January 29th, 2018

Can I Switch from a Variable Rate to a Fixed Rate Home Equity Line of Credit?

With interest rates rising, like they have over the past year, borrowers with variable rate Home Equity Lines of Credit tend to start thinking about how they can convert to a fixed rate to avoid further increases in the interest they have to pay on their outstanding balance.

In most circumstances, the borrower is going to have to apply for a new fixed-rate home equity term loan and use the proceeds to pay off the existing variable rate home equity line of credit and here’s the reason why. When the borrower closed on their home equity line, they signed an agreement outlining the terms under which the bank will lend them money. Essentially, they signed a contract and the terms of that contract cannot be altered. Because the contract cannot be altered, the loan type cannot be converted from variable rate product to a fixed rate product. It has to be replaced entirely. Paying off the variable rate line accomplishes that.

Before moving forward with that plan of action, it’s important to understand when applying for a new home equity loan that there is the possibility of incurring costs such as application fees, appraisal fees, and settlement fees. The interest you’ll save if rates go up is usually enough to offset these costs over time, but there are no guarantees – so it’s an important consideration.

There is an exception to this. Some banks have a home equity line product that allows customers to “term out” the outstanding balance on the line. This means that within the line these balances can be converted to a fixed-rate loan, which is paid back over a term of the borrower’s choosing in equal monthly installments. Any available line balances can continue to be accessed and as you pay down the principal on the termed-out balance then that amount becomes available on your line of credit.

ENB offers a product called the HomeLine, which offers this functionality. When you close on the line, you can request funds be used to pay off other loans and term-out and fix the rate on that balance immediately, which makes it a great option if you are looking to refinance a variable rate line of credit.

If you’d like to learn more, visit our HomeLine page or if you’d like to speak with someone, give us a call at (717) 733-4181.