A home equity line of credit (HELOC) can be a useful financial tool if you have sufficient equity in your home and need a stream of cash. It allows you to use that equity as collateral, borrowing against it as the need arises — similar to using a credit card.

You’re given a decade or two to repay the funds, but let’s say you want to settle your HELOC balance early. It’s doable — but be aware, your lender might charge a prepayment penalty to do so.

Key terms

How HELOCs work
A HELOC allows you to tap your home's equity  Once you open a HELOC, you'll have access to a line of credit. You can typically access the line of credit over a 10-year draw period, during which you'll make interest-only payments. After the draw period, you'll need to repay what you borrowed, along with any outstanding interest, usually over 10 or 20 years. HELOCs almost always have variable interest rates, so your payments will change as rates fluctuate.

What is a prepayment penalty on a HELOC?

Once you enter your HELOC’s repayment period, you’ll have a specific time frame to pay off your outstanding balance. If you make the minimum payments, you’ll be following that time frame, geared to completely clearing the debt by the end of it.

However, you might choose to pay your balance off sooner by making a lump-sum payment or adding an extra amount to each payment. A prepayment penalty is a fee the HELOC lender charges if you make more than the minimum payment and settle the HELOC ahead of schedule.

This surcharge can also be referred to as an “early closure” or “early termination” fee. If you repay and close the line of credit within a certain time after opening it — when you’re still in the draw period — you may also be charged the penalty.

Some lenders entice borrowers with a “no closing cost” HELOC. But these often come with the stipulation that the lender can recapture those closing costs through an early closure fee.

How to avoid prepayment penalties on a HELOC

Not all lenders charge prepayment penalties. They tend to be more typical with banks, so if you’re concerned about incurring one, it might make sense to go with a non-bank lender, provided you can still get an attractive rate.

Carefully read and make sure you understand the terms of your HELOC. If your line of credit does in fact have a prepayment penalty, you might choose to absorb that cost at payoff, or wait until the penalty period has passed before prepaying.

Can I negotiate prepayment penalty fees with my lender?

Yes, as with any detail about a loan, you have the option to negotiate with your lender.

However, some lenders will simply refuse to remove the fee from your HELOC. Others might raise your interest rate or ask for something else in return. It’s up to you to decide if negotiating is worth trying and what is worth giving up to get the fee removed from your line of credit.

How much is a HELOC prepayment penalty?

The cost of a HELOC prepayment penalty varies by lender, but is typically no more than a few hundred dollars. It might equal a percentage of the balance up to a certain amount.

For example, if you close out a HELOC from Bank of America within three years, you’ll pay a fee of $450.

Why do lenders charge HELOC prepayment penalties?

Lenders make money by charging interest on the products they offer, along with annual or maintenance fees. With  contractual products (like a HELOC)  they calculate the profit they’ll make based on its entire term, or lifespan. If you settle and close your HELOC prematurely, it cuts off their income stream early. To compensate for that loss, they ding you with the fee.

Final word on HELOC prepayment penalties

While some HELOC lenders don’t charge a fee for prepayment, others do. So, before you commit to a line of credit, be sure you read and understand the fine print. That’s where prepayment fee info is usually buried. By law, lenders have to indicate if they impose one, but bear in mind that it could be called something else, like “early termination fee.”

Additional reporting by T. J. Porter