What Is a Fixed-Rate HELOC and How Does It Work?

Key takeaways

The interest rate on fixed-rate HELOCs stays the same, as opposed to fluctuating as it does with traditional HELOCs.
Certain lenders allow you to switch a portion of your traditional variable-rate HELOC balance into a fixed rate.
Fixed-rate home equity lines of credit might have increased fees along with higher interest rates.

You may be familiar with how a home equity line of credit (HELOC) operates—a flexible line of credit featuring a fluctuating interest rate, similar to a credit card. This is typically what people refer to as a regular HELOC. However, there exists a less frequent type known as a fixed-rate HELOC, where you have the option to lock in the interest rate—ensuring consistent payment amounts.

Here’s how a fixed-rate HELOC operates and how it varies from a standard home equity line of credit.

What does a fixed-rate home equity line of credit entail?

If a standard HELOC is like having a large credit card, then a fixed-rate HELOC resembles a second mortgage. In fact, it’s a combination of both. home equity loan (This provides you with a one-time payment at a set rate) along with a home equity line of credit. It enables you to lock in a part or entirety of your balance at a specific interest rate, safeguarding you from market volatility affecting rates.

With a fixed-rate home equity line of credit (HELOC), you have the flexibility to borrow as much or as little from your approved credit line whenever necessary, similar to how it works. variable-rate HELOC Unlike the adjustable version, however, the interest rate on a fixed-rate balance remains constant throughout the entire term.

If your home equity line of credit (HELOC) provider includes a fixed-rate choice, you generally have the opportunity to make this change at the time of closing or during the draw phase, according to Laura Sterling, who serves as the Vice President of Marketing at Georgia’s Own Credit Union. Locking in a fixed interest rate can provide the stability of predictable monthly payments.

The fixed-rate portion of the HELOC 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 .

What is the mechanism behind a fixed-rate home equity line of credit (HELOC)?

Similar to other home equity loans or lines of credit, the interest rate for your fixed-rate Home Equity Line of Credit (HELOC) will be influenced by your credit score as well as prevailing market conditions.

Usually, lenders permit you to freeze part or all of the amount available on your home equity line of credit anytime within the draw phase. However, they may restrict the number of occasions you can convert to a fixed interest rate on your HELOC (such as U.S. Bank permits clients to maintain up to three fixed-rate balances simultaneously, whereas Regions Bank provides the choice to transform a portion of its Home Equity Line of Credit (HELOC) into a fixed-rate loan, allowing this process up to 10 times). Additionally, certain lenders mandate maintaining a specific balance before changing to a fixed interest rate.

Based on your lender, you could potentially secure the interest rate yourself via your online account, or you might have to reach out to a representative for this process.

Advantages and disadvantages of a fixed-rate home equity line of credit

Like all monetary products, a fixed-rate home equity line of credit comes with advantages and disadvantages. Consider these factors when thinking about it.

Advantages of a Fixed-Rate Home Equity Line of Credit (HELOC)

Avoid interest-rate fluctuations: The interest rates for regular, adjustable HELOCs might fluctuate each month in line with changes in the prime rate or another specified index. However, should your HELOC be set at a fixed rate, you wouldn’t need to concern yourself with shifts in interest rates.
Stable, predictable repayments: When the interest rate remains constant, you are aware of precisely what your monthly payments will amount to. This consistency aids in budgeting while also budgeting for additional costs.
Potential to lock future low rates: HELOCs have the potential to become extended financial commitments lasting up to three decades. Over such an extensive period, numerous changes may occur concerning interest rates. However, opting for a fixed-rate HELOC allows you to secure an advantageous rate initially and maintain it throughout the term. Regardless of whether market interest rates rise during this timeframe, your monthly payments on the HELOC will remain constant—assuring you of consistently lower borrowing costs over time.

Drawbacks of a Fixed-Rate Home Equity Line of Credit (HELOC)

Increased interest rates and charges: The interest rates on fixed-rate home equity lines of credit (HELOCs) tend to be higher compared to the starting rates on standard HELOCs. Additionally, numerous lenders impose a fee whenever you opt to lock in a rate. closing costs and fees — such as the origination and account maintenance fees — may also be higher with a fixed HELOC.
Harder to find: Fixed-rate HELOCs are becoming more popular, but they still aren’t as widely available as their traditional counterparts. If your lender does offer them, you might be required to have a minimum balance on the HELOC before converting to a fixed rate, or the lender might mandate a minimum or maximum amount whose 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.)

