A home equity line of credit (HELOC) can be an effective tool for tapping into your home’s built-up equity when interest rates are low. However, as rates rise, a variable-rate loan, such as a HELOC, can lead to higher, unpredictable payments.
As such, many homeowners opt to convert their variable-rate HELOCs into fixed-rate loans to regain payment stability and protect against future rate increases. We’ll examine some of the most practical options for doing so and discuss which borrowers are best suited for each type of conversion of variable-rate HELOC balance into a fixed-rate loan, often called a fixed-rate HELOC conversion.
Key Takeaways
- Some lenders will let you convert some or all of your HELOC balance into a fixed-rate sub-loan while keeping your credit line open.
- Other fixed-rate HELOC conversion options include refinancing into a new fixed-rate HELOC, taking out a home equity loan, or doing a cash-out refinance.
- Borrowers with a low interest rate on their primary mortgage may want to consider a new fixed-rate HELOC or home equity loan, while those with an above-market rate may save with a cash-out refinance.
How to Convert a HELOC to a Fixed-Rate Loan
In most cases, converting a HELOC to a fixed-rate loan means refinancing the amount you owe into an entirely different mortgage product, such as a cash-out refinance, a home equity loan, or even another home equity line of credit.
Some lenders, however, may let you convert some or all of your balance into a fixed-rate portion that functions more like a traditional installment loan, with predictable payments over a set term, often called a fixed-rate sub-loan.
Fixed-Rate HELOC Conversion
Depending on your lender’s policies, you may be able to convert some or all of your HELOC balance into a fixed-rate loan and still have access to your remaining line of credit. Not all mortgage companies offer this option; however, lenders typically allow borrowers to divide their HELOC balance into a limited number of fixed-payment portions, each with its own locked interest rate. These are often called “rate-locked sub-loans,” and most lenders cap how many you can have at once.
Another option is to refinance your current balance into a brand new HELOC. While some lenders offer HELOCs with fixed rates from the start, this typically involves transferring your balance to a new loan and then requesting a fixed-rate lock from the mortgage provider.
Pros and Cons of a Fixed-Rate HELOC
Pros:
- Provides stable and consistent payments that are easier to budget for
- Can protect you from higher payments in a rising interest rate environment
- Allows you to still access your remaining available line of credit.
Cons:
- Must immediately begin making principal payments on the fixed-rate balance
- Could be locked into an above-market rate if interest rates decrease in the future
- Not usually possible to convert with your existing HELOC during its repayment period
Cash-Out Refinances
A cash-out refinance involves replacing your existing primary mortgage with a new, fixed-rate loan while consolidating your HELOC balance. With a cash-out refinance, you generally borrow a larger amount than if you refinance into another HELOC or a home equity loan, since you also refinance your first-position mortgage.
Because it’s an entirely different loan, doing a cash-out refinance means incurring a full set of closing costs – typically ranging from 2% to 6% of the refinanced amount – and establishing a new repayment term, which could extend the length of time you pay on your home.
However, converting your HELOC into a fixed-rate loan through a cash-out refinance provides predictable monthly costs and a single mortgage payment, rather than two. Keep in mind, though, that a cash-out refinance will likely have higher upfront fees, and resetting your term may result in paying more interest over the life of the loan.
Home Equity Loans
A home equity loan is a type of second mortgage – similar to a HELOC – that sits alongside your primary loan rather than replacing it. Home equity loans usually come with fixed rates, allowing you to refinance your HELOC into a new loan with stable monthly payments while keeping your existing first mortgage intact.
Converting a HELOC into a fixed-rate home equity loan often makes the most sense for borrowers locked into a below-market rate on their primary mortgage or whose HELOC balance is relatively small compared to the total amount they owe. However, this means having two separate loans and making two separate monthly payments.
Cash-Out Refinance vs Home Equity Loan
Let’s examine the similarities and differences between cash-out refinances and home equity loans, and compare them across various key factors.
| Cash-Out Refinance | Home Equity Loan | |
| Mortgage Type | First mortgage | Second mortgage |
| Rate Type | Typically lower fixed rate | Typically higher fixed rate |
| Closing Costs | Typically higher | Typically lower |
| Typical Credit Requirement | 620+ in most cases | 680+ in most cases |
| Payments | Single monthly payment | Two monthly payments |
| Best Use Cases | Replacing a high-rate first mortgage | Retaining a low-rate first mortgage |
Similarities
Both cash-out refinances and home equity loans:
- Offer a fixed interest rate with consistent monthly payments
- Use your home as collateral – missing payments on either could put your property at risk of foreclosure
- Require set minimum credit scores and maximum debt-to-income ratios, although specific requirements can vary by lender
Differences
Although they share some similarities, it’s the differences between cash-out refinances and home equity loans that make each ideal for different scenarios. Let’s walk through a few of these primary differences in more detail.
Closing Costs
Both cash-out refinances and home equity loans typically have closing costs, ranging from 2% to 6% of the loan balance for most borrowers. However, you usually pay more at closing with a cash-out refinance because many fees are based on your loan amount, and a cash-out refinance refinances your entire mortgage balance.
