When you need extra funds, a home equity line of credit could be a lifesaver. A HELOC is a revolving line of credit that is guaranteed by your home’s equity, and you can borrow from it as needed. Most HELOCs have variable rates, meaning your interest rate can rise and fall based on market conditions. However, more and more banks have begun offering fixed-rate HELOC options, where you can lock in some or all of your HELOC balance at a fixed rate and potentially save money.
What is a fixed-rate HELOC?
A fixed-rate HELOC is a HELOC that allows you to lock in a portion of your balance at a fixed rate. These are also often known as hybrid HELOCs. A hybrid HELOC allows you greater flexibility, allowing you to make adjustments throughout the life of the loan. Most banks will even allow you to switch back to a variable rate, should your needs change. If you prefer to know what your payment will be from month to month but don’t want to miss out on lower interest rates, a hybrid HELOC could be the perfect solution for you.
Factors to consider with a fixed-rate HELOC
Fixed-rate HELOC options have their own pros and cons; consider these factors before applying.
With inflation, fixed-rate home equity lines of credit may be a smart move for your loan. If the market changes, you are still protected by the rate you locked in with your loan.
“Fixed rates are great for consumers looking to create and stick to budgets,” says John Sweeney, adviser at Figure. “Particularly in a time when interest rates may start to rise, locking in a fixed rate is a big benefit and provides peace of mind.”
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.
A HELOC does not work for everyone. If interest rates rise quickly, you may not have time to lock in the lowest rate possible. Some lenders also require minimum amounts for a fixed-rate loan, so there is less flexibility for budget-conscious borrowers.
There also may be hidden fees, such as penalties for an early draw or refinancing. Be sure to thoroughly review your HELOC to ensure that the terms work for you, because those penalties and fees can add up quickly.
When to convert a HELOC to a fixed rate
There are times when converting a variable HELOC to a fixed-rate option is the best choice. Whether it’s a home renovation project or a large unexpected expense, it’s wise to examine both variable-rate and fixed-rate options to make the right decision for your needs.
A fixed-rate loan can be the perfect solution when remodeling a home. Throughout construction, your 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 protects you against rate fluctuations.
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.
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: fixing your home and preserving your child’s education. Unlike a debt consolidation loan, a fixed-rate HELOC does not limit you to just one withdrawal — you can take up to three. 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.
How to convert your HELOC to a fixed-rate
If you’ve taken out a variable-rate HELOC and want to convert it to a fixed rate, there are options.
- 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.
- Refinance your old HELOC. Opening up a new hybrid HELOC allows you 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.
- Lock in your rate when rates are low. Once you have a hybrid HELOC, keep an eye on interest rates. You may be able to make multiple fixed-rate locks over the course of your draw period, and locking your rate when interest rates are low may help you save thousands of dollars.
The bottom line
You have options when you need a home equity line of credit. Both variable- and fixed-rate loans have their benefits — it’s just a matter of your needs. 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 tides of the financial market.