Should I terminate my HELOC early?
HELOCs can be terminated early
- Your HELOC consists of a draw period and a payback period.
- Keeping a HELOC can provide useful cash, but usually carries an annual fee.
- Most HELOCs have an early termination fee.
- You must give your lender written notice when terminating a HELOC.
You’ve been enjoying that kitchen remodel for a few years, and just celebrated paying off the home equity line of credit (HELOC) you took out to finance the work. The question now is, should you keep the HELOC account open or close it out?
Draw vs payback
A HELOC can be a powerful resource for homeowners who need affordable financing for renovations, emergency expenses or other large expenses. As a line of credit secured against a homeowner’s equity, borrowers have an initial draw period of five to 10 years, where typically only interest is paid on the balance. After the draw period ends, a 10- to 20-year payback period begins, during which the principal plus interest is paid. You can pay extra during the draw period, directing the extra money toward the principal amount. Note that in some cases, the remainder of the loan will be due in a balloon payment at the end of the draw period.
A HELOC is not terminated when the balance is paid down to zero. In this way, it is similar to a credit card, where borrowers can continue to draw from and repay the loan. If you have paid off your HELOC and have no immediate use for it, you can either keep the line open or take steps to close it out.
To keep or terminate
Keeping a HELOC can be a financial safety net should an unexpected expense like a car accident occur in the future. You will have ready cash at hand without having to go through a lengthy loan approval process — and pay any associated fees. Furthermore, keeping a HELOC open without drawing from it can boost your credit score, as your overall available credit amount will be larger.
Many HELOCs carry an annual fee, however, which can be reason to terminate the line if you do not intend to use it. Additionally, if you are still paying off your mortgage, having a HELOC on top of it means there are two liens on your home. That is, two lenders have a right to your property should you be foreclosed on. You will find it extremely difficult to get any additional home equity loans while the HELOC is in place, as lenders almost never want to take a third lien position.
If you decide to close the line, you will need to send a written termination notice informing your lender. Before doing so, make sure that you are clear on your loan terms. Contact your lender to identify annual fees and early termination fees. Lenders are not legally required to inform you of early termination fees when taking out the loan — though most will — so it is worth double checking.
Lender freezes or terminates
In some situations, your lender can be the one to initiate a HELOC reduction, freeze or termination. If your home falls drastically in value, your income changes significantly, or your credit score drops, your lender has the right to reduce or freeze your HELOC. They may even seek termination if you are delinquent on payments or have conducted fraud. In these cases, the law requires lenders to inform you of the reasoning behind the change and they must reinstate your HELOC if the problem is resolved.
Refinancing a HELOC
If your payback period is approaching and you have not yet paid off the HELOC, you will likely see your monthly payments increase significantly — particularly if you have been making minimum interest-only payments. If you are unwilling or unable to start repaying the HELOC, consider refinancing. You can refinance an existing HELOC into a new HELOC, a home equity loan or refinance the HELOC together with your first mortgage.