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Yes, there are often penalties for paying off a home equity loan early. Lenders impose these penalties, sometimes called prepayment penalties or early termination fees, to recover the interest they would have otherwise received if you had remained a borrower for the entire duration of the loan.
Here’s what you need to know about home equity loan prepayment penalties:
- How they work: Prepayment penalties are typically a percentage of your remaining loan balance, ranging from 1% to 5%. Some lenders may charge a flat fee instead.
- When they apply: These penalties usually apply if you pay off your loan within the first few years of the term. The exact timeframe varies by lender.
- How to avoid them: You can avoid prepayment penalties by choosing a lender that doesn’t charge them, or by refinancing your loan to a new lender with no prepayment penalties.
- Alternatives to consider: A home equity line of credit (HELOC) may be a better option if you plan to pay off your loan early, as they typically have lower or no prepayment penalties.
Here’s a breakdown of the key points:
- Title: Are There Penalties for Paying Off a Home Equity Loan Early?
- Keywords: home equity loan, prepayment penalty, early termination fee, HELOC
- Meta Description: This article explains how prepayment penalties work for home equity loans, how to avoid them, and alternative options to consider.
Here’s the SEO-friendly structure of the article:
- H1: Are There Penalties for Paying Off a Home Equity Loan Early?
- H2: What are Home Equity Loan Prepayment Penalties?
- H3: How do Home Equity Loan Prepayment Penalties Work?
- H4: When do Home Equity Loan Prepayment Penalties Apply?
- H3: How to Avoid Home Equity Loan Prepayment Penalties
- H2: Alternatives to Home Equity Loans with Prepayment Penalties
- H3: Home Equity Lines of Credit (HELOCs)
- H2: Conclusion
Here’s the content of the article:
Are There Penalties for Paying Off a Home Equity Loan Early?
By enabling you to access the equity you’ve built in your house, a home equity loan can be a useful financial tool. But it’s crucial to be aware of the possible expenses connected to this kind of loan, such as early repayment penalties.
What are Home Equity Loan Prepayment Penalties?
Lenders impose penalties on you if you pay off your home equity loan early. These fees are meant to make up for the interest the lender would have received if you had remained on the loan for the entire duration.
How do Home Equity Loan Prepayment Penalties Work?
Prepayment penalties typically range from 1% to 5% of your remaining loan balance. Some lenders may charge a flat fee instead. The exact amount of the penalty will vary depending on the lender and the terms of your loan agreement.
When do Home Equity Loan Prepayment Penalties Apply?
Prepayment penalties usually apply if you pay off your loan within the first few years of the term. The exact timeframe will vary by lender, so it’s important to check your loan agreement carefully.
How to Avoid Home Equity Loan Prepayment Penalties
There are a few ways to avoid home equity loan prepayment penalties:
- Choose a lender that doesn’t charge them. Some lenders offer home equity loans with no prepayment penalties.
- Refinance your loan to a new lender with no prepayment penalties. If you’re already paying a prepayment penalty, you may be able to refinance your loan to a new lender with lower or no penalties.
- Pay off your loan slowly. If you can’t avoid a prepayment penalty, you can minimize its impact by paying off your loan slowly over time.
Alternatives to Home Equity Loans with Prepayment Penalties
If you’re concerned about prepayment penalties, you may want to consider an alternative to a home equity loan, such as a home equity line of credit (HELOC). HELOCs typically have lower or no prepayment penalties, making them a more flexible option if you think you might want to pay off your loan early.
Home Equity Lines of Credit (HELOCs)
A HELOC is a revolving line of credit that allows you to borrow against the equity in your home. You can use the funds for any purpose, and you only pay interest on the amount you borrow. HELOCs typically have variable interest rates, so your payments may fluctuate over time.
Prepayment penalties can be a significant cost associated with home equity loans. If you’re considering taking out a home equity loan, it’s important to understand the potential penalties and how to avoid them. By choosing the right lender and loan terms, you can minimize the impact of prepayment penalties and save money on your home equity loan.
How to avoid prepayment penalties on a HELOC
Not all lenders charge a HELOC early payoff penalty. If you’re worried about getting one, it might make sense to use a non-bank lender—as long as you can still get a competitive rate—as they are more common with banks.
Carefully read and make sure you understand the terms of your HELOC. If there is a prepayment penalty associated with your line of credit, you can decide whether to pay it now when the balance is paid off or to wait until the penalty period has ended before making the payment.
How much is a typical prepayment penalty on a HELOC?
The exact amount of a prepayment penalty varies from one lender to the next. In general, you can expect the fee to range from 2 percent to 5 percent of your loan. In some cases, the fee the lender charges may be based on how early you prepay the HELOC.
For example, you might be penalized 3 percent if you close a home equity loan before the three-year period ends, or 5 percent if you close a home equity loan before the five-year period ends. Some lenders might choose to impose an early termination fee, typically in the range of several hundred dollars. For instance, Bank of America charges $450 if you close your account before 36 months after opening a HELOC. If you close or cancel the line of credit within 24 months of opening it, Rockland Trust Bank may charge an early termination fee of $500. Alliant Credit Union offers a potential $200 one for the same duration.