There are multiple ways to pay off a HELOC quicker, such as refinancing into a new HELOC or completely paying it off through a cash-out refinance. Some HELOC lenders might even offer a loan modification to lower your interest rate or convert to a fixed rate without requiring a full refinance. It’s a good idea to check with your lender about the options available to you. It never hurts to ask.

If didn’t know, a HELOC is a nick-name of home equity line of credit which has become the hottest cash out tool for homeowners in 2024. The HELOC can be a valuable financial tool for homeowners, offering flexible access to funds for home improvements, debt consolidation, or other significant expenses.

Tips for Paying Off a HELOC Faster

You can pay off your HELOC early if you would like. Make sure there are no prepayment penalties or early termination fees.

If you have a home equity line of credit, so you know how valuable these 2nd mortgages can be.

Most HELOC lenders offer interest-only payments during the draw period, followed by principal and interest payments during the repayment period.

Making additional principal payments on your HELOC can lower your monthly payments and help you pay off the loan faster. The interest only HELOC loan is cherished by many homeowners.

Remember, if you pay it off and close it, you will not be able to reuse it.

However, because a HELOC is secured by your home, it’s crucial to pay it off as quickly as possible to avoid long-term debt and the risk of foreclosure. This article will guide you through strategies to pay off your HELOC quickly, helping you save money on interest and regain full ownership of your home.

Understanding How a HELOC Works

Before diving into repayment strategies, it’s essential to understand how a HELOC works. A HELOC typically has two phases: the draw period and the repayment period.

Draw Period: During the draw period, which usually lasts 5 to 10 years, you can borrow money as needed up to your credit limit. Typically, you are only required to make interest payments during this phase, which keeps the payments low but doesn’t reduce the principal balance.
Repayment Period: After the draw period ends, the HELOC enters the repayment period, which usually lasts 10 to 20 years. During this phase, you can no longer borrow from the line of credit, and you must start repaying both the principal and interest. Monthly payments increase significantly during this phase.

To avoid being burdened by larger payments during the repayment period or to reduce the interest paid over the life of the loan, it’s wise to focus on paying off your HELOC quickly. Learn how to apply for a HELOC for a lower interest rate and a larger credit line.

1. Start Paying Down Principal During the Draw Period

One of the most effective ways to pay off your HELOC quickly is to start paying down the principal during the draw period, even if you are only required to make interest payments. By making additional principal payments early on, you can reduce the amount of debt you owe before the repayment period begins, thereby lowering the total interest you’ll pay over time.

Set Up Automatic Payments: Consider setting up automatic payments that include an amount toward the principal, not just the interest. Even small additional payments can make a significant difference over time.
Make Lump-Sum Payments: If you receive a windfall, such as a tax refund, bonus, or inheritance, consider applying it directly to your HELOC principal. Lump-sum payments can substantially reduce your balance, helping you pay off the loan faster.

2. Refinance Your HELOC

Refinancing your HELOC into a fixed-rate home equity loan or a new HELOC with better terms can be an effective strategy to pay it off more quickly. Refinancing allows you to lock in a lower interest rate or transition from a variable-rate HELOC to a fixed-rate loan, which can provide stability and potentially lower monthly payments.

Fixed-Rate Home Equity Loan: By refinancing into a home equity loan that carries a fixed interest rate, you can secure a predictable monthly payment and a defined repayment schedule. This makes it easier to budget for your payments and plan for an accelerated payoff. If you want to convert it to a fixed rate, find out how long it takes to get a HELOC today.
New HELOC: If you’re nearing the end of your draw period and anticipate difficulty managing the higher payments in the repayment phase, refinancing into a new HELOC can extend your draw period and give you more time to pay down the balance. Just be cautious of extending the loan too much, as this can lead to more interest paid over the long term.

3. Create a Budget and Stick to It

A disciplined approach to budgeting is essential when aiming to pay off a HELOC quickly. By carefully managing your finances, you can identify areas where you can cut back on expenses and redirect those funds toward your HELOC payments.

Track Your Spending: Start by tracking your income and expenses to get a clear picture of where your money is going. This will help you identify discretionary spending that can be reduced or eliminated.
Prioritize Debt Repayment: Once you’ve identified areas where you can cut back, prioritize directing those savings toward your HELOC. Consider it a high-priority debt, especially because it’s secured by your home.
Set Financial Goals: Establish specific financial goals related to paying off your HELOC, such as a target payoff date or a monthly principal payment goal. These goals can help keep you motivated and focused on accelerating your repayment.

4. Make Biweekly Payments

Making biweekly payments instead of monthly payments is a proven strategy to pay off debt faster. By splitting your monthly payment in half and paying every two weeks, you effectively make one extra full payment each year without feeling the pinch.

