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Many people borrow against the equity in their homes 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 up your house as collateral.
Borrowers typically have to choose between a fixed-rate home equity loan or a variable-rate HELOC. But a fixed-rate HELOC gives you the best of both worlds — the stability of a home equity loan and the flexibility of a traditional HELOC.
Here’s what you need to know about fixed-rate HELOCs:
- What is a fixed-rate HELOC?
- Variable-rate vs. fixed-rate HELOC
- What are the pros of fixed-rate HELOCs?
- What are the cons of fixed-rate HELOCs?
- When a fixed-rate HELOC makes sense
What is a fixed-rate HELOC?
Home equity lines of credit (HELOCs) traditionally carry a variable interest rate. However, variable interest rates come with drawbacks that many borrowers find unappealing, a key one being fluctuating monthly payments. But a fixed-rate HELOC comes with an interest rate that doesn’t change.
A fixed-rate HELOC gives borrowers access to a certain amount of their home equity. Equity is the difference between the value of the home and the amount you owe on your mortgage.
You can use these funds for any purpose, including home improvements, debt consolidation, or to fund a major purchase. You’ll have access to a revolving line of credit, similar to a credit card, but the interest rate won’t change over the life of the loan.
If you already have a traditional HELOC, your lender may let you convert a variable-rate balance to a fixed rate.
Variable-rate vs. fixed-rate HELOC
Most HELOCs come with variable interest rates, which change periodically over the life of the loan. Two key factors influence variable rates:
- Index: The index is a benchmark interest rate that rises or falls depending on the overall economy.
- Margin: This is an extra set of percentage points the lender adds to the index. The margin won’t change over the life of your loan.
The interest rate for your HELOC will periodically change depending on changes in the index. This means you may have a lower rate at the start of your HELOC, but will likely see your rate fluctuate over time.
In comparison, a fixed-rate HELOC has a set interest rate that remains the same over the life of your loan. Since your interest rate won’t change, your monthly payments won’t change either. This makes fixed-rate HELOC payments easier to budget for, but keep in mind that you won’t be able to take advantage of falling interest rates.
Here are a few other key differences between variable- and fixed-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 |
What are the pros of fixed-rate HELOCs?
Fixed-rate HELOCs come with many advantages, including:
- Lock in your rate: With a fixed-rate HELOC, you’ll have a set rate that doesn’t change. Even if interest rates rise in the future, your interest rate and payments won’t change. This gives many borrowers added peace of mind.
- Borrow only what you need: Unlike a home equity loan, you don’t have to know how big of a loan you want upfront. You’ll borrow as much as you need and only pay interest on that amount.
- Predictable payments: The biggest advantage of choosing a fixed-rate HELOC is that your monthly payments won’t change. You’ll know exactly how much you need to pay each month, which makes budgeting much easier. This can be especially helpful for borrowers on a tight budget.
- High borrowing 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.
What are the cons of fixed-rate HELOCs?
There are many benefits to choosing a fixed-rate HELOC, but they come with a few downsides as well:
- Higher initial APR: Your initial APR may be higher than a variable-rate HELOC but won’t adjust higher if interest rates rise.
- No possibility of a rate drop: 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.
When a fixed-rate HELOC makes sense
Whether a fixed-rate HELOC makes sense largely depends on your financial situation and long-term goals. For instance, it may be a good idea if you’re planning to use the funds for a long-term expense, like a home renovation project.
Because the monthly payments on a fixed-rate HELOC won’t change over time, it can be easier to plan and budget for these expenses over time. And if you’re on a tight budget, this borrowing option will give you the stability you need.
A fixed-rate HELOC can also be a good idea if you’re worried about possible rate increases in the future. It’ll help you avoid the uncertainty that comes with fluctuating variable interest rates.
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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Amy Fontinelle and Josh Patoka contributed to the reporting for this article.
