Convert your HELOC to a fixed-rate loan and get the benefits of both
When planning your home renovation costs, sometimes it’s tough to calculate exactly how much you’ll need. There always seems to be an unexpected surprise lurking around the corner. Did you know you can take the flexibility of a HELOC and combine it with the stability of a home equity loan?
For uncertain costs or as a rainy day buffer, a HELOC or Home Equity Line of Credit is a smart choice. With a HELOC you apply for a line of credit that stays open for 10 years. There are no maintenance fees and you only pay interest on the money you use.
The money doesn’t necessarily need to be used for home repairs either. HELOCs can be a great emergency funds source for unexpected car repairs and medical bills. You can even use a HELOC to help pay college tuition. Instead of taking out a loan every year, you have a revolving line of credit for tuition, rent, books and incidentals. The ways to use your HELOC are endless.
HELOCs are also interest-only loans during the draw period, up to 10 years. Which means you don’t have to start paying down the principle for up to 10 years. It keeps your payments small and gives you flexibility. You can pay on your principle as you feel comfortable.
The one feature of a HELOC that some folks find troubling is that it has a variable interest rate. The annual percentage rate (APR) is based on the value of the Prime Rate, which is decided by the Federal Government. Normally it doesn’t change very often but it can and has in times of inflation.
If you are ready to start repaying your loan and want a secure, fixed-rate, you can rollover your HELOC into a home equity loan. Your HELOC could remain open depending on your loan-to-value ratio, but you will have that fixed interest rate with the home equity loan.
It is also possible to combine it with your current mortgage, and do a cash-out refinance. You would simply refinance your current mortgage adding the extra amount owed on your HELOC. The cash from the new mortgage loan would pay off your HELOC. That keeps the simplicity of one loan payment.
A side note about closing costs
There are closing costs associated with all of the loans mentioned, HELOCs, home equity loans and cash-out refinances. Closing cost fees are usually a percentage of the amount borrowed, however, Madison Credit Union likes to keep things more straight forward. We offer specific low-cost fixed fees.