Fixed-Rate HELOC: How Does It Work?

Article Summary:

A home equity line of credit (HELOC) allows you to use your home’s equity without selling the house. Though HELOCs traditionally had variable rates, today’s HELOC borrower has another option. A fixed-rate HELOC replaces the variable rate of a traditional HELOC with the fixed rate of a typical home equity loan. With a fixed-rate HELOC, you can dip into your home equity and pay it off with a fixed interest rate. This means that your interest rate payments do not change even with a fluctuating market.

Home equity lines of credit (HELOCs), a type of home equity loan, allow people to borrow money from their home equity when they need to. They are similar to a credit card in the sense that you get access to a line of credit, not a lump sum.

With a fixed-rate HELOC, your interest rate remains the same regardless of what the market is doing. Fixed-rate HELOCs may mean you sometimes pay more than you would with a variable rate, but your monthly payments stay the same. This is great for when the market rises, and it makes budgeting easier. Keep reading to learn more about the benefits of a fixed-rate HELOC, and why you might want to consider one.

What is a home equity line of credit?

Your home equity is the difference between your home’s current value and the mortgage balance. A home equity line of credit is a revolving credit line that is similar to a credit card. You can access your home equity line of credit whenever you need to. Many people use their HELOC balance for debt consolidation, a home renovation project, payment of education costs, and more.

Most HELOCs have a variable interest rate that changes with the market, but some HELOCs have a fixed interest rate. These are called fixed-rate HELOCs.

What is a fixed-rate HELOC?

A fixed interest rate is when the interest rate on the amount you’re borrowing stays the same. So, regardless of changes in the market interest rates, your interest payment will always be the same percentage of your loan balance.

Fixed-rate HELOC lenders have applied this concept to HELOCs. With a fixed-rate HELOC, the borrower can set it up so that some or all of the borrowed funds have a fixed interest rate. The interest rate, and so the monthly payment, stays the same over the repayment period. This protects your interest rates, and resulting payments, from fluctuating with the market.

With fixed-rate HELOCs, you can withdraw as much as you need from your credit line. The same interest rate will be applied throughout the draw period. Fixed-rate HELOCs are usually paid back over five to 30 years in monthly payments, similar to how a borrower pays off a mortgage.

What are the differences between a fixed-rate and a variable-rate HELOC?

The difference between fixed-rate and variable-rate HELOCs is how much your interest payments are. A traditional HELOC has a variable interest rate. This means that, as the market changes, so does the amount you pay in interest. With a fixed-rate HELOC, in contrast, the interest rate stays the same no matter what the market does. This is great in times when the market rate rises. Your fixed interest rate could be lower than what you would be paying with a variable rate. But, when the market rate drops, those with variable-rate HELOCs could be paying less than what you pay with a fixed rate.

Options for switching from a variable to fixed rate

If you have a variable-rate HELOC but want to replace it with something that has a fixed rate, you have multiple options. These include converting to a fixed rate when you enter repayment, switching to a home equity loan, refinancing with a fixed-rate HELOC, and paying off your HELOC with a mortgage refinance.

Converting to a fixed rate when you enter repayment

First, you may have the option to switch to a fixed-rate loan when your HELOC repayment period begins, but this period might not start for years. If you want to switch sooner than that, you can convert your HELOC to a different type of loan.

Switch to a home equity loan

Perhaps the simplest way is to convert your HELOC into a home equity loan. You’ll just be switching from one home equity loan to another, so it’s a pretty straightforward way to get a fixed-rate loan.

Refinance with a new, fixed-rate HELOC

Another option you have, which you might find easier, is to refinance your old, variable-rate HELOC with a new, fixed-rate one. This method will pay off the old HELOC with the new HELOC. It will also reset your draw period.

Pay off your HELOC with a mortgage refinance

You could also pay off your HELOC with a mortgage refinance. This will essentially convert your HELOC to a portion of your new mortgage, paying off both your existing first mortgage and your HELOC with the new loan. If you’ve already paid off your first mortgage, meaning your HELOC is now the first and only mortgage on your property, you may even have enough equity available for a cash-out refinance.

This option is best for those who have large balances on their HELOCs. Doing this will also make it so that you only have one monthly payment, which is an added bonus.

Pitfalls of replacing your HELOC with a new loan

Converting to a new loan does have its drawbacks, however. For one thing, converting to a new loan means new closing costs, which could be pricey. Also, the interest rates could end up being higher when you get a new loan. This could mean you’re stuck paying a higher interest rate for quite some time. While a variable-rate HELOC’s rate can be high, it has a chance to drop lower in the right market conditions. Once you have a fixed-rate loan with a high rate, the rate stays high regardless of the market.

Pros and cons of fixed-rate HELOCs

There are some definite benefits to having a fixed-rate loan, but it’s important to know the cons, too.