Fixed- vs. variable-rate HELOC

A variable-rate HELOC translates to some uncertainty when planning your monthly household budget. A fixed-interest HELOC’s payment can’t fluctuate.

What's the drawback then? Primarily, HELOCs offering a fixed rate usually come with higher starting rates. interest rates Unlike traditional HELOCs, explains Sterling, you're essentially paying extra for the guarantee of a fixed interest rate. Additionally, fixed-rate HELOCs could have higher origination and maintenance fees compared to their conventional counterparts.

Typically, the terms — duration of draw period And the repayment term remains consistent for both kinds of HELOCs. Nevertheless, the fixed-rate version could come with constraints on borrowing that do not apply to a variable-rate HELOC.

Elements to think about with a fixed-rate home equity line of credit

Inflation/interest rate moves

If inflation worries you, opting for a fixed-rate Home Equity Line of Credit (HELOC) could be the wiser choice. This way, irrespective of economic shifts and changing interest rates, you will benefit from the stability of a consistent rate.

Keep in mind, a standard HELOC's interest rate can vary over time, so if interest rates decline ,, you will reap the benefits. Therefore, switching to a fixed-rate HELOC tends to work well when you believe interest rates have reached their lowest point and are likely to rise again shortly. However, should prevailing market rates decrease, converting back to a variable rate to lower your payments may not be straightforward.

Purpose of the HELOC

A fixed rate can be particularly advantageous if you're utilizing the HELOC for this purpose. home improvements It frees you from the pressure to withdraw funds and start renovations before interest rates go up.

Setting up a fixed-rate lock on a Home Equity Line of Credit (HELOC) usually makes sense for customers who have specific expenses they plan to cover, like remodeling their home," explains Perveiler. "This way, the customer will know exactly how much their funding will cost them.

A fixed-rate HELOC could also be beneficial during an emergency, like an unexpected situation. medical bill , or to consolidate debt .

Cost and fees

Based on your lender and loan conditions, fixed-rate home equity lines of credit might be offered with several fees , including:

Origination fee
Converting or locking-in fee
Annual or maintenance fee
Prepayment penalty

Additionally, although a fixed-rate home equity line of credit provides stability for your finances, future interest rate changes remain unpredictable. Should rates drop, you could conclude that opting for a variable-rate line of credit would have been more advantageous.

Hidden fees could also apply, including penalties for early repayment or costs associated with using the conversion feature. For instance, Bank of America imposes an early closure fee of $450 if you terminate your HELOC less than 36 months after initiating it. Similarly, U.S. Bank levies a prepayment penalty if you settle and fully repay a HELOC within the initial 30-month period; this charge amounts to 1% of the original credit limit but caps at $500.

"Borrowers might want to watch out for annual fees and rate locks," states Sterling. "Certain lenders limit the number of fixed-rate locks a borrower can initiate each year and could impose a fee for every rate lock. borrowers must also keep an eye on the minimum withdrawal requirements" (at Bank of America For instance, it's $5,000.

Another factor to keep in mind is that the locked-in fixed rate will probably be several percentage points above your current HELOC rate. Consequently, this raises the expense of borrowing and entails paying additional interest.

Minimum borrowing requirements

Sometimes lenders mandate a specific minimal amount be kept in your line of credit before offering a fixed interest rate. If you're aiming to stick to a particular budget, this could backfire as it may compel you to take out extra money you genuinely do not require.

Alexander Suslov, who leads the capital markets at A&D Mortgage, states, "Certain lenders might require a minimum sum to be switched to a fixed interest rate, typically beginning near $5,000."

They might also restrict how many times you can switch from a variable rate to a fixed one.

Why aren't all home equity line of credit interest rates fixed?

The traditional, variable-rate HELOCs Have long held the dominant position among HELOCs and continue to be the most commonly available option. The interest rate on conventional HELOCs varies according to shifts in other interest rates, which are determined by the benchmark rate established by the bank. Federal Reserve .

Nevertheless, fixed-rate options are increasingly prevalent: Lenders started incorporating them during the period of rising interest rates over the past couple of years. Fixed-rate Home Equity Lines of Credit (HELOCs) provide security in such financial conditions. This insight comes from a mortgage lender. Rate’s considering the addition of a fixed-rate home equity line of credit (HELOC) to its product lineup in 2022. Despite HELOC rates having declined since late 2021, lenders are still providing this option, believing it remains attractive to borrowers.

Is it possible to switch from a fixed-rate home equity line of credit to a variable-rate one when interest rates decrease?

