Decreasing any additional charges to your line and increasing monthly payments are an effective strategy for paying off the outstanding balance in a shorter time period. Use this calculator to find out how long it will take to pay off your home equity loan or line of credit.
Most HELOCs have a set term—when the term is up, you must pay off any remaining balance. If you pay off your HELOC balance early, your lender may offer you the choice to close the line of credit or keep it open for future borrowing.
When a consumer takes out a home equity loan, that adds a large balance or credit line to their credit report. Credit scoring agencies consider the total amount of money a consumer owes, and a large increase in outstanding debt drives scores lower.
While home equity loans enable you to take out a second mortgage on your property, cash-out refinances replace your primary mortgage. Instead of obtaining a separate loan, the remaining balance of your primary mortgage is paid off and rolled into a new mortgage that has a new term and interest rate.
How long do you have to repay a home equity loan? You'll make fixed monthly payments until the loan is paid off. Most terms range from five to 20 years, but you can take as long as 30 years to pay back a home equity loan.
A cash-out refinance is another way to tap your home equity. You essentially take out a mortgage larger than your current balance, use those funds to pay off your first loan, and then get the remaining balance in a lump-sum cash payment.
Dave Ramsey advises his followers to avoid home equity loans and HELOCs. Although it might seem like home equity loans might make sense if homeowners are trying to quickly pay down credit card debt in their quest to become debt-free, he still does not recommend home equity debt.
While the average closing costs for a home equity loan or line of credit may be lower than the closing costs of a standard mortgage, it can range between 2 percent to 5 percent of the total loan amount.
The Bottom Line
Paying off your home equity loan early is a great way to save a significant amount of interest over the life of your loan. Early payoff penalties are rare, but they do exist.
With an equity release plan approved by the Equity Release Council, you can make partial, or full repayment whenever you like. Some plans allow you to make payments without charges; however, some plans will require you to pay additional fees.
Home equity loans
When you get a home equity loan, your lender will pay out a single lump sum. Once you've received your loan, you start repaying it right away at a fixed interest rate. That means you'll pay a set amount every month for the term of the loan, whether it's five years or 15 years.
Loan payment example: on a $50,000 loan for 120 months at 6.10% interest rate, monthly payments would be $557.62.
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.
Though HELOCs carry lower interest rates than credit cards, they are still borrowed money. You eventually must repay the HELOC, and the more you borrowed and used, the larger your payments will be. If you don't, the lender will foreclose.
Since HELOCs sometimes have lower interest rates than mortgages, you could save money and potentially pay off your mortgage sooner. Even if the rates are similar, refinancing your first mortgage with a HELOC might still be the best choice for you.
How Much Equity Do You Need? To determine the amount of equity you need when selling your home, you need to know your reasons for selling. If you're looking to relocate, then you will need about 10% equity. If you're looking to upsize to a bigger home, you will need at least 15% minimum equity.
Yes, if you have enough equity in your current home, you can use the money from a home equity loan to make a down payment on another home—or even buy another home outright without a mortgage.
Home equity—the current value of your home minus your mortgage balance—matters because it helps you build wealth. When you have equity in your home, it's a resource you can borrow against to improve your property or pay down other high-interest debts.
For a $150,000, 30-year mortgage with a 4% rate, your basic monthly payment — meaning just principal and interest — should come to $716.12.
Home equity loans and HELOCs are two of the most common ways homeowners tap into their equity without refinancing. Both allow you to borrow against your home equity, just in slightly different ways. With a home equity loan, you get a lump-sum payment and then repay the loan monthly over time.
A home equity line of credit, also known as a HELOC, is one of the best ways to access equity in your home without selling it. Instead of taking out a loan at a fixed amount, a HELOC opens a pool of money that you can utilize, but you don't have to take it all at once or use it all.
If you have an existing home equity loan and need to fund a new project, take advantage of lower interest rates, or even change payment terms, you can create flexibility through home equity refinancing. You might even consider refinancing into a home equity line of credit.
The main disadvantage of equity release is that it does not pay you the full market value for your home. You will receive far less money than you would from selling the property on the open market – although of course in that situation you would still have to find somewhere else to live.