How does a fixed-rate HELOC work?

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You may know how a typical home equity line of credit (HELOC) works — functioning as a revolving line of credit secured by your home’s equity. However, a fixed-rate HELOC works a little differently.

A typical HELOC has a variable interest rate, meaning the interest you pay on the balance you owe can rise and fall based on market conditions. Here’s where a fixed-rate HELOC differs: It has a fixed interest rate which can save you from big changes in the market and potentially help you save money.

What is a fixed-rate HELOC?

A fixed-rate HELOC is considered a hybrid of a home equity loan and a HELOC. It allows you to lock in a portion or all of your balance at a fixed interest rate, protecting you against market fluctuations that impact rates.

How a fixed-rate HELOC works

With a fixed-rate HELOC, you can withdraw as much or as little of your credit line as needed. Unlike a variable-rate HELOC, the interest rate on any amount you use will have the same interest rate applied throughout the draw period.

Borrowers can usually convert their HELOCs to a fixed rate at closing or during the draw period, says Laura Sterling, vice president of marketing at Georgia’s Own Credit Union. “Some lenders may also allow the borrower to convert back to a variable rate.”

The ability to switch back and forth between variable and fixed rates allows borrowers to take advantage of dropping interest rates when they become available. At the same time, locking in a fixed interest rate can provide the stability of predictable monthly payments.

The fixed-rate portion of the HELOC can be locked in for terms ranging from five to 30 years, during which time the loan is paid back like a typical mortgage, says Vikram Gupta, executive vice president and head of home equity at PNC Bank.

Fixed- vs. variable-rate HELOC

Because most traditional HELOCs come with interest rates that may fluctuate daily, they can cause some uncertainty when you’re planning your monthly household budget.

“Be prepared for your payment to double every month or more, if the rate were to move up significantly,” says Mark Charnet, founder and CEO of American Prosperity Group, a retirement and estate planning firm.

A fixed-interest HELOC’s payment cannot fluctuate. However, fixed-rate HELOCs typically have higher starting interest rates than traditional HELOCs, Sterling says. There are also market factors to consider.

“Borrowers could be paying more than necessary for a fixed-rate HELOC if interest rates fall,” Sterling says.

Fixed-rate HELOCs also may have higher fees than a traditional HELOC. Additionally, they can have limits for borrowing that you won’t have with a variable-rate HELOC.

Factors to consider with a fixed-rate HELOC

Fixed-rate HELOC options have their own pros and cons; consider these factors before applying.

Inflation

With inflation, a fixed-rate HELOC may be a smart move for your loan. If the market changes, you’re still protected by the rate that’s locked in on your loan.

“Inflation is a key variable that determines the interest rate environment,” Gupta says. “Inflation typically increases when the economy starts overheating and prices start increasing rapidly.”

Timeline

A fixed-rate option is also especially beneficial when your loan is meant for home improvements or other ongoing projects. With a fixed-rate loan, there is no hurry to begin construction before the interest rate increases.

“Establishing a fixed-rate lock on a HELOC can often make sense when a customer has a planned expense they need to finance, such as a home renovation project,” Gupta says. “In that scenario, the customer will have full certainty about the cost of their financing.”

Cost

A HELOC doesn’t work for everyone. A fixed-rate HELOC can mean you are stuck with a higher interest rate than you could get for at least part of the life of a variable-rate HELOC. Interest rates for variable-rate HELOCs can change as often as every month, meaning you have a chance for lower or higher rates monthly.

Your lender could also require you use a minimum amount of your HELOC, which may not work well for you if you are trying to stay within a certain budget.

Hidden fees

There may also be hidden fees, such as penalties for paying the loan off and closing it early or refinancing. Be sure to thoroughly review your HELOC’s terms to ensure that they work for you, because those penalties and fees can add up quickly.

“Borrowers may want to look out for annual fees and rate locks,” Sterling says. “Some lenders cap the number of fixed-rate locks that a borrower can do annually and may charge a fee for each rate lock. Borrowers should also be aware of minimum withdrawal amounts.”

Can I convert an existing HELOC to a fixed rate?

If you’ve taken out a variable-rate HELOC and want to convert to a fixed rate, there are a couple ways you can go about it.

  1. Open a new hybrid HELOC. The simplest way to get a fixed-rate HELOC is to take out a new HELOC altogether. This is best if you’re near the end of the draw period for your current HELOC.
  2. Refinance your old HELOC. If you open up a new hybrid HELOC, you can use it to refinance your existing HELOC — you’ll simply pay off the balance of your old HELOC using funds from your new HELOC. This will also reset your draw period.

It could make sense to convert your variable interest rate HELOC to a fixed rate for some of the following situations.

Remodeling

A fixed-rate loan can be the perfect solution when remodeling a home. Throughout construction, the interest rates on a variable-rate HELOC could fluctuate, landing you at a higher rate while the renovation is in progress. When it comes to home renovations, converting part of your HELOC to a fixed rate can help you budget more reliably.

Family emergencies

Disaster often strikes without warning, and when it happens to your health, the expensive medical bills you’re left with could necessitate a loan. An unsecured emergency loan is one option, but a fixed-rate HELOC may be cheaper and easier to pay off.

Debt consolidation

Perhaps your oldest child went off to college this year right around the same time a tree fell onto your roof. There are two very important financial needs on your plate: preserving your child’s education and fixing your home. Unlike a debt consolidation loan, a fixed-rate HELOC doesn’t limit you to just one withdrawal. You can even take out a fixed-rate advance on the entire HELOC amount, and with the fixed interest rate, you’ll know exactly what your payments will be so you can plan for them.

Is a fixed-rate home equity loan option best for me?

Whether it’s a home renovation project or a large unexpected expense, it’s a good idea to examine both variable-rate and fixed-rate HELOC options carefully to determine which one makes sense for you.

Both have their benefits; it’s just a matter of your needs. Here are some questions to ask yourself when considering which may be best:

  • Is it a rising or falling rate market? “If you are in a rising rate market, a fixed-rate HELOC could be a good option,” Sterling says. “If you anticipate rates remaining low, you may save more with a traditional HELOC.”
  • Is there a set amount you need to borrow? Are you paying off a student loan or do you need flexibility in the amount you are borrowing for a large or ongoing home improvement project? Fixed-rate HELOCs may give you more flexibility. However, some lenders require that you borrow a minimum amount to lock in a fixed rate.
  • Are you comfortable with rates and payments that may change over time? “If the answer is no, a fixed-rate HELOC could be a good choice,” Sterling says. A traditional variable-rate HELOC will have a different interest rate depending on the market. So, a fixed-rate HELOC is best for you if you don’t want to deal with changing rates.

The ultimate goal is to borrow the money you need and pay as little as you can for it. A variable- or fixed-rate HELOC can get you there, especially if you keep an eye on the ever-changing financial market.

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Written by
Natalie Campisi
Mortgage reporter
Natalie Campisi is a former mortgage reporter at Bankrate.
Edited by
Loans Editor
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