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Home Equity FAQs - Is there a prepayment penalty on a home equity line of credit?

Posted by Bill Burpeau on Apr 12, 2017 5:00:00 PM

Referees discussing a pre-payment penalty.jpgWhat is a prepayment penalty?

A prepayment penalty is a provision of your contract with a lender that states that in the event you pay off the loan entirely at a point prior to the final maturity date, you will pay a penalty. Penalties can be expressed as a percent of the outstanding balance at time of prepayment, or a specified number of months of interest.

Usually, prepayment penalties decline or disappear with the passage of time. Seldom do they apply after the fifth year.

Prepayment Penalty Specifics 

The specifics of a prepayment penalty vary from one lender to another. One type of prepayment penalty is referred to as a soft prepay. This type of prepayment penalty is waived if the source of the original loan, such as a home, is sold. In this case, the penalty is only enforced if the loan is refinanced. This type of prepayment penalty is considered to be an incentive for customers who do not plan on refinancing, while still protecting the original lending institution.

Example

A common prepayment penalty is the following formula: six months worth of interest on 80% of the principal balance is owed at the time of prepayment. This means the prepayment penalty on a loan with an outstanding principal balance of 100,000 dollars and an interest rate of 5% would be approximately 2,000 dollars.
 
At Hanscom FCU, there are no prepayment penalties for home equity lines of credit.  However, if you terminate a line within 24 months of closing, you will be responsible for all closing costs (even if you sell your house).
 
Learn more about home equity by downloading our free Equity Edge eBook. This eBook will introduce you to current remodeling trends, affordability, the difference between a HEL and a HELOC, and includes tip sheets on going green and quick home improvement projects to spruce up your home in a pinch.

 

Use Home Equity Wisely

Topics: Home Equity

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