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If you’re making regular payments on your home equity loan or line of credit, you may be searching for a way to pay off your debt sooner and pay less interest over the life of the loan. Creating a home equity payment plan and sticking to it could provide the help you’re looking for.
In order to determine the right approach, you’ll first need to understand how each is paid off. Then you can set up your plan.
A home equity loan is much like a regular installment or auto loan. You borrow a certain amount and pay off the balance via fixed monthly payments at a fixed interest rate. There’s no fluctuation from month to month, so what you pay one month is the same as the next.
If you have a home equity line of credit (HELOC), repayment is far different. It operates like a credit card — you draw from the line up to the line amount (just like the credit limit on your credit card). Typically, you’re only required to make interest payments during the draw period, which tends to be 10 to 15 years. You can also make payments back toward the principal during the draw period. When you pay off part of the principal, those funds go back to your line amount.
When the draw period ends, you enter the repayment period, where you begin paying back the remaining principal on your HELOC, plus interest. Note: HELOCs tend to have variable interest rates while home equity loans are fixed.
Evaluate your budget to see how much you can allot toward repayment of your home equity loan or HELOC. Are you concerned about how much interest you’ll pay over the life of your loan? Go back to your budget to see if there’s more room to make additional principal payments. Making these extra payments on your home equity loan will reduce the amount of time it takes to repay the loan. For a HELOC, extra principal payments will reduce your monthly payments.
Alert your lender that the extra payments should be applied to the principal.
Some lenders will charge prepayment penalties if you pay off your loan in the first three to five years of the repayment plan. Whether you’re selling your home, refinancing, or just want to pay off debt early, a prepayment penalty could be an unexpected charge. Make sure you check with your lender before you decide to pay off your loan early.
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 carefully and discuss the terms with your lender before making a decision.
We are committed to helping you reach your potential by providing personalized solutions. Our dedicated colleagues can help you find the right product to help you reach your goals. To learn more about home equity, please call 1-888-514-2300, visit us online, or Ask a Citizen at your nearest Citizens Bank branch.
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