The Benefits of Converting an Outstanding HELOC balance to a Mortgage to Help Purchase a 2nd Home

Firstly, lets look at why someone may keep a large outstanding balance on their Home Equity Line of Credit:

1. Low monthly debt burden, only interest payments are required, not interest & principal
2. Flexibility to pay off the entire HELOC without incurring any pre-payment penalties.
3. Ability to borrow and repay as needed

Carrying a balance on a HELOC will lower the monthly debt burden by requiring only interest payments to be made, but it will actually hinder ones mortgage qualifying amount, and here’s why:

1. Banks calculate monthly payments for credit cards and unsecured lines of credit @ 3% of the outstanding balance. A $15,000 credit card balance will create a monthly payment of $450!
2. Home Equity Lines of Credit with balances over $50,000 are calculated at the stress-test rate (5.25%) and amortized over 25-years. An outstanding HELOC balance of $150,000 creates a monthly mortgage payment of $893.88 on the mortgage application.

However, when the balance of a HELOC is converted into a mortgage, the actual mortgage payment is used in the qualifying calculation.

For example, a $150,000 HELOC balance converted into a variable mortgage @ 1.50% creates a monthly mortgage payment of $599.58, a difference of $294!

In this scenario, the borrower is paying off their debts AND qualifies for $50,000 more!