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Penalty For Early Termination On A Home Equity Line Of Credit

Penalty For Early Termination On A Home Equity Line Of Credit

A home equity line of credit can be a valuable financial tool for debt consolidation or remodeling a kitchen but there are some drawbacks to be aware of. Early termination fees are used to protect financial institutions from borrowers looking to manipulate the system. It costs time and money to establish a home equity line of credit and should only be considered if a home owner is serious about its intended use. Early termination fees can vary from place to place and depending on the type of HELOC to be used. If you're looking to establish a line of credit at your bank or credit union, ask about all applicable fees during the initial meeting.

Early termination fees aren't the only costs involved when establishing a home equity line of credit. Some institutions will charge an annual membership fee, transaction fees each time the line of credit is used or fees to initially open the account. If you have the option to accept an early termination fee penalty while waiving other associated fees, it may make more sense over the course of the loan. Most consumers aren't going to use a HELOC as a piggy bank to nickel and dime purchases for a year or less. If used correctly, then a home equity line of credit should be fully realized during the approved "draw" period making the early termination fee less of an issue.

Most home equity lines of credit have a standard period of time for which they can be used. The normal draw period is 10 years but it can be as little as 5 years and as long as 25 years. Most HELOCs are not indefinite and only allow home owners to borrow against the equity in their home for a fixed period of time. After the draw period has ended, the line of credit is closed and the outstanding balance with interest is too repaid in full.

Home equity lines of credit have increased in popularity recently as more home owners realized they could use their built-up equity for other purposes. Common uses for home equity lines of credit include debt consolidation where multiple lines of high-interest rate debt are consolidated into a single low interest rate monthly payment. Financing a small business or other venture where a small business loan or borrowing from friends and family may not be feasible. And the most common use, building a home addition or remodeling a kitchen or bathroom. Regardless of the use, a low interest rate and tax-deductible interest often significantly outweigh any penalties or fees pertaining to a HELOC.

Financial institutions are not legally required to disclose early termination fees to consumers when establishing home equity lines of credit. This might sound like an issue but in reality, virtually every lender will be up front about any penalties or fees simply because it's good business. A business's reputation, word-of-mouth advertising and Internet forums mean businesses can't afford to be shady or underhanded especially when dealing with large sums of money. However, it still behooves consumers to ask as many questions as possible before opening a home equity line of credit to protect themselves from unexpected costs after-the-fact.

Image by: Gwenael Piaser