Can you pay off a HELOC early? Yes, it’s possible. But depending on your financial institution, there may be fees involved in clearing out what you owe on your home equity line of credit, so it’s important to understand how much you can truly save before you start making extra payments.
Key Points
• A HELOC includes both a draw and a repayment period.
• Early payoff can result in significant interest savings.
• Some lenders impose prepayment penalties on early HELOC closure.
• Paying off a HELOC improves equity and financial flexibility.
• Consider possible tax implications and credit score impact before paying off early.
HELOC Repayment Structure Explained
A home equity line of credit is broken into two periods: the draw and the repayment period.
Draw period: In this portion of your HELOC, you can make interest-only payments on whatever amount you draw. It usually lasts between five and 10 years, during which time you can pay off some or all of the balance and replenish your available credit. Then you can draw again as needed and only accrue interest on your outstanding principal.
Repayment period: Once the draw period closes, you can’t pull funds from your HELOC anymore. Repayment begins on both principal and interest. Oftentimes, you’ll have a 10 to 20-year term to repay the full balance. The rate usually starts as variable, but you may be able to roll the balance into a fixed-rate home equity loan.
In some cases, however, there’s a balloon payment: Your entire balance, including principal and interest, comes due at one time unless you refinance.
Benefits of Paying Off a HELOC Early
There are some potential benefits to take advantage of when you pay off a HELOC early.
Interest savings: Interest accrues throughout the life of a HELOC and can increase even more over time if you have a variable rate. Paying off a HELOC early could save you money in the long run. (Different types of home equity loans accrue interest in different ways, so make sure you understand how a HELOC, for example, differs from a home equity loan.)
Improved equity position: A HELOC is considered a second mortgage, which means it has precedence in getting paid off right after your original mortgage. Paying off your HELOC means that when you calculate home equity, your equity number will be greater. And it may also smooth the path to a sale of your home. (Some lenders may require you to pay off your HELOC before you can sell your home.)
Financial freedom: Getting rid of your HELOC payment also frees up more of your budget to work toward other financial goals, like retirement savings, or putting money toward a special trip or other large expense.
Recommended: Home Equity Loan Calculator
Potential Drawbacks of Early HELOC Payoff
Can you pay a HELOC off early without any drawbacks? It depends. Here’s what to consider before making a decision.
Prepayment Penalties
Some financial institutions charge a HELOC early payoff penalty if you close your account within a certain timeframe, often within the first five years of repayment. Instead of charging a flat fee, banks usually charge a percentage of your loan balance, usually 2%.
The average HELOC balance in 2023 was $42,139; paying off that balance with a 2% early penalty would cost $843.
But not all lenders charge this fee. If you’re considering a HELOC and may pay it off ahead of schedule, prioritize quotes that don’t include any kind of HELOC early payoff penalty.
Loss of Tax Deduction
In some instances, you may be eligible for HELOC-related tax deductions. Any interest paid on a HELOC or home equity loan between 2018 and 2025 may be tax deductible if the funds are used to buy, build, or substantially improve your home. Additionally, the property must be your main or second home. Paying off your HELOC means losing that deduction, but you can only take this deduction if you itemize (and many people don’t). Consult a tax advisor so you’re not surprised by the numbers when it comes tax time.
Recommended: HECM vs. HELOC
Strategies for Early HELOC Payoff
Now let’s look at how can you pay off a HELOC early. There are a few strategies to choose from.
Lump sum payments: Making large payments on top of your regularly scheduled payments can help you chip away at your balance and interest accrual. However, check into can you pay off a HELOC during the draw period, because some lenders may limit you to interest-only payments during this time. Also, clearly communicate to your lender that the additional payments should be credited to principal only; otherwise the lender may apply the funds to interest.
Accelerated payment schedules: Consistently make extra payments toward your principal to lower your balance at a faster pace over time. Use a HELOC monthly payment calculator to experiment with how your monthly payment would look using different payoff dates.
Refinancing options: It’s possible to refinance your HELOC into another line of credit in order to change the terms, such as the available credit line or draw period. To pay off your balance early, however, you can apply to transfer it into a home equity loan, which could have a fixed interest rate and payoff schedule.
Impact on Your Credit and Financial Profile
You can close a HELOC early without hurting your credit in the short-term because accounts in good standing stay on your credit report for as long as 10 years. Once that period expires, the average age of your credit history may drop, which could temporarily affect your score. Incorporating other types of no-fee credit could help mitigate any future damage, especially if you’re confident you won’t carry a balance.
Evaluating Your Financial Situation Before Early Payoff
Take a look at your entire financial picture before deciding to pay off your HELOC early. Do you have a solid emergency savings account? Are you contributing to your retirement account? If you have other high-interest debt, consider whether you should pay that off as you decide where the HELOC balance falls on your priority list.
Another factor is how long you plan to stay in your house. If you want to move soon, find out if you need to pay off the HELOC in full before listing your home, or if you can repay the balance with the proceeds from the sale.
The Takeaway
Paying off a HELOC early can save you in interest payments over time. However, it’s important to understand the details of your financing agreement to avoid any unwanted prepayment penalty fees. If you’re actively searching for a HELOC, make sure that’s part of your comparison process so you have more control over when you pay off your balance without worrying about extra costs.
SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
FAQ
Can I pay off my HELOC during the draw period?
Most lenders only require interest payments during the draw period, but you can usually make principal payments as well. That will lower the amount of interest being accrued while also replenishing your available credit.
How do I calculate potential savings from early HELOC payoff?
Use a HELOC calculator to find out how much interest you would save by paying off your balance ahead of schedule. If your lender charges an early payment fee, factor that cost into your potential savings to see if it’s worth it.
Will paying off my HELOC early affect my credit score?
As long as your account is in good standing, a HELOC will stay on your credit report for up to 10 years. After that, your average credit account age may drop unless you have other mature accounts to make up for the loss.
Photo credit: iStock/Riska
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