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Many people borrow against the equity in their home to make home improvements, pay for medical expenses, or cover tuition costs. To do this, they’ll often take out a second mortgage — a home equity loan or home equity line of credit (HELOC). These loans make it possible to borrow large sums at low rates, as long as you’re willing to put your house up as collateral.
Traditionally, choosing between these loans meant choosing between a fixed interest rate with a home equity loan or a variable interest rate with a HELOC. But with a fixed-rate HELOC, you get the best of both worlds.
Here’s what you need to know about fixed-rate HELOCs:
- What is a fixed-rate HELOC?
- How a fixed-rate HELOC works
- Pros and cons of a fixed-rate HELOC
- Fixed- vs. variable-rate HELOC
- Can I convert an existing HELOC to a fixed rate?
- Alternatives to a fixed-rate HELOC
What is a fixed-rate HELOC?
A fixed-rate HELOC is just that: a home equity line of credit with an interest rate that doesn’t change. Normally, HELOCs carry an adjustable interest rate. However, adjustable interest rates come with drawbacks that many borrowers find unappealing, a key one being fluctuating monthly payments.
You may be reluctant to take out a loan if you don’t know how much it’ll cost you month to month or in the long run. And lenders might struggle to collect what you owe when a rate increase makes loan payments unaffordable.
If you already have a traditional HELOC, your lender may let you convert a variable-rate balance to a fixed rate.
How a fixed-rate HELOC works
Fixed-rate HELOCs work much like variable-rate HELOCs — you’ll have a draw period (the time when you can access funds) and a repayment period (the time when access to funds is cut off and you begin to repay the loan).
HELOC loan terms can range between five and 30 years, with a draw period lasting up to 10 years, and the remainder of the loan dedicated to repayment.
However, your lender may restrict how many balances you can have at once even if you still have available equity. For example, your lender may only let you have up to five rate locks and you must pay off one balance to open another.
Your loan-to-value (LTV) ratio typically can’t exceed 80% when you take out a HELOC. Lenders also require adequate property insurance as they have a lien position on your home title. Like a variable-rate HELOC, you can make multiple withdrawals to pay for different expenses, from completing home improvements to refinancing high-interest debt.
Fixed-rate HELOCs are a cross between HELOCs and home equity loans
HELOCs and home equity loans are both considered second mortgages, but there are some distinct differences between the two:
- Home equity loan: A home equity loan lets you borrow a lump sum against your home equity and repay it over a set number of years at a fixed interest rate. For example, you might borrow $30,000 at 5% for 30 years, similar to a first mortgage. Your monthly payment will never change.
- HELOC: A HELOC works similar to a credit card. You can borrow as much or as little from your line of credit as you want during the first five to 10 years of the loan (also known as the “draw period”). This is followed by a repayment period of 10 to 20 years.
The initial interest rate of a HELOC is usually lower than the rate on a home equity loan, but the rate can adjust as often as once a month as rates in the broader market change.
This is where fixed-rate HELOCs come in handy. A fixed-rate HELOC is like a cross between a home equity loan and a regular HELOC. It gives you the flexibility to draw on a credit line at your convenience along with the option to lock in your rate on the sums you borrow, reducing the uncertainty in what you’ll pay per month.
You won’t find fixed-rate HELOCs at Credible, but for another way to tap your home equity, consider a cash-out refinance. Credible can help you check refinance rates from all of our partner lenders. Checking rates with us is safe and simple — and it won’t impact your credit score.
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Pros and cons of a fixed-rate HELOC
If you’re considering a fixed-rate HELOC, you’ll want to understand the pros and cons before you apply.
Pros
- Consistent monthly payments: When you lock in your interest rate, you know what your payment will be each month. That’s easier to budget for.
- Borrow as needed: Unlike a home equity loan, you don’t have to know how much you want to borrow upfront. You’ll borrow as much as you need and only pay interest on that amount. You could save money on interest this way, especially if, say, your home improvement project ends up costing less than you expect.
- Same qualifications: Second mortgage qualifications related to income, debt, home equity, and credit score are more or less the same whether you want a fixed- or variable-rate HELOC (or a home equity loan). Which lender you choose is more important than which loan product you choose.
