Home Equity Line of Credit – Is There a Prepayment Penalty?


For the most part, homeowners are familiar with home equity loans and
home equity lines of credit. With either option, you are able to acquire
funds for emergencies, home improvement projects, etc. Getting a line
of credit and using your home’s equity to your advantage is a huge
benefit to owning a home. However, before completing the credit application,
homeowners should carefully read and understand the credit line
agreement.How Does a Home Equity Line of Credit Work?A home equity line of credit is a credit line that is based on your
home’s equity. For example, if you owe $80,000 on a $120,000 mortgage,
your home’s equity is $40,000. When applying for a home equity line of
credit, the lender will approve you for a credit line up to the amount of
your home’s equity. Lines of credit are slightly different than home
equity loans. While home equity loans are also based on your home’s
equity, homeowners obtain a lump sum of money upon approval of their loan
application. These loans are generally based on a fixed rate, whereas
lines of credit have variable rates.How to Obtain Funds with a Home Equity Line of CreditGetting money from your home equity line of credit is very simple. Once
a lender approves your line of credit, you will be issued a checkbook
or ATM card. Whenever you need cash, you simply write yourself a check
from your credit line. Because the amount you withdraw from a line of
credit varies, your monthly payments will also vary. If you prefer a
predictable monthly payment, a home equity loan will best suit your needs.Home Equity Line of Credit Prepayment PenaltyHome equity lines of credit have specific terms. Your lender may
approve your line of credit for 10 to 25 years. At the end of the term, you
must re-apply to obtain another credit line. Home equity lines of credit
are similar to other mortgage loans in regards to prepayment penalties.Before applying and accepting a lender’s offer, carefully review the
offer and inquire of prepayment penalties. With a prepayment penalty, you
are charged a fee if the credit line is closed before the end of the
term. Typical fees are about $500. However, if the balance on your line
of credit is zero, but the account remains open for future withdrawals,
prepayment fees will not apply.