What is a fixed-rate HELOC, and how do they work?

A HELOC, or home equity line of credit, is a revolving credit line that typically has a variable interest rate — but a fixed-rate HELOC has the same interest rate over the draw period, which keeps your minimum payments stable. This is an uncommon option, but it can be beneficial if you don’t want to worry about how changing market rates will impact your budget each month. 

How does a fixed-rate HELOC work?

In most ways, a fixed-rate HELOC operates the same as a variable-rate HELOC. You can withdraw as much or as little of your credit line as needed, whenever you need it, for the length of your draw period. You will only pay interest on the amount you actually withdraw.

Typically, lenders will let you freeze some or all of the balance on your HELOC when you establish it, or at any point during the draw period, says Laura Sterling, vice president of marketing at Georgia’s Own Credit Union. A lender might limit how many times you can lock in a fixed interest rate, though, and some lenders will require a minimum balance to switch to a fixed interest rate. Some may also require that you borrow a minimum amount to lock in the rate.

Much like with a fixed-rate mortgage, the interest rate on a fixed-rate HELOC balance won’t change for the length of the term. The fixed-rate portion can be locked in for terms ranging from five years to 30 years, during which time the loan is paid back like a typical mortgage, says Joe Perveiler, home lending product executive at PNC Bank.

Depending on your lender, you might be able to lock the rate yourself through your online account, or you may need to contact a representative to do so.

Variable rate vs. fixed rate HELOCs

A variable-rate HELOC is the most common option for homeowners. The interest rate changes based on the benchmark rate set by the Federal Reserve or other system — it should be specified in your contract. For that reason, the variable rate translates into some uncertainty when planning your monthly household budget.

A fixed-rate HELOC is the opposite. Because your rates are set at loan origination, they won’t change over time or with the market. Generally, the terms — the length of the draw period and the repayment period — are the same for both types of HELOCs. However, fixed-rate HELOCs typically have higher initial interest rates than traditional ones, says Laura Sterling, vice president of marketing at Georgia’s Own Credit Union. They may also charge higher origination and maintenance fees than comparable adjustable-rate HELOCs, too.

Can you convert an existing HELOC to a fixed rate?

Yes, if rates drop below your fixed amount, it may be possible to convert your fixed-rate HELOC to a variable one. “Some lenders may allow the borrower to convert back to a variable rate,” says Sterling. The ability to switch back and forth between variable and fixed rates allows you to take advantage of lower interest rates when they become available.

If you open up a new hybrid HELOC, you can even use it to refinance your existing HELOC — you’ll simply pay off the balance of your old HELOC using funds from your new line of credit. This strategy will also give you a new draw period.

Pros and cons of a fixed-rate HELOC

As with any financial product, there are both benefits and drawbacks associated with a fixed-rate HELOC. Here are some of the considerations to keep in mind.

Pros

• Avoiding interest-rate fluctuations: Variable HELOC rates can change on a monthly basis, following fluctuations in the prime rate or whatever index your loan follows. But if your HELOC rate is fixed, you won’t have to worry about interest-rate trends or market movements.
• Stable, predictable payments: When you have a consistent interest rate, you know exactly how much your monthly payment will be. This can help with budgeting and planning for other expenses.
• Locking in for the long term: HELOCs are long-term debt, and some have terms as long as 30 years. A lot can happen to interest rates in that time. With a fixed-rate HELOC, you can grab a good rate and hang on to it for the duration of your term.

Cons

• Higher interest rates and fees: The interest rates on fixed-rate HELOCs are often higher than adjustable-rate ones. Plus, many lenders charge a fee when you lock a rate. Other closing costs and fees — such as the origination and account maintenance fees — may also be higher with a fixed-rate HELOC.
• Harder to find: Fixed-rate HELOCs aren’t as widely available as their adjustable-rate counterparts. If your lender does offer them, you might be required to have a minimum balance before converting to a fixed rate, or your lender might mandate a minimum or maximum amount with an interest rate you can freeze.
• More complex bookkeeping: If you convert only part of your balance or take out additional funds after your rate lock, you’ll have to keep track of the amount you’re paying back at a fixed rate plus how much you’re paying back at a variable rate. (Your statement should delineate the amounts, but it’s still a bit complicated.)

Is a fixed-rate HELOC right for you?

If you’re concerned about inflation, a fixed-rate HELOC might be the smarter move — regardless of what happens with the economy, you’ll still have the security of a stable monthly payment. However, if interest rates decline, a regular HELOC’s adjustable rate will benefit you, while you won’t get the benefit if your rate is locked.

In deciding between HELOC options, ask yourself:

• What is the interest rate environment? “If you are in a rising-rate market, a fixed-rate HELOC could be a good option,” says Sterling. “If you anticipate rates remaining low, you may save more with a traditional HELOC.”
• Is there a set amount you need to borrow? “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,” says Perveiler. “In that scenario, the customer will have full certainty about the cost of their financing.”
• Are you comfortable with payments that could change over time? “If the answer is no, a fixed-rate HELOC could be a good choice,” says Sterling. If it’s yes, a traditional variable-rate HELOC will work — just be sure to budget for potential rate hikes, especially when your repayment period begins.

Frequently asked questions 

• How does a fixed-rate HELOC compare to a home equity loan?

  Both are backed by the equity of your property and typically offer lower interest rates than unsecured loans. However, a HELOC is a revolving line of credit, from which you can withdraw funds as needed, while a home equity loan provides a lump sum of money that’s repaid in installments. The loan has a fixed interest rate from the beginning. When you fix the rate on a HELOC, you’re essentially turning it — or at least a portion of it — into a home equity loan.

• Can you pay off a HELOC early?

  Yes, you can pay off and close a HELOC early — during the draw period or at the beginning of the repayment period. But before you do, check whether your lender charges an early closure or termination fee, aka a prepayment penalty. Not all lenders impose these charges (it’s more common with banks), but if yours does, it could come in the form of a flat fee or a percentage of your HELOC amount.

Additional reporting by Taylor Freitas