Understanding Zero Balance on HELOC Loans

A person thinking about HELOC loans in front of a white background.

Home Equity Line of Credit Overview

A Home Equity Line Of Credit (HELOC) is a line of credit, meaning borrowed money against your home's equity at a variable interest rate and not a fixed interest rate. That means the amount you owe from the credit line will vary from month to month, like credit card debt. The minimum monthly payments you have to pay will also change.  

A home equity line of credit offers you access to a specified amount of money, but you do not have to use any of it. At any time, you can pay off any remaining balance owed against your home equity line of credit. Most home equity loans have a set term—when the repayment period is up, you must pay off any remaining HELOC payments and pay interest accrued from the home equity loan.

If you pay off your home equity loan balance early, your lender may offer you the choice to close the line of credit or keep it open for future borrowing. It’s possible to have an equity line of credit with a zero balance.

Managing a Zero-Balance Equity Line of Credit

Deciding Between Closing or Maintaining Your Line of Credit

Upon settling the balance on your home equity loan before the repayment period concludes, you're often presented with a choice: to end the equity line of credit or keep it accessible for potential future use. This decision requires careful consideration of various factors, including potential fees and your future financial strategy.

The Case for Closing Your Home Equity Line of Credit

Evaluating the Benefits of Closing Home Equity Lines

You cannot sell your home, get a second mortgage, etc. while the home equity line of credit is open. The line of credit includes a lien against your property, which must be released (by closing the HELOC) before you can transact on the property.

Sometimes, a mortgage lender will charge an annual fee for an open home equity line of credit. If you pay off your home equity loan early and don’t want to pay the annual fees and get a second mortgage, then closing the home equity line of credit can be a good idea.

The Advantages of Keeping a Home Equity Line of Credit Open

Credit Score Benefits and Future Borrowing Flexibility

If your home equity loan has a zero balance, your credit score will benefit in two ways.

One, your average “length of credit history” will be increased every month the HELOC remains open. This accounts for 15% of your FICO score.

Maintaining a revolving credit line with a zero balance can positively impact your credit score in two significant ways: by extending the average length of your credit history and offering potential for a better credit utilization ratio and a great debt to income ratio.

an asian couple going over home equity line of credit and repayment period with mortgage lenders to be able to borrow money from their home's equity

Making an Informed Decision

Guidance from Housing Counselors

Since there are compelling reasons for both closing and keeping a HELOC open, this will have to be an individual decision based on each borrower’s circumstances. Our certified HUD-approved housing counselors can help you decide what to do when your HELOC reaches zero balance.

The decision to close or keep an HELOC open after paying it off is highly personal and depends on individual financial situations and goals. Professional advice from a housing counselor can be invaluable in navigating this decision, providing personalized insights and recommendations based on your unique circumstances and future financial objectives.

Whether you're leaning towards closing your line of credit or keeping it open for future flexibility, our financial counselors are here to provide the guidance you need to make the best decision. Reach out today for expert guidance tailored to your specific situation.

Article written by
Melinda Opperman
Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.

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