How to pay off a HELOC quickly
Homeowners who have an open home equity line of credit (HELOC) often want to know how to pay off their HELOC faster. If you need to pay off a HELOC quickly, first create a budget so you can plan to put more money into paying off your loan balance each month. If possible, stop drawing from the loan entirely, or borrow only what you need.
Although there are several benefits to paying off your HELOC early, you may be charged prepayment penalties by your lender for paying off and closing your HELOC early.
Read on to learn more about how to pay off a HELOC faster.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC) easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
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What is home equity?
Home equity is the amount of the home you own. For example, if you do not have a mortgage, you have 100% equity. If you have a mortgage, as you pay off your mortgage loan your equity increases, as your debt is reduced.
What is a HELOC?
A
HELOC is a type of secured loan that lets you borrow money as a line of credit. A line of credit limit is determined by the lender based on several factors, including the equity in your home, your property’s fair market value, and your credit score. Generally, the more equity you have, the higher the amount of credit you’ll be approved for.
A secured loan requires the borrower to pledge an asset as collateral to “secure” the loan. With a HELOC, your home is the collateral securing the loan. This means if you fail to repay the loan the lender can foreclose and take your home.
Getting a HELOC is a straightforward process, and many homeowners benefit greatly from their HELOC. HELOC funds can be used for anything, including making home renovations, paying off high-interest debt, paying for college tuition and even as a down payment on a second home or investment property.
There are times when homeowners who have a HELOC want to know how to pay off a HELOC faster, to free-up their equity.
How do HELOC repayments work?
HELOC repayments can be tricky to understand. All HELOCS have a “draw period” (typically 10-15 years) and a “repayment period” (typically up to 20 years). HELOC repayment is divided into two timeframes, a draw period, and a repayment period. Let’s take a closer look at each of these.
Draw period. During the draw period, you can borrow as much of the funds as you need. Payments made during the draw period are calculated as “interest only,” meaning you aren’t repaying the entire loan or the principal amount. Some lenders will allow payments toward principal during the draw period to help make it easier for people to manage their finances by avoiding a large “balloon” payment when the repayment period starts.
Repayment period. After the draw period ends, the HELOC repayment period begins. At this time, most HELOC interest rates will adjust from a variable rate to a fixed rate, and monthly payments will include both principal and interest on the outstanding balance.
How to pay off your HELOC off faster
There are advantages to
paying off a HELOC early, including saving money on interest and freeing up cash by eliminating your monthly HELOC payment. However, lenders typically charge fees, called prepayment penalties, for paying off a HELOC early.
Here are several strategies for paying off a HELOC faster:
Only borrow what you need.
If you've taken out a HELOC for a specific purpose, such as a home renovation project, paying college tuition for yourself or your child, paying off high interest debt, be sure not to stray from your goal. Having access to large amounts of cash can be tempting, but the more you borrow from your HELOC the more debt you'll create and the more interest you'll pay.
Make payments towards principal during draw period.
HELOCs generally have a 10-year draw period during which interest only is charged on the amount you use. Lenders allow you to make payments toward the principal balance during the draw period. By paying down the principal amount owed you will pay less interest and avoid having a large "balloon" payment of both principal and interest.
Make a lump sum payment.
If you have the money to do so, consider making a lump sum payment to pay off your HELOC balance. You replenish your credit line in the process and save money on interest.
Consider switching to a fixed-rate HELOC.
More lenders are starting to offer
fixed interest rate HELOCs. A fixed-rate HELOC may start with a variable interest rate which can be converted to a fixed interest rate. The HELOC fixed rate option may be advertised as a hybrid HELOC because it combines fixed and variable interest rate options.
Research different refinancing options.
There are several ways to
refinance a HELOC, including refinancing to a new HELOC or paying off your HELOC entirely through a cash-out refinance. Some lenders may allow you to do a loan modification to lower the interest rate or convert to a fixed rate, without having to refinance, so be sure to ask your lender what options are available to you.
Can you pay off your HELOC early?
Yes, it's possible to
pay off a HELOC early. However, lenders often charge a prepayment penalty fee to customers who pay off and close a HELOC account before the end of the loan term. Each lender has its own fees and policies; however, HELOC prepayment penalties typically range from 1% 5% of the loan amount. Some lenders will not charge a penalty for paying your loan balance in full, but they will charge a penalty on HELOC accounts that are paid in full and closed.
Advantages to paying off your HELOC early
Many homeowners with a HELOC ask, “
Can I pay off a HELOC early?” HELOCs can be paid off early, and there are advantages to doing so, including:
Streamlining monthly payments. Your household budget will be easier to navigate once your HELOC is paid off.
Free up cash. Paying off your HELOC early frees up cash for other purchases you may have been putting off.
Reduce debt-to-income (DTI) ratio. Your
DTI ratio is a comparison between your income and your monthly debt payments. By paying off your HELOC early you’ll have less debt, which could make it easier to qualify for other types of loans and credit.
Do HELOCs have prepayment penalties?
Yes. Lenders make money on the interest they charge borrowers on loans. Therefore, lenders charge prepayment penalties to borrowers who pay off their HELOC early, to make up for lost revenue when a loan is paid off and closed. A prepayment penalty may be charged to borrowers who pay off a HELOC quickly before the loan term officially ends.
Are HELOC prepayment penalties negotiable?
It may be possible to negotiate a HELOC prepayment penalty. Each lender has its own HELOC policy. If you want to pay off your HELOC, it doesn’t hurt to ask the lender how to pay off a HELOC early and negotiate the prepayment penalty fees.
How to avoid HELOC prepayment penalties
The best way to avoid paying HELOC prepayment penalties is to understand the terms of your HELOC before you sign for the loan. If you’ll need the line of credit for a short period of time or will be selling your home and closing the loan, be sure to ask the lender if there is a pre-payment penalty fee and if so, how much it is.
Is getting a HELOC worth it right now?
Whether or not a HELOC is worth it largely depends on your unique financial situation. If you need a large amount of cash to use over time, then a HELOC could be worth it.
HELOC interest rates are lower than credit cards rates, so you could save money on interest payments by choosing a HELOC. However, HELOCs come with an adjustable rate that will become a fixed rate after the 10-year draw period is up, and the fixed rate may be higher than the introductory rate.
Before you sign for a HELOC make sure you understand how the variable rate works and what the maximum rate could be. And don't forget to ask your lender how to pay off a HELOC quickly just in case you need to close the loan before the specified term.\
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Line of Credit Today!