If you’re shopping around for a HELOC, you may be hesitant to take out a variable-rate line of credit when interest rates are set to rise. One alternative is a fixed-rate HELOC. Here’s a closer look at how it works.
A fixed-rate HELOC is a line of credit secured by your home’s equity that you can pull from as needed (much like a credit card). But instead of having a variable interest that changes over time, the interest rate stays the same.
Fixed-rate HELOCs are less common than traditional variable-rate HELOCs — and lenders set their own rules for how they work.
For instance, some lenders let you open a fixed-rate HELOC as a new line of credit. Others make you open a variable-rate HELOC first, then convert a portion of your balance into a fixed-rate HELOC for a set amount of time — anywhere from a few months to right up until your HELOC expires — at which point it converts back into a variable-rate loan. (These are also known as hybrid rate HELOCs.)
Fixed-rate and variable-rate HELOCs work exactly the same: you pull from the line of credit as needed. The major difference is how interest is calculated.
A variable-rate HELOC has an interest rate that fluctuates with the prime rate. Your monthly payments can go up or down, depending on changes in the prime rate or inflation.
With a fixed-rate HELOC, your interest rate is locked in for part or all of your loan. You’ll know exactly how much your monthly payments are, making budgeting easier. And, because the fixed rate is locked in, you have protection if interest rates rise.
This stability comes at a cost, though, and fixed-rate HELOCs may have more fees or a higher interest rate to start.
| Fixed-rate HELOC | Variable-rate HELOC |
|---|---|
| 5 to 30-year term | 20 to 30-year term |
| Monthly payment stays the same | Monthly payment fluctuates |
| Interest rate may be initially higher | Interest rate may be initially lower |
| May have more fees | May have fewer fees |
There are a few circumstances when you might want to consider getting a fixed-rate HELOC.
If you think that interest rates or inflation will increase soon, a fixed-rate HELOC can offer some protection against rising costs. This is because your interest rate is locked in at the current rate, even if market rates go up.
If you’re using your HELOC for home improvement, a fixed rate can give you structure and help you stay on budget. It also means you won’t be rushed to finish a remodeling job before rates rise.
A HELOC fixed rate option may be a good call when consolidating debt. This is because you’ll know exactly how much your payments are, which can help you figure out if consolidating will save you money in the long run.
One major downside of a traditional HELOC is that your monthly payment can go up and down at any time. If interest rates rise overnight, your payment could double without you having any control over it.
However, a fixed-rate HELOC can provide some peace of mind because you know exactly how much your monthly payments are.
There are a few scenarios where you may want to avoid a HELOC fixed-rate option.
If you anticipate that interest rates will fall soon, going with a variable rate may be beneficial. That way, your payments decrease as rates decline.
Some fixed-rate HELOCs may have higher minimum draw amounts than variable-rate HELOCs. If you need to borrow money for small, infrequent expenses, make sure the minimum draw amount isn’t too high. Otherwise, you could take on more debt than you need.
Some lenders may charge a fee each time you lock in your HELOC rate. So read each lender’s fine print to determine which fees you may be responsible for.
If you’re trying to keep fees low, look for a lender that doesn’t charge fees to lock in a rate or consider choosing a variable-rate HELOC instead.
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There are a couple of options for converting an existing variable-rate HELOC into a fixed-rate option.
If you refinance, you’re essentially taking out a new loan from scratch. So compare interest rates from multiple lenders to find the best deal. Consider the total cost of refinancing — such as interest rates, fees, and closing costs — to ensure it doesn’t outweigh your potential savings.
Fixed-rate HELOCs aren’t your only option for getting predictable monthly payments. Consider these fixed-rate loan options:
A fixed-rate HELOC could make sense if interest rates are about to rise or if you prefer predictable monthly payments. As with any loan, shop around and compare rates from multiple lenders before deciding.
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