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MoneyWatch: Managing Your Money
By Ben Geier
Edited By Matt Richardson, Angelica Leicht
/ CBS News
Borrowing against your home equity can be an effective way to add cash to your coffers if you need it. Whether it's to start a small business or do home repairs, you'll usually get a better rate than you would with other loans. One option for borrowing against your home equity is to open a home equity line of credit (HELOC).
HELOCs work like a credit card – you use a line of credit to pay for things, and the lender charges interest. After a set period of time, the line of credit closes and you must repay the money you borrowed, plus the interest accrued.
The interest can start to add up on these loans, so it's understandable that a borrower might want to pay off their loan early. With all the rules and regulations around lending, though, you may want to make sure that paying off their loan early is the right move.
Start shopping for a home equity line of credit online now.
Can you pay off a HELOC early?
Paying off a loan early saves you in interest payments and lets you start focusing on other aspects of your finances like retirement saving or investing. Here's what you need to know about paying off a HELOC early.
Generally speaking, you are allowed to pay off your HELOC early. Just like with any other loan, you can make extra payments against your principal and end up paying off the totality of the money you borrowed before the term of the loan is over. This means that you'll get out of debt earlier and you'll pay less in interest.
A HELOC has two phases: the draw period and the repayment period. The draw period is usually between five and 10 years. During this time you take out money as needed and you make small payments that only cover interest, not principal. After the draw period is over, the repayment period starts. During that phase, the money you owe – interest and principal – is paid off over a preset period of time, often 20 years.
Some HELOCs will let you pay off the principal during the draw period as well, which would greatly reduce your interest payments when the draw period ends. You could even completely pay off the principal during the draw period if you want. Some loans don't allow this, though, so check before you open the line of credit.
It should be noted that some HELOCs could come with a prepayment penalty. This is a rider on a loan that allows the lender to still collect what they stand to make if borrowers choose to pay early. If you think paying off your HELOC early is something you might want to do, make sure you take the time to investigate whether your HELOC has a prepayment penalty before you open the line of credit.
Start shopping for a HELOC today and get started with your projects.
3 great reasons to open a HELOC
Here are a few possible reasons you might consider using a HELOC:
Home values are high right now
A HELOC is only as valuable to you as the equity you have in your house. This means that if your house is worth a lot, you have the ability to borrow money with a HELOC. Right now, home values are very high. There is no predicting when that could change, but when it does, a HELOC could become less lucrative. If you need to borrow money and want to use home equity to do it, now is a great time to consider it.
Interest could be tax deductible
One of the most popular uses of a HELOC is to do home improvement projects, whether to make your house more livable or improve the resale price, which would also let you pay off your HELOC more quickly.
If you use a HELOC to perform improvements on the home the HELOC was taken out against, the interest is tax-deductible. This could benefit you when filing taxes.
Housing stock is low
If you aren't happy with your current home and are looking for a new place to live, there aren't a lot of options out therecurrently, and what is there is very expensive. Another option could be upgrading your current home, and a HELOC is a great way to do that.
You could use your HELOC to renovate your kitchen, finish your basem*nt or even build an additional wing to your home.
The bottom line
Generally, it's OK to pay back your HELOC early – and you'll save yourself some cash if you do. There are some HELOCs, though, that have limits on this. Make sure you know all the details of your loan before you open the line of credit so you aren't surprised when trying to make payments several years from now.
Ben Geier
Ben Geier is a personal finance writer based in Brooklyn, New York.
