In Lending Act requires all HELOC providers to disclose their fees. It is important to research so you know what fees to look for in case something is missing. The common fees include: annual percentage rate (APR); payment terms; miscellaneous charges; variable-rate feature information; application fees; annual fees; transaction fees; appraisal fees; credit report fees; attorneys’ fees

What if my HELOC lender charges an early payoff penalty?

If your current HELOC provider charges prepayment penalties, there are a few things you can do:

• Read your contract carefully: Understand the specific terms of the penalty. It might only apply during certain periods (like the draw period) or for payments over a certain amount.
• Wait it out: Many prepayment penalties expire after a few years. If it makes sense, you can wait until the penalty period ends before making large payments or paying off the loan.
• Calculate the cost-benefit: Sometimes, paying the penalty might still be worthwhile if the interest you’ll save is more than the penalty amount.
• Refinance strategically: Some lenders might be willing to cover your prepayment penalty as part of the new loan terms if you’re refinancing.

Prepayment penalties can be frustrating, but they shouldn’t necessarily prevent you from making financial decisions that are in your best interest. Always crunch the numbers to see what makes the most financial sense in your situation.

How much can you save without a prepayment penalty?

It’s a good idea to find a Home Equity Line of Credit with no prepayment penalty because they are usually 1% to 5% of your remaining balance. So, you could save thousands of dollars if you chose a HELOC lender that doesn’t charge prepayment penalties. The exact savings will depend on your loan amount, the specific penalty rate, and how early you pay off the loan.

If you’re considering paying off a HELOC ahead of time, review your loan agreement or ask your lender about potential prepayment penalties.

Being able to pay off a HELOC early without a prepayment penalty could help you save thousands of dollars, which you could then invest or use to pay down other debt. Given the option, I would advise a borrower to elect a HELOC that does not charge prepayment penalties over one that does.

However, if the company charges other fees instead of a prepayment penalty, I would advise weighing those costs against the terms of the HELOC to understand where the greater savings are obtainable. Paying the prepayment penalty could be more advantageous than paying other fees. The bottom line is to do your research and number crunching; consult a financial professional, trusted friend, or family member if in doubt.

Benefits of paying off your HELOC early

It’s no secret that paying off your HELOC early can lead to major savings. For instance, say you have a $50,000 HELOC with a 10% fixed interest rate. The HELOC has a 20-year repayment period, but you decide to pay it off in 10 years instead. Here’s how your savings might shake out: 

Scenario 1: You stick to the 20-year repayment period: 

Monthly payment	$483
Total interest paid	$65,803
Total amount paid	$115,803

Scenario 2: You opt for a 10-year repayment period

Monthly payment	$661
Total interest paid	$29,290
Total amount paid	$79,290

Savings by paying off early: $36,512

Given the potential savings, finding a lender without prepayment penalties is worth it if you plan to pay off your balance early.

FAQ about no prepayment penalty HELOCs

How we chose the best HELOCs without prepayment penalties

Since 2018, LendEDU has evaluated home equity companies to help readers find the best home equity loans and HELOCs. Our latest analysis reviewed 850 data points from 34 lenders and financial institutions, with 25 data points collected from each. This information is gathered from company websites, online applications, public disclosures, customer reviews, and direct communication with company representatives.

These star ratings help us determine which companies are best for different situations. We don’t believe two companies can be the best for the same purpose, so we only show each best-for designation once.