HELOC or home equity line of credit is a type of home equity loan that allows you to use your home as equity to pay for home improvements, down payments for a new car, credit card debt consolidation loans or use it in any way you like. As long as your employment and income level, credit standing and history, and current debt levels are not too poor, HELOC allows you to borrow up to 85% of your appraised home equity. Typically, the largest asset a person has is the house and this sum of money freed up using a HELOC can provide many financial opportunities for the savvy investor.

A HELOC home equity loan is simply borrowing the difference between your appraised home value and the remaining home mortgage. For example, you bought a house valued at $100,000 few months ago and now its value has appreciated to $110,000 while the outstanding house mortgage is $80,000. The difference between the present value of your house and the outstanding house loan is $30,000 and you can borrow up to 85% of this value using a HELOC home equity loan.

Home equity loans also commonly called second mortgages. This is because they are normally structured over a shorter tenor (term for a loan repayment) compared to the original home mortgage. Although home equity loans provides a convenient source of financing for home owners, HELOC borrowers must be very careful with repayments, or the consequences of defaulting home equity loans is foreclosure. With falling interest rates and announced tax deductions on interest repayments, HELOC loans become popular with homeowners seeking another source of financing. Furthermore, such secured loans enjoy lower interest rates compared to other types of loan financing since the house is used as loan collateral. Banks prefer issuing home equity loans because the HELOC borrowers usually belong to the mature, middle-aged group with respectable monthly income bracket and good credit standing. Since the default rate of home equity loan borrowers tend to be rather low, the interest rate charged is therefore lower as well.

Unlike fixed home equity loans, the line of credit HELOC offers more flexibility in terms of repayment tenor and variable interest rate pegged to the prime rate which may be suitable to some homeowners. However, note that when interest rates trends keep increasing, the HELOC minimum monthly payments increase as well unfortunately. When that happens, you can choose to convert the HELOC loan to a fixed rate home equity loan via refinancing, loan conversion or getting another new home equity loan.

Some HELOC borrowers choose to refinance their house mortgage to clear the original HELOC debt. By applying for a fixed rate home refinancing mortgage, you are effectively converting your outstanding HELOC balance into a fixed rate house mortgage loan. However, this usually does not apply to HELOC borrowers and are usually mean for home loan borrowers whose existing mortgage interest rates are higher than the prevailing interest today. Another option is to convert your HELOC into a fixed rate home equity loan. Although you have lesser flexibility over the loan tenor and monthly repayment quantity, you can enjoy locking in the lowered interest rate for the outstanding home debts. If your current HELOC lender does not provide any loan conversion or refinancing options, you may be able to work with a third party bank and apply for a new home equity loan to cover your existing HELOC. Many banks and home loan companies are willing to assist you in doing such HELOC loan conversions. To conclude, having a HELOC does not mean you have no choice but to lose money over the increasing interest rates. There are several options you can make to switch to a cheaper fixed interest rate home equity loan.