Your HELOC may already have a conversion option; some even give you more than one chance to convert during the life of the loan.
Keep in mind this may not be a great deal. The fixed-rate repayment period after the conversion may be longer, stretching out interest payments over a longer period of time. Also, at times, a variable interest rate is preferred to a fixed rate. And a convertible HELOC may charge higher fees.
Still, this is an option worth considering if you’d like a hybrid between a variable-rate HELOC and a fixed-rate HELOAN.
- Is there a charge for the conversion? If so, how much is it?
- Will I be able to use the remaining credit available on the line after a conversion?
- Does the loan convert to a new fixed loan (for example, with a 30-year term), or is the balance amortized over the remaining term of the existing loan?
- How many times can I convert?
- How often can I convert?
- What determines the new fixed interest rate?
As always, make sure you fully understand the terms of the loan and the total long-term cost before signing on.
Home equity loan vs. HELOC FAQ
Home equity is the portion of your home’s value that you own. To calculate your equity, subtract the amount you owe on your current mortgage from the ount of equity in a home fluctuates over time as you pay down your mortgage loan and as the value of the property goes up or down.
Homeowners can typically borrow 80–90% of their home’s appraised value using a home equity loan – minus what is owed on their first mortgage. This amount can vary according to your credit score.
A home equity loan is a second mortgage. Just like your primary mortgage, the home’s value serves as collateral for the lender. Home equity loans are paid off in installments of principal and interest over a fixed repayment period. A home equity line of credit (HELOC) is a bit more complex. You can draw from the line of credit and make payments only on the amount withdrawn. As with any mortgage, if the loan is not paid off and the home enters foreclosure, the home could be sold to satisfy the remaining debt.
A home equity loan can be a good way to convert the equity you’ve built up in your home into cash, especially if you invest that cash in home renovations that increase the value of your home. But always remember, you’re putting your home on the line. If real estate values decrease, you could end up owing more than your home is worth. Should you then want to relocate, you might end up losing money on the sale of the home or be unable to move.
Home equity loans may impact your credit score. However, home equity lines of credit (HELOCs) tend to have a bigger impact on credit scores. Whether the impact is positive or negative typically depends on how much you owe compared to the available credit limit.
Most lenders require a minimum credit score of 620 for a home equity loan. Other lenders may require scores as high as 700. As with other mortgage loans, the better your credit score, the better your interest rate and loan terms.
The interest paid on a home equity loan or HELOC might be tax deductible if the funds were used to “buy, build, or substantially improve your home.” If the funds were not used for any of these purposes, interest is not tax-deductible. In addition, you can only deduct mortgage interest if you itemize your tax deductions instead of taking the standard deduction. If you’re not sure how to handle your taxes, consult a tax professional.