A home equity line of credit (HELOC) lets a homeowner borrow against the home equity they’ve accumulated to cover things such as home improvements or debt consolidation. Equity is the amount your home is worth minus the amount you owe on your mortgage. Unlike a traditional loan, a HELOC lets the borrower draw from a revolving line of credit, much like a credit card does. A HELOC lets you borrow as much money as you need, and whenever you need it, as long as the amount doesn’t exceed the credit limit.
A HELOC typically has a variable interest rate, which means the interest rate can change from month to month. A home equity loan—which also lets you borrow against your home equity—frequently comes with a fixed interest rate. In some cases, you may be able to convert a variable-rate HELOC to a fixed-rate home equity loan. Read on to learn how to do that and whether it’s right for you. If not, there are alternatives that might be a better fit for your needs.
- Converting a variable-rate HELOC to a fixed-rate home equity loan may lead to a lower interest rate and lower monthly payments.
- Switching from a HELOC to a home equity loan might require a borrower to pay closing costs and fees.
- Some of your other options include switching to a fixed-rate HELOC or rolling your HELOC into a new mortgage.
How To Convert a HELOC to a Fixed-Rate Loan
So, how do you convert a HELOC to a fixed-rate loan? Here are some of the key steps.
Look Into the HELOC’s Draw Period
Typically, you can only convert your HELOC to a fixed-rate loan during the HELOC’s draw period. The draw period is the amount of time—often 10 years—that you’re able to borrow money through a HELOC; once that period ends, the payoff period starts.
Reach Out to a Lender
Once you’ve determined your HELOC draw period hasn’t closed, contact your HELOC lender or any other mortgage lender to inquire about your conversion options. Be sure to compare rates and other lending terms from several lenders, not just the one you’re working with now.
Refinance the HELOC
No matter which lender you choose, you’ll need to refinance your HELOC into a home equity loan. Proceeds from the new home equity loan will go toward paying off the HELOC.
Apply for a Home Equity Loan
To swap your HELOC for a home equity loan, you’ll submit a loan application. In order for your home equity loan application to be approved, you’ll need to meet the lender’s requirements for credit scores, credit history, income, and home equity. After you apply, the lender will assess your creditworthiness, determine your eligibility for a loan, order an appraisal of your home’s value, and assemble the necessary loan documents.
Complete the Process
If your application is approved, you may need to pay fees and closing costs, although some lenders may let you roll those expenses into your loan. You might also be able to find a lender that charges low or no lending fees and closing costs.
Should You Convert Your HELOC?
What should you consider when deciding whether to convert your HELOC? Here are some questions to ask.
Will I Get a Lower Interest Rate?
One of the potential advantages of refinancing from a HELOC to a home equity loan is the possibility of getting a lower interest rate. But if interest rates are on the rise, you may wind up with a higher interest rate on your home equity loan than you have with your HELOC.
You can look up current interest rates and trends online and compare those to your HELOC’s interest rate. You can also use online calculators from lenders, such as this one from Bank of America, that estimate what your home equity loan’s interest rate and monthly payments might be.
Will My Monthly Payments Increase or Decrease?
If converting from a HELOC to a home equity loan would result in lower monthly payments, then it could be a smart move. But if it would lead to higher monthly payments, you might want to think twice about whether refinancing the HELOC into a home equity loan is a good idea. Before you sign any loan paperwork, a lender can give you a more accurate idea of what your monthly payments would be.
Has My Home Equity Gone Up?
When you convert from a HELOC to a home equity loan, you may be able to borrow more money if your home equity has increased since you took out the HELOC. To calculate your current home equity, subtract the amount you owe on any home loans from the market value of your home.
For example, if you purchased a home for $100,000 and had a $40,000 mortgage when you took out your HELOC, your equity would have been $60,000. If the value of your home is the same but your mortgage is now only $30,000, your equity would have increased by $10,000. If the value of your home has gone up to $150,000 and you still owe $40,000 on your mortgage, your equity would have increased by $50,000.
What Shape Is My Credit In?
Have your credit scores slipped recently or have you taken on more debt? If so, it may be tougher to qualify for a home equity loan that offers low interest rates and other attractive lending terms. If your credit isn’t where you want it to be, you may want to wait to refinance until you have a better credit score.
On the other hand, if your credit score has improved significantly since you took out your HELOC, you may qualify for a lower interest rate. Checking your credit scores and credit reports can help point you in the right direction.
Alternatives To Converting Your HELOC
If you decide converting from a HELOC to a home equity loan isn’t right for you, you have other choices. Here are a few options:
- Refinancing your HELOC. You might be able to refinance your HELOC during the draw period (usually 10 years) and get a brand-new HELOC with different terms, such as a new interest rate.
- Switching to a fixed-rate HELOC. You may be able to lock in a fixed interest rate for all or part of the balance during a HELOC’s draw period. Keep in mind that the fixed interest rate may be higher than the existing variable rate for the HELOC, though. And taking advantage of the fixed-rate option depends on several factors, such as your creditworthiness.
- Rolling your HELOC into a new mortgage. Another alternative is refinancing your first mortgage and your HELOC into a new mortgage. But if you go down this road, you’ll no longer have access to a line of credit.
- Modifying your HELOC. Your lender may agree to modify the terms of your HELOC, such as by lowering the interest rate or extending the repayment period.
Frequently Asked Questions (FAQs)
How long does it take to convert a HELOC to a fixed-rate loan?
The time it takes to convert a variable-rate HELOC to a fixed-rate home equity loan depends on your lender. But the typical window of time is two to six weeks until you are able to close on your loan. In general, you will receive funds four business days after closing. If the home is your primary residence, there is a mandatory three day waiting period to access funds, during which you can cancel the loan without penalty if you want.
How often can the interest rate change on a HELOC?
If you have a variable-rate HELOC, the interest rate may change each month, depending on whether the index rate for your APR (often the prime rate) has gone up or down. Locking in a fixed interest rate for your HELOC allows you to avoid month-to-month shifts in interest rates.
Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!