How does repayment for a HELOC work?

If you're considering a home equity line of credit (HELOC) or already have one, it's important to understand how repayment works. Paying it back early or faster than you planned may offer several benefits, but there may be drawbacks to consider as well.

Learn more about how paying back a HELOC works so you can find the approach that's best for your situation.

How a HELOC works

A HELOC is a form of revolving credit that allows homeowners to borrow against the equity in their home. It works similarly to a credit card in that you can borrow money up to a set limit. You can borrow up to the entire amount you're approved for, or just a small portion of it. The available credit replenishes as you pay down the balance, allowing for flexibility in accessing funds.

What is the HELOC draw period?

During the draw period, you can use the funds available up to the credit line amount. Typically, you're only required to make interest payments during the draw period, which tends to be 10–15 years, depending on your lender and the terms of your HELOC. Most HELOCs allow you to also make payments toward the principal during the draw period. When you make payments toward the principal, those funds go back to your line amount.

How does the HELOC repayment period work?

At the end of the draw period, you enter the HELOC repayment period — typically a 15-year fixed term during which you pay off your remaining principal, plus interest. During this time, no further draws may be taken on the line even if you have not used all of the available credit. Most HELOCs offer variable interest rates, which could change your monthly payment amount, but lenders may allow you to lock in a fixed rate for a number of years. However, there's often a fee for choosing this option.

Can you pay back your HELOC early?

You can pay down your HELOC faster than your lender requires. You could consider paying the entire balance at once if you have enough cash on hand. Otherwise, you might make additional principal payments. If you decide to make extra payments, be sure to alert your lender to ensure that the funds are applied to the principal.

HELOC prepayment penalties

There might be a cost associated with paying back your HELOC early, known as a prepayment penalty. Citizens does not charge for early payments towards your principal, however, some lenders will charge prepayment penalties if you pay off your loan in the first three to five years of the repayment period. Most prepayment penalties are about 2% of your loan balance, but the amount varies by lender. Check with your lender before you decide to pay off your loan early so you aren't surprised by any fees.

Typically, you won't face a prepayment penalty for contributing a small amount above the required monthly payments, but you should read your loan agreement and discuss the terms with your lender before deciding to make any payments ahead of schedule.

Alternative ways to pay off a HELOC

Rather than making the standard monthly payments on the HELOC during your repayment period, you might want to consider additional options for paying off your line of credit:

• Pay off the HELOC with a cash-out refinance: If you've built up equity in your home, you may want to refinance your first mortgage and use some of the equity to pay down or pay off the HELOC. This will help you avoid having two loan payments to manage each month.
• Apply for a new HELOC: A new HELOC could give you access to the funds to payoff your existing HELOC and postpone the repayment period another 10 years. Plus a new HELOC for a larger line amount could give you access to additional funds to pay for your next project

Benefits of paying off a HELOC early

Paying off a HELOC sooner means you'll owe less in interest over the life of the loan, which saves you money. Lowering the outstanding balance also decreases your debt-to-income ratio, which is attractive to lenders and can help you meet your personal financial goals. Reducing your debt may boost your credit score and make it easier to qualify the next time you apply for credit.

Enjoy the flexibility of a HELOC

You can pay off a HELOC early by making additional payments to the principal, but talk to your lender first to make sure you don't owe a prepayment penalty. Alternative ways to pay down a HELOC include converting it to a fixed-rate loan or refinancing.

Have questions about how to pay back your HELOC? Talk to your lender to learn more. And if you're considering a new HELOC, get your rate online in minutes with Citizens FastLine®.

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