- High loan limits: Many lenders let you borrow up to 80% of your property appraisal value. Some lenders may accept an 85% combined loan-to-value (CLTV) ratio with your current mortgage. Your closing costs can also be less than a cash-out refinance as your new loan is for a smaller balance.
Cons
- Miss out on rate drops: If you lock in your rate and then rates go down, you won’t automatically benefit from the lower rate like you would with a variable interest rate.
- More decisions to make: A fixed-rate HELOC is still fundamentally a HELOC. By default, you’ll get a variable interest rate. You have to choose how much of your credit to lock your rate on and when to do it.
- Limits on rate locking: Your lender may limit you to locking your rate on only part of the money you borrow. They may require you to borrow a minimum sum to lock your rate, and you may pay an additional fee.
- Higher initial APR: Your initial APR may be higher than a variable-rate HELOC but won’t adjust higher if interest rates rise.
Fixed- vs. variable-rate HELOC
Both HELOC products share many similarities. For example, you can withdraw a portion of your home equity now and more in the future with either type of HELOC.
This chart highlights the key differences between fixed-rate and variable-rate HELOCs.
| Fixed-rate HELOC | Variable-rate HELOC | |
|---|---|---|
| APR | Initial APR is usually higher but you may save more long-term in a rising rates environment. | Usually has a lower initial APR. However, future rates can fluctuate lower or higher. |
| Loan limits | $5,000 up to 80% of your home appraisal value (varies by lender) | $5,000 up to 80% of your home appraisal value (varies by lender) |
| Withdrawal limits | Most lenders limit the number of rate locks per year. A withdrawal minimum can also apply. | Can make on-demand withdrawals, usually restriction-free. |
| Loan term | Up to 30 years but can have a shorter draw period | Up to 30 years |
| Interest-only payments | Might be possible during the draw period | During the draw period |
Can I convert an existing HELOC to a fixed rate?
Lenders may let you transfer all or a portion of your variable-rate HELOC balance to a fixed-rate HELOC. You can request this conversion during the draw period or once you start making principal-and-interest payments.
Some lenders may only offer a fixed rate to existing HELOC customers. In this instance, you would need to open a variable-rate HELOC first. Then, you can convert your balance later and choose your loan term to get a stable monthly payment.
While your total interest costs can be lower, your lender may charge a one-time transfer fee of up to $100. Fortunately, some lenders waive the fees and may provide rate discounts if you enroll in a qualifying payment plan.
Converting to a term loan can be worth it when interest rates are rising and you still need several years to pay off your variable balance. Rates can rise rapidly and make it difficult to afford your monthly payment.
Alternatives to a fixed-rate HELOC
A fixed-rate HELOC is just one of several options for borrowing against your home equity. Consider these three alternatives to fixed-rate HELOCs to decide what’s best for your situation.
Variable-rate HELOC
Best if: Your HELOC is just for emergencies.
If you have no plans to actually use your HELOC but want to know the money is available to borrow in case of an emergency, then it makes sense to stick with a traditional, variable-rate HELOC.
This way, you won’t be paying interest on money you might never use, like you would with a home equity loan. And you might be able to enjoy a lower interest rate down the road.
Home equity loan
Best if: You know how much you want to borrow and how long you need to pay it back.
A home equity loan is very similar to a fixed-rate mortgage. If you know that you need $100,000 to build an addition to your home, replace the roof, and paint the exterior — and that paying the money back over 20 years will be affordable — then a home equity loan can be a good choice.
However, if rates drop, you’ll have to refinance your home equity loan to secure a lower rate.
Check Out: Second Mortgage vs. Home Equity Loan: Understanding the Difference
Cash-out refinance
Best if: You want to borrow a lump sum and get a lower rate on your first mortgage.
Maybe your first mortgage rate is 5% and you could get a rate of 3.5% by refinancing — but you also want a lump sum to pay off your high-interest debt.
A cash-out refinance could be your most cost-effective option in this case. However, the closing costs can be substantially higher compared to a second mortgage.
Keep Reading: Home Equity Loan vs. Personal Loan: Which Is Right for You?
Josh Patoka contributed to the reporting for this article.
