HELOC Prepayment Penalties: What They Are and How to Avoid Them

A HELOC is one way to tap into your home’s equity, and you can use the cash for just about any purpose, such as home renovations, paying off debt, or covering college expenses. These lines of credit are flexible and usually have lower interest rates than credit cards. But here’s something that might catch you off guard: some lenders charge a fee if you pay it off early or close the account.

This can happen if you refinance or sell your home, although that’s not always the case. Here’s a closer look at what these penalties are and how you can avoid them.

In this article (Skip to...)

• What is a prepayment penalty on a HELOC?
• Common situations that trigger HELOC prepayment penalties
• How much do HELOC prepayment penalties cost?
• How to avoid HELOC prepayment penalties

What is a prepayment penalty on a HELOC?

A prepayment penalty might not be something you hear about often, but if you’re thinking about taking out any kind of loan or line of credit such as a HELOC, it’s something you’ll want to understand.

In simple terms, it’s a fee some lenders charge if you pay off a loan early.

Often called an early termination or early closure fee, when you apply for a HELOC, your lender estimates how much interest they’ll earn over time. So when you pay off the account ahead of schedule, it cuts into their profit.

Here’s how it works. Let’s say you get a HELOC, and 12 months later, you decide to refinance or sell your home. If your agreement includes a clause that says the lender can charge a fee for closing the account within a certain number of years, you could be on the hook. It’s their way of recovering some of the upfront costs.

Common situations that trigger HELOC prepayment penalties

If you want to save money with a HELOC, it’s important to understand the situations that can trigger a prepayment penalty, especially if you prefer paying things off early.

1. Refinancing and paying off the HELOC early

Mortgage rates can go up or down. And when they drop, some people refinance to get a lower rate and monthly payment, and they might pay off their HELOC in the process.

But before you do that, check your HELOC agreement.

If you’re within the first few years, your lender might charge a fee for paying it off or closing it early. Sometimes, that fee might be cheaper than sticking with a higher mortgage rate, so you’ll need to run the numbers.

2. Selling your home during the draw period

A HELOC usually has two phases: the draw period (when you can borrow money and make interest-only payments, typically 10 years) and the repayment period (when you start paying it back, typically 20 to 30 years).

If you sell your home while you’re still in the draw period, the full HELOC balance becomes due immediately, even though selling your home is a valid reason to pay off and close the account.

3. Voluntarily closing the HELOC early

Maybe you took out a HELOC for a quick home project or didn’t borrow that much, meaning you’re able to pay it off quickly. That’s fine, just know that this can also trigger a fee.

4. Paying down the balance aggressively

Some people like to throw extra money at their debt each month, which is normally a cost-effective move. But with a HELOC, that could backfire.

Paying more than the minimum payment reduces the interest your lender earns, which might trigger a fee. So check your terms before going all in.

How much do HELOC prepayment penalties cost?

Even though some HELOCs come with prepayment penalties, that doesn’t mean you shouldn’t refinance, sell your home, or close the account early.

In some cases, the fee you’d pay to close it early might be minor compared to the benefits, like locking in a lower mortgage rate or reaching your financial goals faster.

It really depends on the lender and their policies. Some charge a flat fee, usually between $300 and $500. Whereas others might charge a percentage of your credit line, often between 2% and 5%. So if you had a $50,000 HELOC, a 2% early closure fee would cost you $1,000.

That’s not necessarily a dealbreaker, but it’s still something to factor in.

Also, keep in mind that most lenders only charge this fee if you close the account within the first two to three years. So, if you shut it down after 18 months, you might get hit with the fee. But if you wait until 37 months, you might not pay anything.

How to avoid HELOC prepayment penalties

If you’re thinking about getting a HELOC and want to avoid a prepayment penalty, the best thing you can do is be direct with your lender: “Is there a fee if I pay this off early or close the line within a certain number of years?” 

This information is also in your contract, but there’s no harm in asking upfront.

You should also read the agreement and pay attention to the fine print. Yes, it’s a lot of legal language, but it can prevent surprise fees later.

It’s also worth noting that not all lenders charge this fee. Banks are more likely to include it, but some credit unions or online lenders might not. That’s why shopping around is so important.

The bottom line

Some HELOCs come with prepayment penalties, but not all. That’s why it’s important to shop around, compare lenders, and always read the fine print. A HELOC can be a great financial tool when used wisely, as long as you understand how it works so you’re not caught off guard.