Home Equity Lines of Credit, or HELOCs, offer a number of advantages.
They're cheap to set up, and they're easy to use.
But they also have a drawback -- they come with variable interest rates, which means your payment can increase over the life of the loan, especially when the Federal Reserve hikes rates.
The convertible HELOC solves this problem.Click to see today's rates (Aug 19th, 2017)
HELOC loans come with two stages -- the drawing or withdrawing phase, and the repayment period.
During the drawing phase, your minimum payment is only the interest due -- you don't need to pay down your balance at all. The drawing phase can last up to 20 years, depending on the loan's term.
Your payment depends on your interest rate, which can change every month, and your loan balance.
Once the drawing phase ends, you enter the repayment period. This can range from ten to 20 years. During this time, you must pay off the entire balance. Your payments are calculated based on your rate that month and your balance, and they must be sufficient to pay off the loan within its term.
This can result in significant (and possibly unaffordable) payment spikes. If you're concerned about this, consider a convertible HELOC.
Convertible HELOCs are lines of credit with an additional feature -- the conversion option.
What this means is that at some point during the loan's lifetime, you get the opportunity to convert your HELOC to a fixed rate, fully amortizing second mortgage.
If you already have a HELOC, check your paperwork. Your loan may allow you to convert to a fixed rate. Note that there may be fees involved.
When shopping for a HELOC with a conversion option, ask lenders these questions:
See what the loan's fixed rate would be if you were converting it now. You might not find the conversion option worth exercising if the rate would be too high.Click to see today's rates (Aug 19th, 2017)
If you have a convertible HELOC with a balance, make sure the new rate is worth having. You might be better off with one of these options:
Understand that the new loan would probably be considered a "cash-out" refinance, and lenders typically impose some risk-based fees. If your new loan balance will exceed 80 percent of the current property value, it will be harder to get approved, and you'll probably have to pay for mortgage insurance.
Before wrapping a first and second mortgage into a new first mortgage, you should know what you're paying on the total mortgage balances.
This calculation is called your "blended rate." And here's how you do it.
Now that you know what you're really paying, you can compare that to any cash-out refinance offers you receive.
Current mortgage rates depend on several factors -- your strength as a borrower, the product you choose to pay off your HELOC, and how effectively you shop for a loan.Click to see today's rates (Aug 19th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)