Home Equity Loan Prepayment Penalties

When you take out a home equity loan, you typically agree to borrow money at a fixed interest rate over a fixed period. This gives both you and your lender certainty about how much you will pay for the loan. If you enjoy a sudden windfall, however, you may want to pay back your home equity loan early.

In that case, you might face home equity loan prepayment penalties. These are fees you could be charged if you pay off the loan early and they vary a lot by lender. In this guide, we’ll explain how to find out if there are prepayment penalties attached to your home equity loan and how to avoid them.

Understanding Home Equity Loan Prepayment Penalties

Home equity loans can be a relatively low-cost way to borrow money. Because you put your house up as collateral for this type of loan, they are very low-risk for lenders, who are consequently able to offer low interest rates. However, home equity loans can have associated fees: origination fees, appraisal fees, and application fees, among others. These fees vary by lender and many lenders will try to attract customers by offering low-fee loans.

Prepayment penalties are often overlooked when borrowers look for a home equity loan because they are less imminent than the fees you will pay at the beginning of a loan. However, early payment penalties can be steep and it’s important to know if your loan has these penalties, especially if you are planning on paying it off early. If you are planning to use your loan for home improvements before selling your home, for example, your home equity loan might still be active when you sell and you may have to pay a penalty when you repay the loan at the close of your house sale.

The prepayment penalties associated with home equity loans vary a lot by lender. Some lenders impose steep fees, some impose almost no fees, and others will only charge a fee if you pay back the loan within a few years of taking it out. If you are unsure which of these applies to your loan, you should check your loan agreement or ask your lender to clarify the fees they charge.

Alternatives To a Home Equity Loan

There are a number of ways to avoid home equity loan early repayment fees. The most direct is to choose a lender which doesn’t impose these fees or at least one that doesn’t impose them after the first few years of your loan. This is especially important if you are planning on paying the loan back early.

A second option is to take out a home equity line of credit (HELOC) rather than a home equity loan. HELOCs sometimes also have early closure penalties, but you will normally only pay interest on the money you have borrowed on the line of credit. This means that if you pay back what you’ve borrowed early—that is, reduced the balance of your credit to zero—you won’t pay any interest. You can then leave the HELOC to come to the end of its term and then close it without penalties.

If you already have a home equity loan with prepayment penalties and want to pay it back early, you have a calculation to make. Some loans impose a set fee for early repayment; others have a fee that is equivalent to a (hopefully small) percentage of the total loan. In some cases, these fees may mean it costs more to repay the loan early than it does to let it run its course.

The Bottom Line

Some home equity loans have early repayment penalties. These are fees you will be charged if you pay back your loan earlier than expected. Whether your loan has these penalties and how much they are will depend on your lender. 

Make sure you read your loan agreement when taking out a home equity loan and talk to your lender if you are unsure about early repayment penalties. If you expect to pay back your loan within a short period of time, it might make more financial sense to apply for a home equity line of credit (HELOC).