A Home Equity Line of Credit (HELOC) offers homeowners a flexible way to borrow against their home’s equity. It often comes with lower interest rates than credit cards or personal loans. But once you’ve utilized your HELOC, a common question arises: Should you pay it off early?
The answer depends on your financial goals, interest rates, and how you use your HELOC. Let’s find out the potential benefits and drawbacks of early repayment so you can make a decision that works best for your situation.
Benefits of Paying Off Your HELOC Early
1. Save on Interest Costs
Like any loan, a HELOC accrues interest, typically at a variable rate. The longer you carry a balance, the more interest you’ll pay over time. Paying off your HELOC early, especially during a rising interest rate environment, can significantly reduce your total interest costs.
Even small extra payments each month can shorten your repayment period and save you hundreds or even thousands of dollars in interest. Talking about interest costs, the 10-year interest-only period provided by Amerisave can be the best option to help you manage your monthly payments and other financial obligations.
2. Free Up Monthly Cash Flow
Once you pay off your HELOC, that monthly payment is gone. This can ease your budget and free up cash for other goals, like investing, saving for retirement, or making home improvements without debt.
If you’re heading into retirement or simply want fewer financial obligations, eliminating your HELOC can bring peace of mind.
3. Improve Your Credit Profile
Carrying a high balance on your HELOC could impact your credit utilization ratio—especially if the account is reported as a revolving line of credit. Paying it down or off entirely may improve your credit score by lowering your debt load.
A paid-off HELOC also reflects positively in your overall credit history, showing lenders that you can responsibly manage large credit lines.
Things to Consider Before Paying It Off Early
- Prepayment Penalties or Fees
Not all lenders charge penalties for early repayment, but some may include clauses for minimum interest or early closure fees, especially if the HELOC is closed within a few years of opening.
Before you rush to pay it off, check your loan agreement or speak with your lender to confirm whether any fees apply.
2. Flexibility Loss
A HELOC is a revolving credit line. That means as you pay down the balance, the available credit remains open for future use. If you pay off the balance and close the account early, you lose access to that line of credit.
For homeowners who want the security of having funds available for emergencies or future projects, keeping the HELOC open might be worth more than paying it off quickly.
- Opportunity Cost
Paying off debt is generally smart, but consider whether your money could be working harder elsewhere. If your HELOC interest rate is relatively low, it might make more sense to invest extra funds in a retirement account, build an emergency fund, or pay off higher-interest debt first.
Every dollar used to pay off a HELOC is a dollar not available for other financial opportunities. So weigh the trade-offs carefully.
