How to Convert a Home Equity Loan

A Home Equity Line of Credit, or a HELOC, is a mortgage for homeowners. If you have a HELOC, you likely took it out after your first mortgage. These loans are used for a variety of purposes, but some popular uses include: home improvements, large purchases (boat, car, recreational vehicle) and credit card consolidation. However, HELOCs are often harder to repay than standard mortgages. These are revolving loans, so the monthly payment is usually only enough to cover the interest for the preceding month (much like a credit card). Converting these loans can be challenging.

Review the terms on your HELOC. These accounts often are based on adjustable or variable interest rates. Common HELOC rates are tied to indexes like the Prime Rate and the LIBOR (London InterBank Offered Rate)--both of which can and do fluctuate.

Consider a total refinance. The least costly method of converting a HELOC is to roll it into your existing first mortgage with a refinance. However, you should not refinance if you believe the rate and program you currently have could not be secured again with a refinance.

Pull a copy of your credit report. This can be accessed at Annual Credit Report (see Resources). You should also pay for a copy of your FICO score, which is between 300 and 850. Excellent scores are more than 720; poor scores are less than 600. You'll need to know your credit score if you plan to rewrite your HELOC.

Contact lenders about a second mortgage refinance. There are several types of second mortgages (HELOCs are only one variety). If you struggle to pay your HELOC, you can convert the loan into a standard closed-end, fixed-interest second mortgage--much like a conventional first mortgage. Use your credit score as a guide when seeking lenders.

Collect several second mortgage conversion and refinance mortgage options from lenders. Compare these offers side-by-side and against the current HELOC's paperwork. Any new, converted second mortgage or refinance must have a tangible benefit over the existing loan. This could be any of the following: rate reduction, monthly payment savings, variable rate to a fixed rate, debt consolidation or cash out.