Can I Pay Off My Home Equity Loan Early?

As a homeowner, you can tap into your home equity — the amount of the home you own — as a tool for a variety of reasons. Perhaps you want to renovate your home, pay for your child’s college education or consolidate high-interest debt. Whatever the reason, you may be able to take advantage of lower interest rates compared to other types of debt.

What Is A Home Equity Loan?

A home equity loan is a type of secured debt that uses your home equity as collateral. Lenders typically allow you to use the loan for most purposes, like debt consolidation or making home improvements.

The amount of home equity you have is one of the major factors lenders use to decide how much to lend you. Sometimes referred to as second mortgages, home equity loans typically offer a lump sum that you pay back over time at a fixed interest rate — it could be anywhere from 5 to 30 years. Home equity loans are best for homeowners who know how much they want to borrow.

A home equity loan is different from a home equity line of credit (HELOC) in that it’s an installment loan. With a HELOC, you’re approved for a credit line that you can draw from for a specified amount of time.

Can You Pay A Home Equity Loan Early?

Yes, you can pay off a home equity loan early, depending on the loan agreement you signed with the lender.

Types Of Loan Agreements And Early Payment Terms

Lenders want to earn as much profit as possible from the money they lend out, so it makes sense that they’d prefer borrowers to pay their loan on time and the length of the entire term. That being said, there’s nothing that’s really stopping you from making early payments. Maybe you want to save on interest, or be debt-free sooner.

In either case, be sure to check the fine print before doing so.

Prepayment Fees

Some lenders may charge prepayment penalties or fees for paying off your home equity loan early. The amount will depend on the terms you agreed to when you signed the loan documents. In many cases, it could be a percentage of your remaining loan balance, or several months’ worth of interest.

Check your loan documents to see if there is a prepayment penalty. If yes, consider whether the money you save in interest paying off the loan early will more than offset the fee.

Impact On Credit Scores

Benefits Of Paying Off A Home Equity Loan Early

Paying off your home equity loan has many benefits, including saving on interest and more financial flexibility.

Saving On Interest

Paying off a home equity loan early, especially well before the end of your repayment term, can save you thousands of dollars (if not more) in interest. The amount you saved on interest could go toward other goals like building your emergency fund or retirement accounts.

Reducing Debt

Paying off your entire loan reduces your overall debt burden. Having this breathing room could help you feel more financially secure. Plus, you’ve freed up the amount that was tied to your home equity loan.

Financial Freedom

How To Pay A Home Equity Loan Off

Reach out to your lender to see how to best pay off your home equity loan. In most cases, you can do so in three ways:

• Occasional payments: You can make extra payments toward your home equity loan whenever possible.
• One lump sum payment: Speak with your lender to confirm your remaining balance to ensure you are paying off the entire loan with one payment.
• Additional principal payments: It may be possible to schedule additional payments toward the principal loan amount on a regular basis.

Alternative Options To Early Repayment

If it’s not possible for you to pay off your entire loan early, there are some alternatives to consider that can still help give you some breathing room and save on interest.

Refinancing A Home Equity Loan

Refinancing your loan could help you pay less in interest if you qualify for one at a lower rate. To increase your chances of approval, try to boost your credit score. When refinancing, you may need to pay closing fees so check to see whether it’s worth the extra cost.

Debt Consolidation

The Bottom Line