Home Equity Loan: How Long Do You Have to Pay It Back?

How long do you have to pay back a home equity loan? That's not as dumb a question as it may first seem. True, the easy answer is the period you ask for when you apply, which will be specified in your loan agreement.

But there are good reasons why most home equity loans have a "term" (the period it's intended to run) within a five to 15-year range, and why it's rare to find ones that last longer or shorter than that.

Why Five Years Minimum?

A home equity loan is a second mortgage and, just like a first, usually comes with closing costs. And those can make a big difference to the attractiveness of a short-term loan.

Presumably, you want one of these loans because they're almost always cheaper than unsecured borrowing (such as personal loans or credit cards) and you'll pretty much invariably get a significantly lower interest rate with one. But add the one-time closing costs to the interest you pay, and your overall cost of borrowing may come out higher if your home equity loan has a very short term than if you signed up for a personal loan over the same period. And that's the main reason these mostly last a minimum of five years, though you just might track down one with a three-year term.

If you want to borrow money over a relatively short period, get quotes for home equity loans and also for personal loans. A little basic math should help you make the best choice, but don't forget when doing your calculations that interest paid on home equity loans is often (though not always) tax deductible.

You may find some lenders offering home equity loans without closing costs. These can be good, but be wary. Often the costs are merely repackaged with a higher interest rate, or the loan agreement may contain more onerous conditions. And you may find such deals aren't available on shorter-term loans because lenders can't recover closing costs over brief periods any more effectively than you can.

Why 15 Years Maximum?

The reason most home equity loans have terms in a five- to 10-year range is again down to the total cost of borrowing. If you're going to borrow over a longer period, why not just refinance your first mortgage for a higher sum and take out from that the cash you require? After all, in a hierarchy of consumer interest rates, those for mortgages are typically the lowest of all. Again, get quotes for home equity loans and use mortgage calculators to model your options and make an informed choice.

While you're at it, don't forget to check out a cash-out refinancing using a mortgage with a 15-year term. These won't suit everyone, because they're best for people with exceptionally good cash flow. But, if you can afford the higher monthly payments, you should normally get a lower rate, pay way less interest over the lifetime of the loan and be free of mortgage debt in half the time.

Why a Cash-Out Refinance Isn't Always Best

If you're not in that happy position of having exceptionally good cash flow, you may be tempted to go for the refinancing option anyway. That's almost certain to provide you with the lowest interest rate and the smallest monthly payment, and those may be the only things you care about right now. Fair enough.

But be aware that refinancing isn't always a strategically smart option. There are reasons home equity loans are so popular. Most importantly, even at a lower rate, interest charges are likely to be higher over 30 years than, say, ten.

And it's simply better to repay borrowing for some purposes over shorter periods. Suppose you refinance using a 30-year mortgage in order to consolidate existing debt. You stand to still be paying for last year's vacation and last week's restaurant meal in three decades' time. Or maybe you want to borrow to buy an RV or a boat. Do you really want to be paying for those years after they'll likely have been recycled through a junkyard? Even the kitchen you remodel (and home improvements are usually regarded as "good" borrowing), will probably have been replaced two or three times by the time you make the final payment on it. You may be more comfortable covering the cost of these and similar things over the shorter period provided by a home equity loan.

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