If interest rates decline, a variable-rate Home Equity Line of Credit (HELOC) could seem appealing—plus, it might offer greater financial advantages compared to a fixed-rate option. Should you have previously switched from a variable rate to a fixed one, certain lenders "may permit borrowers to revert back to a variable rate" subsequently, according to Sterling. This flexibility in changing between variable and fixed rates lets you capitalize on reduced interest rates as soon as they're offered.

If not, Plan B might involve refinancing the HELOC (refer to FAQ for more details).

Is a fixed-rate home equity line of credit the right choice for you?

Regardless of whether you're undertaking a home improvement project or facing an unforeseen major cost, it's wise to thoroughly evaluate both variable-rate and fixed-rate Home Equity Line of Credit (HELOC) choices to decide which suits you best. Each comes with its own advantages; it simply depends on what you require. Consider these questions: 1. What financial goals do I aim to achieve? 2. How steady is my income flow over time? 3. Am I comfortable with fluctuating interest rates? 4. Which repayment terms align better with my budget constraints?

What is the current interest rate situation? If you find yourself in a rising interest rate environment, opting for a fixed-rate HELOC might be beneficial," explains Sterling. "However, should you expect rates to stay low, a conventional HELOC could end up saving you more money.
Do you have a specific amount you're looking to borrow? Are you currently paying off debt? student loan Are you considering funding a substantial or continuous home renovation effort? A fixed-rate Home Equity Line of Credit (HELOC) could offer greater adaptability; nonetheless, certain financial institutions may necessitate borrowing a specific minimum sum to secure your interest rate.
Do you feel okay about payments that might vary later on? "If the response is negative, a fixed-rate HELOC might be a suitable option," suggests Sterling. However, if the answer is affirmative, a conventional adjustable-rate HELOC would suffice—just ensure you account for significant fluctuations, particularly once your payment phase starts.

FAQ

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

In reality, they're quite alike. Each one is backed by the equity in your home and can serve comparable needs, like home improvements Or debt consolidation. Both usually provide lower interest rates than unsecured loans, according to Suslov. Nevertheless, a fixed-rate HELOC initially functions as a revolving line of credit with a variable interest rate that can subsequently be changed into a fixed rate for all or part of the outstanding balance. Conversely, a home equity loan disburses a single lump sum that is then paid back in installments at a fixed interest rate right from the start.

Here’s another perspective: Locking in the interest rate on a Home Equity Line of Credit (HELOC) effectively converts it—or part of it—into a home equity loan. However, unlike a traditional home equity loan, with a HELOC, you have the flexibility to make additional withdrawals whenever necessary. As for repayment, each payment will restore your available credit limit up to the original amount.
Is it possible to change my current Home Equity Line of Credit (HELOC) to have a fixed interest rate?

Indeed, numerous lenders permit you to switch from a variable-rate HELOC to a fixed rate even during the draw phase. According to Suslov, you must reach out to your lender to convey your desire for this change. The financial institution will subsequently evaluate whether you qualify for the transition considering aspects like your present debt level, loan-to-value percentage, and credit rating.

If you're currently in the repayment phase and wish to switch to a fixed-rate HELOC, there are several approaches you can take:

• Initiate a new home equity line of credit. The easiest method to secure a fixed-rate home equity line of credit (HELOC) is to apply for a fresh HELOC—either a fixed-rate option or a hybrid version that allows conversion when needed.

• Refinance your old HELOC. If you initiate a new combined home equity line of credit, you have the option to utilize it for various purposes. refinance your existing HELOC —you'll just use the money from your new line of credit to settle the outstanding balance on your previous Home Equity Line of Credit (HELOC). Adopting this approach will provide you with a fresh draw period as well. Alternatively, rather than opting for another line of credit, you might choose to refinance with a home equity loan. For instance, FourLeaf Federal Credit Union provides the distinctive choice to transform part or all of a adjustable-rate HELOC into a fixed-rate loan at no cost; you have the option to select from five-, 10- and 20-year repayment periods.
Can you pay off a HELOC early?
Certainly, you have the option to pay off and close a home equity line of credit (HELOC) prematurely—whether this be during the draw phase or right when the repayment stage begins. However, prior to making such a move, ensure you verify whether your lending institution imposes any penalties for doing so. early closure or termination fee This is also known as a prepayment penalty. Such fees are not universal among lenders (they're more frequent with banks), but if your lender applies them, they might be charged as either a fixed fee or a percentage of your HELOC balance.

Additional contribution by Taylor Freitas