How It Works: Over the course of a year, biweekly payments result in 26 half-payments, which equals 13 full payments. This extra payment goes directly toward reducing the principal, helping you pay off the HELOC faster and reducing the overall interest.
Set Up Biweekly Payments: Check with your lender to see if they accept biweekly payments. If they do, set up an automatic biweekly payment plan. If they don’t, consider making extra payments manually.

5. Consider Debt Consolidation

If you have multiple debts, consolidating them into a single loan can simplify your payments and potentially lower your interest rate. While this doesn’t directly pay off your HELOC, it can free up cash flow that can be redirected toward HELOC repayment.

Personal Loan: A personal loan with a lower interest rate than your HELOC can be used to pay off the HELOC balance. This can be particularly useful if you’re struggling with the variable interest rate on your HELOC.
Cash-Out Refinance: If you have significant equity in your home, consider a cash-out refinance. This option allows you to refinance your existing mortgage and take out additional cash to pay off your HELOC. You’ll then have a single mortgage payment at a potentially lower interest rate.

6. Avoid Using Your HELOC for Non-Essential Expenses

One of the challenges with a HELOC is the temptation to continue borrowing against it, especially during the draw period. To pay off your HELOC quickly, it’s crucial to avoid using it for non-essential expenses. Treat your HELOC like any other debt—focus on paying it down rather than drawing more funds.

Limit Access: Consider asking your lender to reduce your credit limit or temporarily freeze your HELOC to prevent further borrowing.
Use Other Funds: If you need to cover expenses, explore other financing options that don’t involve tapping into your HELOC, such as a personal loan or a low-interest credit card.

Do Interest Only Payments Pay Off the Interest on a Home Equity Line of Credit?

Interest-only payments on a Home Equity Line of Credit (HELOC) do not pay off the principal balance of the loan; instead, they cover only the interest that accrues on the borrowed amount. During the draw period of a HELOC, which typically lasts 5 to 10 years, borrowers often have the option to make interest-only payments. These interest only-payments are calculated based on the outstanding balance and the current interest rate, allowing borrowers to keep their monthly payments lower during this period.

However, because the principal is not being reduced, the total loan balance remains unchanged. This means that once the draw period ends and the loan enters the repayment period, the borrower will face higher monthly payments as they begin to pay down both the principal and the remaining interest.

While interest-only payments provide short-term financial flexibility, they can lead to payment shock if not carefully managed, as the borrower will eventually need to repay the full principal amount. Therefore, borrowers who can afford to do so should consider making additional payments toward the principal during the draw period to reduce the overall balance and the amount of interest paid over the life of the loan.

Can the HELOC Draw Period be Extended?

Your draw period is a fixed number of years, typically around 10 years. During this time, you’ll be required to make minimum interest payments, but usually, you won’t need to pay down the principal balance. This generally results in relatively low payments that fluctuate based on how much you’ve borrowed, similar to a credit card. When the draw period ends, you might have the option to renew your line of credit and reset the draw period.

Can you pay off a HELOC during the draw period?

Yes, most home equity lenders allow you to pay off a HELOC credit line before the end of the draw period. However, you might incur a prepayment penalty, which can range from 1% to 5% of the loan, though some lenders may have a maximum cap on this penalty. It is always a good idea to check with your lender to see if there are any fees for paying off the loan early.

During the draw period, you have the option to make interest-only payments, which won’t reduce the principal balance. Alternatively, you can choose to make both principal and interest payments, allowing you to repay some or all of the amount you’ve borrowed. Making additional principal payments can lower your monthly payments and help you pay off the loan more quickly. If you pay off your HELOC and have a $0 balance at the end of the draw period, the account may close automatically.

Are HELOC Pre-payment Penalties Negotiable?

It might be possible to negotiate a HELOC prepayment penalty. Since each lender has its own policies, it’s worth asking how you can pay off your HELOC early and if there’s room to negotiate closing costs and prepayment penalty fees. The best way to avoid these early termination fees and penalties is to fully understand the terms of your HELOC before signing the loan documentation. If you anticipate needing the line of credit for a short period or plan to sell your home and close the loan, be sure to ask the lender if there is a prepayment penalty and, if so, how much it will cost.

Takeaway on HELOC Early Pay Offs

Paying off a HELOC quickly requires a strategic approach, discipline, and a commitment to reducing debt. By paying down the principal during the draw period, refinancing for better terms, sticking to a budget, making biweekly payments, and avoiding further borrowing, you can accelerate your HELOC repayment and save money on interest. Ultimately, paying off your HELOC quickly not only frees you from debt but also helps protect your home and strengthens your financial security.

Speak with HEM today and we will match you with top HELOC lenders in your area.