WEIGH THE RISKS AND BENEFITS

Here are some pros and cons of having a fixed-rate HELOC to help you make a more informed decision.

Pros
  • If the market interest rates go up, your fixed-rate balance stays the same.
  • Interest is only paid on what you draw and not the entire balance.
  • The money could be tax deductible if it’s used on home repairs.
  • Your available credit increases as you pay off the fixed-rate HELOC balance.
  • Because you know exactly how much each monthly payment will be, it will be easy to create a budget.
Cons
  • Your total monthly payment amount could increase once the draw period ends. This is because you will now have to pay down the principal balance in addition to interest.
  • The market interest rate may drop, meaning your fixed interest rate could be higher.
  • The starting rate for a fixed-rate HELOC could be higher than a variable rate.
  • Some lenders cap the amount of fixed-rate balances you can have at a time. Depending on who your lender is, this could apply to you.

Is a fixed-rate HELOC right for me?

Deciding whether or not a fixed-rate HELOC is best for you depends on your preferences and what the market currently looks like. If the current market rates are low and you think they’ll increase, then a fixed-rate HELOC could be a good option. But, if the rates look like they might drop soon and you’re willing to take that risk, then you might want to stick with a variable-rate HELOC.

If you don’t care about the market and just want to avoid fluctuating monthly payments in general, then a fixed-rate HELOC could be best for you. While you may miss out on lower interest payments, there’s definitely a benefit to knowing exactly how much you will be paying each month. For example, it makes budgeting easier and gives you peace of mind knowing that your monthly payment won’t be too high.

Pro tip: If a HELOC or home equity loan seems appealing to you, check out a shared equity agreement. This allows you to use your home equity without interest or monthly payments. Learn more about these agreements here.

FAQ

Should I convert my HELOC to a fixed rate?

Converting your variable-interest-rate HELOC to a fixed-rate HELOC usually means converting to a new loan. If the interest rates and closing costs aren’t too high, and if market conditions suggest rates are headed up, it might be worth changing to a fixed-rate loan.

Are HELOC rates fixed or variable?

Traditional HELOCs have variable rates, but many lenders offer fixed-rate loans. Ask your lender to see if this is an option for you.

How do payments on a HELOC work?

Payments on a HELOC are similar to those on a credit card. With interest-only HELOCs, which are the rule rather than the exception, you are only required to make interest payments during the draw period. After the draw period ends and you enter repayment, your monthly payments will include both principal and interest. If you wish to pay down principal during your draw period, you may usually do so, and doing so will mean you can go ahead and borrow that amount again while still in the draw period, up to your full loan eligibility amount.

Do home equity loans have fixed rates?

While there are a few different options you can choose from, most home equity loans do have fixed rates.

Key takeaways

  • A fixed-rate HELOC combines features of traditional home equity lines of credit, which have variable rates, and home equity loans, which usually have fixed rates.
  • Fixed-rate HELOCs allow you to borrow from your line of credit and pay it back with a fixed interest rate.
  • Fixed interest rates are great for when the market rate rises, but you could end up paying more on average when market rates dip.
  • If the market rate is low when you take out the HELOC, or if you don’t want to deal with a changing monthly payment, then a fixed-rate HELOC could be good for you.

Find the best HELOC lender for you

If you have a large, unexpected expense but do not want to sell your home to cover it, dipping into your home equity may be the answer for you. Check out SuperMoney’s list of the best HELOC lenders for this month. Not only will this help you find a great lender for you, but you’ll also learn all the ins and outs of HELOCs in general.

View Article Sources
  1. Home Equity Loans and Home Equity Lines of Credit — Federal Trade Commission
  2. Report to the Congress: Rules on Home-Equity Credit under the Truth in Lending Act — Federal Reserve Board
  3. What you should know about Home Equity Lines of Credit by the Federal Reserve Board — Consumer Financial Protection Bureau
  4. Useful background articles by Discover, Forbes, Time, US Bank, and mortgage industry sites — Various
  5. Best HELOC Lenders — SuperMoney
  6. Best Home Equity Loans — SuperMoney
  7. Cash-Out Refinance vs. HELOC: Which is Better? — SuperMoney
  8. HELOC Alternatives: Best Options For You — SuperMoney
  9. How Does a HELOC Affect Your Credit Score? — SuperMoney
  10. How Long Does It Take to Get a Home Equity Loan? — SuperMoney
  11. The Best Shared Equity Alternatives to a Cash-Out Mortgage Refinance — SuperMoney
  12. The Best Shared Equity Alternatives to a Home Equity Loan — SuperMoney
  13. The Complete Guide to HELOCs: Everything You Need to Know About Home Equity Lines of Credit — SuperMoney
  14. What Is a Subordinate Mortgage? — SuperMoney