Interest rates on HELOCs, or Home Equity Lines of Credit, generally are a little higher than the fixed rates on 30-year mortgages, which is why you may consider refinancing your HELOC with a fixed-rate home mortgage. Another option is converting the current variable-rate HELOC to another HELOC with a partially fixed rate while interest rates are low.
HELOC to Fixed-Rate, 30-Year Mortgages
There are no special rules for converting a HELOC to a fixed-rate mortgage. Essentially, you're taking out a new mortgage loan that pays off both your existing mortgage and your HELOC. But you'll need to decide whether converting the HELOC to a fixed-rate home mortgage is worth doing. In some circumstances it may; in others, probably not.
Rates for a $30,000 HELOC ranged from 4.74 to 4.76 percent in 2015, while nominal 30-year conforming mortgage rates nationwide averaged about 4 percent. Over the course of a 30-year loan, the HELOC rate for that $30,000 costs $4,777 more than costs associated with the 30-year mortgage. According to a 2012 Bankrate survey, closing costs on a $200,000 mortgage averaged $3,754.
Historically speaking, both HELOC and second mortgage rates are always higher than first mortgage rates, but as a Bankrate article points out, the differences can be as little as a quarter point (0.25 percent) at a few banks and as much as 3 to 4 percent.
In this instance, taking out a new home mortgage that paid off the HELOC would result in a savings of only $1,023 over 30 years. Unless you plan to stay in your current house a very long time, it probably doesn't make sense to make the conversion. If you moved after five years, for example, your $3,754 closing costs amortized over the shorter period would be substantially greater than the monthly savings.
Conversions from HELOCs to a 30-year, fixed-rate mortgage probably make the most sense when:
• Your current HELOC balance outstanding is substantial. The savings on a $300,000 HELOC to 30-year fixed taken to maturity could be as much as $47,770.
Variable HELOC to Fixed-Rate HELOC
Banks rarely offer true fixed-rate HELOCs, but several offer hybrid HELOC options that allow you to set aside a portion of your HELOC credit line for a fixed term and lock in a fixed rate for that term. Some considerations that affect this conversion are:
• Does the current HELOC have an early payoff penalty? If it does, you'll need to know if this still works. If the current HELOC has an early payoff penalty, this effectively reduces the amount of money you're getting out of the next HELOC, thereby increasing its effective fixed rate. For instance, if you owe $30,000 on your current HELOC at 4.75 percent variable, there's a $2,000 payoff penalty and the new fixed-rate HELOC allows you to take out $30,000 at 5.5 percent, the effective interest rate on the new loan isn't 5.5 percent since you're really only getting $28,000. It's effectively 5.89 percent. You also need to factor in any closing costs related to the new HELOC, which also increases the effective rate.
• How near your expiration date is your current HELOC? If it expires soon -- which means you'll then have both interest and principal payments on the loan until it's paid off, that could tip the scales in favor of a new fixed-rate HELOC.
• How much greater is the fixed interest rate on the new HELOC than the current variable rate? If interest rates are at a historic low and the fixed rate on your proposed HELOC is lower than the historical average for fixed-rate, 30-year mortgages, it may make sense to convert the existing HELOC to the hybrid fixed rate product, particularly if you plan to use the HELOC funds for a long period of time.