If you have enough stocks in your home and need a cash flow, the Home Equity Credit Line (HELOC) can help. This allows you to use that equity as collateral and, as with credit card use, oppose it when necessary.
It takes 10 or 2 years to repay the funds in monthly installments. But what if you want to resolve the Heloc balance early? It’s viable – but your lender may charge a HELOC advance penalty.
What is the HELOC prepayment penalty?
Once you enter the HELOC repayment period, there is a specific time frame for repayment of your outstanding balance. If you make a minimum payment, you can follow that time frame.
However, you can choose to repay your balance faster by making a temporary payment or adding an additional amount to each payment. A HELOC early or prepayment penalty is a fee charged by a HELOC lender if the debt is resolved long before the end of the loan term. If you repay and close within a certain time after you open it – when you are still in a draw period – you may be charged a penalty.
Why do lenders claim HELOC advance penalties?
Lenders make money primarily by charging interest on the products they offer, along with annual or maintenance fees. With contracted products like HELOC, they calculate the profits they make based on the interest of that term or life expectancy. If they settle down and close earlier than planned, it will close their income flow early. To make up for that loss, they will take charge to you.
When will the lender claim an advance fine?
The exact timing may vary from lender to lender, but if a lender claims an early payoff penalty, there are usually certain points during the lifecycle of the HELOC.
- During the draw period: The HELOC draw period is the time that you can borrow from the credit line. Usually lasts 5-10 years. Chadgamon, a financial planner at Arnold and Mortwealth Management in Iowa City, Iowa, said that during this period (especially within the first two years), if the lender may charge an advance penalty, if the lender may request an advance penalty, or if the lender is able to close. “This fee will cover any interest you won’t earn because the line of credit closes before it is expected,” he says.
- Within the repayment period: The repayment stage is the time frame when you are no longer permitted to borrow money, and you must repay your outstanding balance in amortized monthly installments. The repayment stage continues anywhere from 10 to 20 years. If you pay your loan in full before the term ends, you will be able to pay an early payoff penalty from HELOC. “Some lenders specify that if they pay off and close HELOC within a certain number of years (often within the first 3-5 years) of the start of the repayment period, a prepayment penalty may apply,” Gammon says. “This time frame should be stated explicitly in the loan agreement.”
What is the typical HELOC prepayment penalty?
The exact amount of advance penalty varies from lender to next lender. In general, you can expect the fee to range from 2-5% of the loan. In some cases, lender fees may be based on early HELOC advance payments.
For example, if you close your HELOC three years ago, you can either pay a 3% penalty or charge a 5% penalty for closing your HELOC before the fifth year mark. Some lenders may choose to charge a flat rate for early termination, which usually amounts to several hundred dollars. for example:
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Bank of America will charge $450 if you terminate your account within 36 months of establishing HELOC.
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Rockland Trust Bank may charge an early termination fee of $500 if it closes or cancels within 24 months of opening a credit line.
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US banks may charge a 1% early closure fee or up to $500 if their credit line is closed and paid off within the first 30 months.
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Truist may need to repay the closing costs paid by the lender if it pays off the HELOC within three years (36 months).
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Rockland Trust Bank may charge a $500 fee if it repays the entire remaining balance within the first two years (24 months) and closes HELOC.
How to avoid HELOC advance penalties
Not all lenders will charge Helock’s early payoff penalty. Something that tends to become a bank. So, if you are worried about a penalty, it may make sense to go with a non-bank lender.
The federal truth of the Lending Act (TILA) requires lenders to disclose all costs, surcharges and other expenses related to Helock, including prepayment penalties. Therefore, please carefully read and review the terms of your credit line before you actually commit. Please note that these penalties can be communicated by a variety of names, such as “early closure” or “early closure” fees. Don’t hesitate to ask about any term that makes you mysterious.
If your credit line actually has a prepayment penalty, you can either absorb that cost at the time of payoff, or wait until the penalty period has passed and then wait until it settles down.
“One strategy is to repay the balance to zero if a lender claims a penalty to close the HELOC during the draw period,” explains Gamon. Once the draw period ends, most lenders simply close zero-balanced helock without penalty.
However, there may be other charges. “As HELOC may be able to charge annual or inactive fees, keep an eye on these fees and consider the costs to keep your credit line open against the penalty of early closure,” Gammon says.
Can I negotiate an advance penalty fee with my lender?
Yes, like almost all loan features, you have the option to negotiate a prepayment penalty for your home equity loan with your lender. Of course, there is no guarantee that the lender will agree to drop or change it, but it is worth the effort.
Christina McCollum, producer market leader at Washington-based Kennewick Churchill Mortgage, should consider your approach and ensure a firm case as to why you need to remove or lower your penalty.
“Making a strong claim will be in the borrower’s best interest,” says McCollum. “For example, do borrowers experience hardships? How long do they have left in the draw period? These factors vary on a case-by-case basis, but they can make a difference.”
If you have a long-standing relationship with your lender, try to highlight that fact as well during negotiations. And don’t be afraid to go to higher authority if it seems like the customer rep you are dealing with can’t do anything for you.
What are the benefits of paying back Heloc early?
There may be penalties for early repayment or termination of HELOC, but in some cases it makes sense to eliminate debt in advance. Among the benefits:
- Pay less interest: HELOC repayment periods often increase over 10-20 years, during which period you will be charged interest on your debt. By paying back the HeLoc years in advance, you can avoid paying a significant amount. Often, the profit you avoid paying is far beyond the penalty you received for early termination.
- Streamline your monthly payments: It’s difficult to have multiple debts to track and pay back each month. Eliminating Heloc’s debts will streamline your bookkeeping.
- Reduce the debt-to-income ratio: Having too much debt compared to your income will limit the amount of free cash available and weaken your credit score. Early repayment of Heloc will help you release cash on your monthly budget and improve your debt-to-income ratio. This is a key factor if you are planning to apply for future borrowings.
- Improved financial security: Early repayment of HELOCs can provide a psychological boost and improve your credit score among some raters. And of course, closing the HELOC will eliminate the potential lien in your home.
Final words about Heloc Prepayment Paenties
Some HELOC lenders do not charge upfront fees, but others do. Therefore, read and understand the fine print before committing to a line of credit. It is usually where advance penalty information is buried. While the law requires lenders to indicate whether to impose a penalty, it should be noted that they can go under more harmless sounds, such as “early cancellation fees” (a “penalty” with a rather negative connotation).
Whatever they call it, it’s an extra cost.
Considering the thousands of people you are interested in upfront payments, a penalty of hundreds of dollars is more of a nuisance than a drawback. Still, it’s good to know that and talk about how to get out of it if possible.
