Question : How to convert HELOC to fixed rate mortgage and pay not tax penalty when house is sold?
Hi,
To buy new house I took HELOC against my old house which I planned to sell shortly to pay off HELOC. I could not sell my old house so I am using it as rental property now. I want to convert HELOC into fixed rate secondary mortgage. If I convert HELOC into fixed rate mortgage, when I sell my rental property will the money from sale be transferred to my primary mortgage company without lump sum distribution to avoid tax penalty?

Thank you
heloc

Best answer:

Answer by Mary S
Depending on what state you live in, there may be some nuances in the law. Home Equity Lines of Credit (HELOCs) often have available something called a Fixed-rate Option. You take a portion of your revolving limit, usually that which you have taken an advance on, and “fix-it” or create a closed-ended loan payable at a fixed interest rate, for a set period of time at a fixed payment.

As far as a tax penalty, depending upon what is paid to you after all other liens on your “old” house is sold, you may not have to worry about that. You’ve already purchased another home, and as long as the amount that you got out of your old home is the same or less than what you paid for your new home, you are set. There are other issues involved, such as length of time you owned the home, your income level, etc.

IRS.gov has some publications that can be pulled up online that can clarify this for you.