Do You Pay on a HELOC If You Don’t Use It?

A Home Equity Line of Credit (HELOC) functions as a revolving line of credit, allowing homeowners to borrow against the equity in their home. This financial tool provides access to funds up to a predetermined limit, which can be drawn upon as needed. Understanding the cost implications of a HELOC, especially if the funds remain unused, is important for homeowners considering this option.

Costs of an Unused HELOC

Homeowners may incur various costs associated with a HELOC, even if they do not draw any funds from the line of credit. These expenses begin with initial setup fees, which are one-time charges to establish the HELOC. Upfront costs can include appraisal fees to determine the home’s value, title search fees to verify ownership, and general closing costs that cover administrative and legal expenses. Application and attorney fees may also be part of these initial expenses.

Beyond the initial setup, some HELOCs come with ongoing fees that apply regardless of whether the line of credit is used. An annual fee is a common charge imposed by lenders to maintain the line of credit. Some lenders may waive this fee for the first year or under specific conditions, such as maintaining a certain balance or having other accounts with the institution.

Inactivity fees might also be charged if the HELOC remains unused for a specified period. Some lenders may also impose maintenance fees. Interest is not charged on the unused portion of a HELOC; interest only accrues on the amount actually borrowed or drawn from the line of credit.

Payments When You Draw Funds

When funds are drawn from a HELOC, the payment structure changes significantly, as interest then becomes a factor. Interest is charged on the outstanding balance. HELOCs feature variable interest rates, meaning the rate and payment amounts can fluctuate over time based on a specified financial index.

The initial phase of a HELOC is known as the draw period, which commonly lasts between 5 to 10 years. During this period, homeowners can access funds as needed, and minimum payments are interest-only or cover the interest plus a portion of the principal balance. These minimum payment calculations are based on the outstanding balance at that time.

Following the draw period, the HELOC transitions into the repayment period. During this phase, borrowers can no longer draw funds. Payments become fully amortized, covering both principal and interest over the set term.

Closing Your HELOC

Homeowners may decide to close a HELOC for various reasons, such as to reduce potential ongoing fees, simplify their financial arrangements, or remove a lien on their property. The process of closing a HELOC involves contacting the lender and submitting a formal request. This may require signing additional paperwork to finalize the closure.

Some lenders may impose early termination fees if a HELOC is closed within a certain period after opening. Additionally, if the lender waived initial closing costs, they might recapture those waived fees upon early closure. It is important to review the original HELOC agreement for any such clauses.

Closing a HELOC can have a minor impact on a credit score, as it reduces the total available credit. However, this impact is negligible if other credit accounts are managed responsibly. Homeowners should understand all potential fees and implications before proceeding with closing their HELOC.