Penalty for Early Termination on a Home Equity Line of Credit

If you are a homeowner and need to take out a loan, you may be considering opening a home equity line of credit. There are a number of advantages to home equity loans versus traditional loans (in particular, the tax deductions); however, there are some disadvantages as well. One major disadvantage is that many lenders assess a penalty for early termination of a home equity line of credit.

What Is Early Termination?

If you refinance your home or pay off your line within the first 1 to 5 years, your lender may charge an early termination fee.

Early Termination Fee Amount

Typically, an early termination fee will range from about $350 to $750 or be a percentage (1 to 3 percent) of your outstanding balance.

How to Avoid Early Termination Fees

When shopping for a line of credit, ask your lender if they charge a fee for early termination. If they do, either find a new lender or try to negotiate having the penalty removed by paying an extra point upfront.

Life of Loan

If you must open a line of credit that has an early termination penalty, take the one with the shortest early termination period (1 to 2 years).

Truth in Lending Act (TILA)

The TILA requires all lenders to be completely forthcoming about all fees associated with a loan, including early termination penalties. Be sure to review your contract for any fees prior to signing.