How to Convert a Loan Into a Home Equity Line of Credit

A borrower may want to obtain a home equity line of credit to pay off the mortgage.

To transfer your original mortgage into a home equity line of credit, you must qualify for the line of credit in the amount of the original mortgage. Once the line of credit is obtained, the monies can be used to pay off the mortgage. The process of qualifying for a home equity line of credit is quite similar to that of qualifying for a mortgage.

Difficulty:

Moderate

Instructions

Things You'll Need

• Mortgage loan application
• 2 years tax returns
• 2 months pay stubs
• 2 months bank statements (all pages)
• Appraisal

1. Apply for a home equity line of credit with your mortgage lender. Fill out a mortgage loan application, including your full legal name, date of birth, social security number, and your residential, employment and income histories.

2. Provide your lender with 2 years tax returns, 2 months pay stubs, and 2 months bank statements (all pages). Allow your lender to review your credit and order an appraisal on your behalf.

3. Request that the proceeds from the line of credit be used to fully pay off the mortgage debt.

4. Sign all applicable closing documents. Request a copy of the deed showing that the original mortgage debt has been paid in full.

5. Begin repaying the home equity line of credit the month after the loan closing.

Tips & Warnings

• Borrowers with the highest credit scores receive the lowest interest rates. Check your credit report prior to your loan application to make sure that you have a high credit score, which is above 700. Check your report for any errors and immediately report them to the credit bureau. Also, to quickly raise your credit score, pay down your credit cards to less than 30 percent of their limit.

• Be sure to note and understand the terms, conditions, and rate of the home equity line of credit. In many cases, the home equity line of credit has a variable interest rate that rises and falls with the prime interest rate. If this is the case, it could significantly increase your payments from their current levels. Consider this is your decision making process.

References

• Federal Reserve: What You Should Know About Home Equity Lines of Credit
• Freddie Mac: Applying for a Mortgage