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Fixed-Rate HELOC

A home equity line of credit, or HELOC, typically uses adjustable rates that depend on market trends. But with a fixed-rate HELOC, you can lock in a rate that lasts throughout the life of the agreement. Since the rate never changes, you don’t have to worry about sudden increased costs. Therefore, you can more easily budget to remodel a kitchen, make repairs or undertake other expenses. By understanding this type of financing, you’ll be able to make a more educated decision about opening a HELOC. Consider working with a financial advisor as you evaluate your financing options.

Fixed-Rate HELOC Explained

Fixed-rate HELOCs are a way for homeowners to tap into their home’s equity, which is basically the difference between your property’s value and the amount left on your mortgage balance. Homeowners can use that value to secure funds, putting it towards high-cost projects, like debt consolidation or remodeling. Approval for a HELOC may allow you to access up to 80% of your home’s total equity to pay for costs such as these.

Unlike a home equity loan, you don’t have to pay interest for all the funds available to you. Instead, you only pay it on the amount of credit you use.

Fixed-rate HELOCs charge this interest at a single rate when you withdraw funds. In addition, they typically use a 30-year term. A draw period often lasts for a span of 10 years, followed by a 20-year period for repayment.

Pros of Fixed-Rate HELOCs

A traditional HELOC with variable rates can be helpful for some homeowners. But there are advantages unique to fixed-rate HELOCs. Here are a few ways they can help you:

Combat Inflation

It may seem like traditional HELOCs have the upper hand when it comes to interest. Lenders often start them off with lower, competitive rates compared to fixed-rate HELOCs. But while the latter might be more expensive in the beginning, they may save you money in the long run. Market changes can drive rates up. But with a fixed rate, you don’t have to worry about increasing costs. Your rate will stay consistent, no matter what the economy looks like.

Clear and Easy Budgeting

With adjustable-rate HELOCs, you have to worry about rates increasing over time. But when you opt for a fixed-rate HELOC, you don’t have to plan for any sudden changes. Your rate never varies, so your budget can stay consistent. This not only saves you money over time but stress as well.

Possible Conversion

An increasing number of banks allow their lenders to convert loan balances based on the market. This is helpful for borrowers who realize that an adjustable-rate HELOC would be more cost-effective for them. They don’t have to stick with their fixed-rate HELOC as a result. Instead, they can ask their lender to convert their fixed-rate line of credit into an adjustable one instead. You can sometimes request this during the draw period. But keep in mind that your lender may have certain requirements you need to follow. You may also have to pay some fees for the conversion.

Multiple Uses

You can use the money in whatever way you see fit. And, with the consistent rate, you don’t have to suddenly limit yourself due to market fluctuations. You can spend just as much as you planned, knowing your rate didn’t change.

Cons of Fixed-Rate HELOCs

Fixed-Rate HELOC

Fixed-rate HELOCs come with their fair share of advantages. However, they are not the perfect form of financing for everyone, as they can be rigid and perhaps more expensive depending on the rate you receive. How a line of credit like this can cost you in the long run is important to understand before you start shopping around. Here are a few drawbacks to a fixed-rate HELOC:

Overall Cost

A fixed-rate HELOC may be the right choice for some. But sometimes, it sticks you with a higher interest rate that an adjustable-rate HELOC would have avoided, provided the adjustable-rate HELOC is paid off before the rate jumps. The cost difference may be an issue both at the start and over the financing’s term. Adjustable-rate HELOCs tend to be cheaper at the start. So, you may set yourself to pay more from the outset with a fixed-rate version. Not only that, but adjustable-rate HELOCs can change relatively frequently and it is possible that the rate could adjust down, not up.

Hidden Fees

Lenders may add hidden fees to your fixed-rate HELOC. For example, they may include additional fees, such as an annual fee, every time you lock in a rate. You may also face hidden penalty costs if you’re not careful. If you go into a HELOC unprepared, these fees can stack up quickly. So, it’s crucial that you know all the terms and conditions of your credit line before you agree to them.

Minimum Borrowing Amount

Lenders decide how much you must borrow at a minimum to qualify for a fixed-rate HELOC. While that might not be a problem for some borrowers, it may be a hurdle for others. The amount a particular lender requires might not fit your financial situation. For example, someone working within a particular budget can’t jump unnecessarily for more credit.

Is a Fixed-Rate HELOC Right for You?

HELOCs are a valuable option if you need to finance a large home renovation project or unexpected expense. Certain circumstances might make a fixed-rate HELOC more suitable – for example, the conditions of the market. If analysts project market rates to rise within the near future, a fixed-rate HELOC might be a good option. That way, you can take advantage of earlier, lower rates. However, if rates might stay low, or even drop then a traditional HELOC could save you money.

You may also want to think about the amount of funds you actually need. Someone paying off a short-term debt may be more suited to an adjustable-rate HELOC. They don’t have to worry about long-term changes to the market. In contrast, someone who needs flexibility for an ongoing project may want the predictability of a fixed rate.

Ultimately, the right type of financing depends on your situation. You just want to ensure you can borrow the amount you need and pay the minimum for it.

Bottom Line

Fixed-Rate HELOC

Fixed-rate HELOCs can help homeowners pay for expensive projects and costs using the equity in their home. This form of credit comes with some unique advantages, such as protection against inflation, that may make it appealing to some. Even if you have a variable-rate HELOC, it may not be too late to convert to a fixed-rate version. You can try to open a new HELOC altogether, or you can refinance your existing one.

Tips for Managing Your Finances

  • A line of credit can be a useful tool for homeowners, but it requires careful management. Spending blindly can hurt you in the long run, straining your finances. That’s why it might be worth speaking with a financial advisor before you apply for one. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Your mortgage debt can play a significant role in the way you plan retirement. That’s why one of your most useful tools is a free mortgage calculator.
  • Mortgage rates are more volatile than they have been in a long time. Check out SmartAsset’s mortgage rates table to get a better idea of what the market looks like right now.

Photo credit: ©iStock.com/Feverpitched, ©iStock.com/designer491, ©iStock.com/Edwin Tan

Ashley Kilroy Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
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