Federal law caps prepayment penalties on closed-end home equity loans at 2% of the balance in the first two years, 1% in year three and zero after that, under Regulation Z §1026.43(g). A handful of states go further and ban penalties outright on home-secured loans. Texas writes the ban straight into its state constitution. So whether you’ll owe anything for paying off a HELOAN or closing a HELOC early comes down to three things: the product type, the state you live in and whether your lender is a national bank or a state-chartered institution.
Your loan note is the controlling document. Read it before assuming any general rule applies to your account.
The Short Answer: Can You Be Charged for Paying Off a Home Equity Loan Early?
For a closed-end fixed-rate home equity loan originated on or after January 2014, any prepayment penalty is capped by federal rule and expires after year three. For a HELOC, a lender can charge an “early closure fee,” but under HOEPA that fee gets treated as a prepayment penalty if it exceeds 2% of the initial credit limit or applies more than 36 months after account opening (12 CFR 1026.32(b)(6)(ii)). And adjustable-rate closed-end loans, non-QM loans, and FHA, VA and USDA first mortgages? No prepayment penalty at all.
HELOAN vs. HELOC: Why the Product Type Changes the Answer
A HELOAN is a closed-end second mortgage governed by Regulation Z Subpart C. A HELOC is open-end revolving credit governed by Subpart B. Closed-end products can carry a legally defined “prepayment penalty.” Open-end products cannot. What HELOC lenders charge instead is an “early termination fee” or “early closure fee,” and the two vocabularies point at different sections of Regulation Z. Most consumer guides conflate them – which is how borrowers end up misreading their own fee schedules. Your fee schedule uses one term or the other, and that word determines which rule applies to you.
Prepayment Penalty vs. Early-Closure Fee vs. Closing-Cost Recapture
These are three separate charges. A prepayment penalty is a percentage of the amount prepaid on a closed-end loan. An early-closure fee is a flat or percentage charge for closing a HELOC before a set date, commonly 24 or 36 months. A closing-cost recapture clause requires you to repay lender-paid closing costs if you close within a defined window. And here’s the catch: a HELOC advertised as having “no prepayment penalty” can still carry a recapture clause worth several hundred dollars. Read the closing-cost paragraph of your disclosure, not just the fee table.
Federal Rules That Apply in Every State (2026)
Regulation Z §1026.43(g): The 2%/1%/0 Ceiling on HELOANs
Regulation Z §1026.43(g) permits a prepayment penalty on a closed-end dwelling-secured loan only when the loan is a Qualified Mortgage, is fixed-rate and doesn’t exceed higher-priced thresholds. The cap is 2% of the amount prepaid in years one and two, 1% in year three and zero from year four onward. Loans that fail any of those tests carry no prepayment penalty.
Adjustable-Rate, Non-QM and Higher-Priced Loans
Adjustable-rate closed-end loans are covered by §1026.43(g)(1)(ii) and can’t carry a penalty in any year. Non-QM and higher-priced loans fall outside the safe harbor entirely, so no penalty is permitted.
HELOCs Under HOEPA §1026.32
Under §1026.32(b)(6)(ii), a HELOC early-termination fee crosses into “prepayment penalty” territory and triggers HOEPA high-cost coverage if it exceeds 2% of the initial credit limit or can be imposed more than 36 months after account opening. Most banks size their fee to stay below both triggers. A $450 flat fee that sunsets at 36 months on a $100,000 line clears both tests.
FHA, VA and USDA: Prohibited Outright
Prepayment penalties are prohibited by program rule on FHA, VA and USDA first-lien loans regardless of state. But that prohibition doesn’t extend to a private HELOAN or HELOC placed against the same property.
The 20% Per Year Prepayment Allowance
Even on a loan that carries a legal prepayment penalty, a borrower can generally prepay up to 20% of the outstanding balance per year without triggering the penalty. This allowance appears in the official commentary to §1026.32 and is honored by most lenders as standard. On a $60,000 HELOAN with a 2% penalty in year one, you can pay down $12,000 in that year with no charge. Few borrowers ever hear about it. Ask the servicer in writing before you send the payment, because the fee is applied at servicer discretion – and once it’s landed on your statement, undoing it turns into a phone-tree ordeal you’d rather skip.
How State Law Interacts With Federal Rules
Where state law is stricter than the federal ceiling, the state rule wins for state-chartered lenders. California is commonly cited as barring prepayment penalties on residential mortgages after year five. Massachusetts caps penalties within three years. New York within one year. West Virginia bans them outright on second mortgages. But every one of those figures should be checked against the current statute before you rely on it. State statutes change, and older secondary compilations run out of date fast.
