How to Pay Off a HELOC: Proven Methods and Options

A Home Equity Line of Credit, or HELOC, offers a flexible way to access the equity built up in your home. It functions as a revolving line of credit, similar to a credit card, allowing you to borrow funds as needed up to an approved limit. While a HELOC provides financial adaptability, managing its repayment effectively is important to control debt and minimize interest expenses. This article provides practical strategies and key considerations for successfully paying off a HELOC.

Understanding Your HELOC

A HELOC operates in two distinct phases, each with different payment requirements. The initial stage is the “draw period,” during which you can access funds, make purchases, and pay only the interest on the amount borrowed. This period lasts between five and ten years. Once the draw period concludes, the HELOC transitions into the “repayment period,” where you can no longer borrow funds and are required to make payments that include both principal and interest. This repayment phase extends for up to 20 years.

HELOCs feature variable interest rates, meaning your payment amounts can fluctuate over time. These rates are tied to a benchmark index, such as the U.S. prime rate, plus an additional margin set by the lender. As the prime rate changes, influenced by the Federal Reserve’s actions, your HELOC interest rate and corresponding monthly payment can increase or decrease. Review your original loan agreement and recent statements for details regarding your current interest rate, minimum payment obligations, and the specific end date of your draw period.

Accelerating Your Repayment

Paying down your HELOC balance faster reduces the total interest paid and shortens your repayment timeline. Making extra principal payments, even small ones, directly reduces the amount of interest that accrues on your outstanding balance. This means less of your future payments go towards interest and more towards reducing the principal.

Developing a detailed budget helps identify areas where you can free up additional cash flow to direct towards your HELOC. This involves reducing discretionary spending or seeking opportunities to earn extra income. Any unexpected financial windfalls, such as tax refunds, work bonuses, or inheritances, can be applied as a lump sum payment directly to the HELOC principal.

Interest paid on a HELOC may be tax-deductible if the borrowed funds are used to buy, build, or substantially improve the home securing the loan. This deduction is subject to specific IRS guidelines, including loan limits, up to $750,000 in mortgage debt (including your primary mortgage) for loans taken out after December 15, 2017. To claim this deduction, taxpayers need to itemize their deductions on their federal income tax return, and this provision extends through 2025.

Exploring Refinance and Consolidation

For those seeking alternative repayment structures, refinancing or consolidating your HELOC debt offers solutions. One option is to refinance the HELOC into a fixed-rate home equity loan. This converts the revolving, variable-rate debt into a predictable installment loan with a consistent monthly payment, providing stability against interest rate fluctuations. However, fixed-rate home equity loans involve closing costs, which can range from 2% to 6% of the loan amount.

Another strategy involves a “cash-out refinance” of your first mortgage, which consolidates your HELOC debt with your primary mortgage. This creates a new, larger mortgage that pays off both existing loans, at a lower overall interest rate. While this can simplify payments into a single monthly obligation, it extends the repayment term of your mortgage and also incurs closing costs, between 2% and 6% of the new, larger loan amount.

Using an unsecured personal loan for debt consolidation is an option, though it carries different implications. Personal loans offer fixed interest rates and predictable monthly payments, which can be beneficial for budgeting. However, personal loan interest rates are higher than HELOC rates, with average rates around 12.57% compared to HELOCs around 7.99% or 8.04%. Since personal loans are not secured by your home, they do not carry the risk of foreclosure, but their higher interest rates result in greater overall cost.

Preparing for the Draw Period’s End

The conclusion of the HELOC’s draw period requires proactive planning. When the draw period ends, your ability to borrow new funds ceases, and the loan transitions to a fully amortizing repayment schedule. This means your monthly payments will increase, as they will now include both principal and interest, rather than just interest-only payments.

Determine the exact end date of your HELOC’s draw period, found in your original loan agreement or on recent account statements. To prepare for the higher payments, consider adjusting your household budget well in advance of this transition. Also explore options like refinancing the HELOC into a fixed-rate loan or making larger principal payments during the draw period to reduce the outstanding balance before the repayment phase begins.

Closing Your HELOC Account

Once your HELOC balance has been fully paid off, formally close the account. Begin by contacting your lender to verify that the balance is zero, ensuring all accrued interest and any outstanding fees have been satisfied. Request an official payoff statement, which confirms the exact amount needed to close the account and provides instructions for final payment.

After confirming a zero balance, formally request the closure of the line of credit with your lender. This ensures that the lien placed on your property as collateral for the HELOC is officially released. The lender is responsible for recording this lien release with the appropriate public records office, the county recorder’s office. Finally, monitor your credit report to confirm that the HELOC account is reported as closed and paid in full, which helps maintain accurate credit history.