If your HELOC balance accounts for most of your mortgage debt, the difference may be minimal. Borrowers with a large first mortgage and relatively small HELOC, however, would likely see significant upfront savings by refinancing into a home equity loan.
Repayment Term
Typically, cash-out refinances have a 30-year repayment term. Although other options – such as 15- or 20-year terms – are available, 30-year terms are the most popular because they offer more affordable monthly payments.
Home equity loans, on the other hand, tend to have shorter repayment schedules. Although some lenders may offer a 30-year term, most home equity loans have repayment terms of 5 to 20 years.
If your goal is to minimize your total monthly payments, a cash-out refinance might make more sense. However, this extended term will likely result in higher lifetime interest costs. For borrowers seeking to repay their HELOC as quickly as possible, a home equity loan could be a more practical option.
Interest Rates
Interest rates can vary widely depending on your financial profile and the lender you choose. That said, cash-out refinances typically come with lower interest rates because they’re first-position loans.
Rates for home equity loans are generally higher, as they’re a type of second mortgage. In the event of default, the lender would not recover its funds until the first-lien holder has been paid in full. This added risk equates to a higher interest rate, which could be a couple of percentage points more than a cash-out refinance.
Homeowners with a below-market-rate primary mortgage would likely be better off with a home equity loan. Those with a relatively large HELOC or who can reduce their primary loan rate should consider a cash-out refinance. Check out the Refi.com blended rate calculator to compare your options.
How Much Can You Borrow With Each Option?
The total amount of funds you can borrow with each type of loan varies based on your home’s value, existing equity, and the lender’s specific limits.
Generally speaking, a cash-out refinance lets you borrow a larger overall amount since it’s a first-lien loan and you wrap in your existing mortgage. Fixed-rate HELOCs and home equity loans tend to allow you access to a larger percentage of your home’s overall value.
In most cases, you can borrow up to:
- Cash-Out Refinance: 80% of your home’s appraised value
- Fixed-Rate HELOC: 85% to 90% of your home’s appraised value
- Home Equity Loan: 85% to 90% of your home’s appraised value
Keep in mind that if your primary mortgage and the HELOC you’re converting have a combined loan-to-value (CLTV) higher than 80%, a cash-out refinance may not be an option unless you can pay down a portion of the balance at closing.
Should You Convert a HELOC to a Fixed-Rate Loan?
Some borrowers may greatly benefit from converting their HELOC to a fixed-rate loan. Still, for others, doing so may not be the best choice. Let’s revisit the various fixed-rate HELOC conversion options and review the scenarios for which each may be best suited. We’ll also cover a couple of reasons you may not want to convert your variable-rate HELOC.
Keep in mind, though, that these recommendations aren’t set in stone. The right path forward can vary significantly depending on your individual situation, making it essential to consult with a knowledgeable lender before making a decision.
Choose a Cash-Out Refinance When…
- You’re able to lower the interest rate on your existing primary mortgage.
- Your HELOC balance makes up the majority of your mortgage debt.
- You want to simplify your budget by consolidating your mortgage payments into a single monthly payment.
Choose a Home Equity Loan When…
- You have a highly favorable rate on your existing primary mortgage.
- Your HELOC balance makes up a small portion of your mortgage debt.
- You prefer a shorter repayment term and don’t want to extend your primary loan.
Choose a Fixed-Rate HELOC When…
- You can convert your HELOC into a fixed-rate loan with your existing lender.
- You may still want to access your line of credit in the future.
Keep Your Existing Variable-Rate HELOC When…
- You believe interest rates will decrease in the near future.
- Your current financial situation does not support making principal payments on your balance.
Shopping Lenders
If you plan to convert your HELOC to a fixed-rate loan, shopping lenders for the best deal may help you save significantly on your interest rate and closing costs.
Some critical things to consider when shopping for lenders include:
- Different types of lenders have their own pros and cons. Mortgage brokers may have access to a wider variety of loan options, while local banks and credit unions may offer lower rates and easier approval.
- When comparing mortgage options, consider both the interest rate and the annual percentage rate (APR), which takes other loan costs into account.
- You can negotiate the interest rate and many of the closing costs that lenders quote you. Use your multiple loan estimates to force lenders to compete for your business.
- Shopping around with multiple lenders within 45 days is treated as a single inquiry when it comes to your FICO score.
Ready to Convert Your HELOC to a Fixed Rate?
Converting your variable-rate HELOC to a fixed-rate loan can help stabilize your budget by providing consistent monthly payments. In some cases, you may be able to convert your balance into a fixed-rate with your existing lender, while other times, you may need to refinance into a new fixed-rate HELOC, a home equity loan, or a cash-out refinance.
In some scenarios, however, it may be more practical for you to keep your existing HELOC as it is. The best decision depends on your unique situation and financing needs.
Ready for an individualized comparison of your fixed-rate HELOC conversion options? Get started with Refi.com and speak with an experienced lending professional today!