Federal Preemption and What Cantero Changed
Federal preemption complicates the picture. National banks regulated by the OCC and federal savings associations have historically claimed preemption of state prepayment restrictions under 12 CFR 34.4. And then the Supreme Court’s 2024 decision in Cantero v. Bank of America narrowed the doctrine without eliminating it. The practical result in 2026? Two identical HELOANs on the same block can follow different rules depending on whether the lender is a national bank, a federal savings association or a state-chartered institution.
So what should you do if your loan is with a national bank? Ask the lender’s compliance team in writing which regulatory regime governs your note.
State-by-State Prepayment Penalty Rules for Home Equity Loans (2026)
The strictest state protection is a full statutory ban on prepayment penalties for home-secured loans. Texas is the clearest example, and its rule is constitutional rather than statutory (see next section). West Virginia bans penalties on second mortgages by statute. A few other states cap by time or percentage, including California’s five-year outside limit and Massachusetts’s three-year window. Most states default to the federal §1026.43(g) ceiling with no additional cap.
Worth knowing: a full 50-state matrix requires citation to a current statute for every row. Rather than publish stale figures, this article limits state-specific claims to statutes verified for 2025 or 2026. The verified state table is published as a companion reference and updated on a 90-day cycle.
Texas: The Strongest Consumer Protection in the Country
Texas prohibits prepayment penalties on home equity loans in its state constitution. Article XVI, Section 50(a)(6) requires that the borrower “may prepay the loan without penalty or charge.” The rule covers home equity loans and cash-out refinances secured by a Texas homestead.
And the enforcement mechanism is severe. A borrower who identifies a constitutional defect sends written notice to the lender. The lender then has 60 days to cure the defect. Failure to cure results in forfeiture of all principal and interest on the loan under Section 50(a)(6)(Q)(x). No other state carries a remedy of that magnitude for a prepayment issue.
HELOC Early-Closure Fees at Major Lenders (2026)
Bank of America charges $450 if the line is closed within 36 months. U.S. Bank charges 1% of the credit line to a maximum of $500, within 30 months. Rockland Trust charges $500 within 24 months. Truist requires repayment of lender-paid closing costs if the account is paid off within 36 months, which is a recapture clause rather than a flat fee. Bethpage Federal Credit Union charges $295, one of the lowest at any bank or credit union. Figure charges no prepayment penalty and no early-closure fee. Wells Fargo hasn’t offered new HELOCs since April 2020. Chase re-entered the HELOC market in 2025, so read the current disclosure directly rather than a secondary summary.
How to Avoid a Prepayment Penalty or Early-Closure Fee
Before signing any HELOAN or HELOC, read the TILA disclosure section headed “Prepayment” or “Early Closure Fee.” The fee, the sunset window and the calculation method are all disclosed there by rule.
If you already hold a loan, you’ve got four levers. The 20% per year allowance lets you accelerate payoff meaningfully without triggering the penalty, and waiting past the sunset window (commonly 24, 30 or 36 months) ends the fee entirely. Some lenders will waive the fee if you refinance internally or open a new line with them, so ask before you close the account. And if the fee isn’t waived and the wait is unacceptable, the payoff cost becomes a comparison-shop input alongside interest and closing costs on a replacement loan.
What to Do If You Were Charged a Fee You Think Was Illegal
Compare the charge to your promissory note and to the Regulation Z disclosure you received at closing. If the fee wasn’t disclosed, was applied after the sunset window or exceeds the disclosed cap, file a complaint with the CFPB at consumerfinance.gov/complaint and, in parallel, with your state attorney general’s consumer protection division. Texas borrowers should send the 60-day cure notice under Section 50(a)(6)(Q)(x) as the first step, before any complaint.
Frequently Asked Questions
Does selling my home trigger a prepayment penalty? Yes, if a penalty applies to your loan and the sale happens inside the penalty window. Federal rule and most state statutes make no exception for a sale.
Can a national bank ignore my state’s cap? Possibly. OCC preemption after Cantero (2024) is narrower than before, but it isn’t gone. Confirm in writing with the lender.
Are FHA HELOANs subject to penalties? FHA doesn’t originate second liens in the standard equity-loan format. A separately originated private HELOAN or HELOC against an FHA-financed property follows the rules above.
What if I refinance my HELOAN with the same lender? Some lenders waive the penalty on an internal refinance. Others don’t. Get the waiver in the loan estimate, not verbally.
Requirements vary by lender and by state. Confirm the current fee schedule and any statutory cap with your lender and your state banking regulator before relying on any figure in this article.
