Interest rates on home equity lines of credit, or HELOCs, are variable. But some banks offer a hybrid HELOC option that allows borrowers to set aside a portion of the line for a fixed term and lock a fixed rate on it.
A HELOC with a fixed-rate option has appeal to homeowners embarking on renovation projects. By locking the renovation money at a fixed rate, they don’t have to worry about rising interest rates.
Set aside a portion
Say you take out a $100,000 HELOC and then decide that you want to renovate your home, a project for which you need to pay the contractor $25,000 over three years. Considering that you don’t want to take the risk of interest rates going up during this period, you could instead opt for a fixed-rate advance on your HELOC for this amount.
Kelly Kockos, Wells Fargo’s senior vice president of home equity, says, “In today’s environment, customers are more and more choosing to improve their homes, versus move. And as their equity is rising, they are tapping into that equity to improve their homes. If they have a defined use for it, they are utilizing the fixed-rate advance to enjoy lower interest rates.”
You could opt to take out up to two or three such fixed-rate advances on your HELOC to meet different needs. For instance, in addition to your home renovation, you might want to buy a $20,000 car and pay it off over five years. You could even take out a fixed-rate advance on the entire HELOC amount.
Paying it down
With a traditional HELOC, typically you would make interest-only payments during the initial draw period, which typically runs 10 years. The loan amortizes, requiring interest and principal payments, after the draw period ends.
On the fixed-rate advance portion of a hybrid HELOC, you would pay off both interest and principal during the fixed-rate term, which could even extend through the life of the HELOC.
As the fixed-rate advance is paid off, the amount paid off would once again become available on the credit line. If you have any amount outstanding on the credit line, you would continue to make interest-only payments on that portion during the draw period.
Ease of use
Banks tout the ease of use of this hybrid product. Once you take out a HELOC, you could simply choose to convert a portion of it into a fixed-rate advance without going through another application process.
Rick Huard, a TD Bank senior vice president of consumer products, notes, “A HELOC is typically a 20- or 30-year term. A lot of things might change over that time. This allows the customer — without having to spend more money for closing costs or fees or going through an application process — to continue to meet their borrowing needs over the entire life of their relationship with us.”
Higher interest rate
The price you pay for this convenience is that the interest rate you would get is typically higher than the variable rate you would get on a HELOC, but you do get the certainty of locking in a fixed rate. The longer the fixed-rate term you choose to get the advance for, the higher the interest rate.
Matt Potere, a home equity product executive with Bank of America, says, “We set the interest rate based on the customer’s individual circumstances. It’s typically based on their account characteristics, the size of the amount that they would be transitioning to a fixed rate, as well as factors such as where they live. We look at the overall market and understand potential costs within a market.”
Considering that variable rates can also move down, Wells Fargo allows borrowers to unlock the rate on the fixed-rate advance back into a variable rate if they find that to be more favorable at some point.