What is a fixed-rate HELOC?

A fixed-rate HELOC is a hybrid loan that allows you to lock in the interest rate on a portion of your balance.  (Shutterstock)

Your home equity may be one of your biggest financial resources. If you’ve built up enough, lenders may allow you to borrow against this value to pay for things like home improvements, medical expenses, or a college education. 

One way to access your equity is through a fixed-rate home equity line of credit (HELOC). This article explains what this financial product is, how it works, and when you might get one.

Credible doesn’t offer fixed-rate HELOCs, but you can compare rates on a cash-out refinance.

• What is a fixed-rate HELOC?
• How a fixed-rate HELOC works
• Fixed- vs. variable-rate HELOC
• Pros and cons of a fixed-rate HELOC
• How to convert an existing HELOC to a fixed rate
• Is a fixed-rate HELOC right for you?

What is a fixed-rate HELOC?

A fixed-rate HELOC is a way to borrow against the equity in your home. Equity is the difference between what you owe on your mortgage and what your home is worth. This wealth grows as you make your monthly payments and as your home appreciates in value. 

With this loan product, you’ll have a set borrowing limit, but you can draw on it as many times as you’d like during the draw period. The fixed-rate part refers to the interest rate you’ll pay on the money you borrow. Most HELOCs have a variable rate, meaning your payment can change over time. With a fixed rate, your payments won’t change for as long as you have the loan. 

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How a fixed-rate HELOC works

In general, HELOCs work much like a credit card. Your lender gives you a set limit based on the amount of equity you have and factors like your credit score. You can then draw money from your HELOC account for a specified number of years — this is known as the draw period — in as many transactions as you’d like, often using a card or checks your lender provides. Many people use a HELOC to pay for home renovations, to cover medical bills, or to consolidate debt. 

At the end of the draw period, you’ll enter the repayment period. This period typically lasts for 20 years, and you’re required to pay back all the money you’ve borrowed, plus interest. 

Fixed-rate HELOCs are something of a hybrid between a traditional home equity line of credit and a fixed-rate home equity loan. In most cases, you’ll begin by paying a variable interest rate on money you spend from your HELOC. But after a major purchase, you may have the option to "lock in" the rate on a specific amount you’ve spent. 

Fixed-rate HELOC example

Here’s an example of how a fixed-rate HELOC works. Say you have a $50,000 home equity line of credit. You may choose to spend $30,000 on a major kitchen remodeling project. With a fixed-rate HELOC, your lender would allow you to lock the $30,000 balance at a fixed interest rate. 

If later on you decide to draw another $5,000 for a car repair and $4,000 for a beach vacation from the same HELOC account, you’d still pay a variable interest rate on that $9,000 balance. However, some lenders may allow you to have multiple "locked" portions of your HELOC. Check with your lender to learn about the specifics of its fixed-rate HELOC.

Fixed- vs. variable-rate HELOC

HELOCs typically have variable interest rates, meaning the rate can change along with market conditions during your draw period and repayment period. If interest rates rise, so do your monthly payments. 

Fixed- and variable-rate HELOCs share many similarities. The length of the loan term, loan limits, and withdrawal limits are typically the same for each. However, when you lock in a fixed rate on a portion of your HELOC, your rate will often be higher than the current variable rate. But remember, your variable-rate HELOC’s APR will change and could rise higher than the fixed rate.

If a HELOC doesn’t sound right for you, a cash-out refinance is another way to tap home equity. Credible makes it easy to compare mortgage refinance rates from different lenders.

Pros and cons of a fixed-rate HELOC

Before choosing a fixed-rate HELOC, it’s important to understand some of the pros and cons. 

Pros

• Predictable monthly payments — With a fixed-rate HELOC, you’ll know exactly how much money you’ll spend each month on the portion of your loan you’ve locked in. You’ll also have a road map for how long it’ll take to pay off that portion of the loan.
• Protection from rising rates — By locking in your rate, you don’t have to worry about rising interest rates. With a variable-rate HELOC, your rate and payments could rise as the market changes.
• Flexibility in spending — Since fixed-rate HELOCs are a hybrid product, you have the flexibility to pay off a major purchase at a fixed rate while maintaining your credit line for other purchases.

Cons

• Higher rates — Lenders usually offer fixed rates that are higher than the current variable rates. This means you may start off paying more on your fixed-rate HELOC portion than you would have had you stuck with a variable rate.
• Fees — Some lenders charge you a fee to lock in your rate on a portion of your HELOC.
• Minimum spending requirements — There may be a minimum amount you must spend before you can lock in a rate. These minimums can be fairly high, such as $5,000 or more. 

How to convert an existing HELOC to a fixed rate

If you currently have a variable-rate HELOC and want to convert to a fixed-rate HELOC, you have a few options. One way is to open up a new HELOC account that has the fixed-rate option you’d like. Depending on the status of your current home equity line of credit, you may or may not qualify for this. 

Another way is to refinance your current HELOC to a new one with a fixed-rate option. This involves taking out a new HELOC that pays off and replaces your current one. You may have to pay a fee to close out your current HELOC early.

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Is a fixed-rate HELOC right for you?

A fixed-rate HELOC can be a good way to balance flexibility with predictability. You can tap your home equity with the freedom to spend your loan multiple times, but also gain the security of a fixed rate and payment. 

If interest rates are rising, it may serve you well to seek out a fixed-rate HELOC. This will protect you against rising payments. If you’re planning a major purchase, it may also make sense to convert to a fixed-rate HELOC. This will give you predictability as you budget for the major expense.

Alternatives to a fixed-rate HELOC

You may also look into other options for borrowing against your home equity. These include a cash-out refinance or a traditional home equity loan. 

With a cash-out refinance, you take out a new loan for a higher amount than you currently owe on your mortgage. This loan pays off and replaces your current mortgage, and you receive the difference in cash. 

A home equity loan, commonly referred to as a second mortgage, provides you with a lump sum that you pay back at a fixed rate. You begin paying back your home equity loan right away, and your payment will not change for as long as you have the loan. 

Both home equity loans and cash-out refinances — along with a fixed-rate HELOC — put you at risk of foreclosure if you fail to make your payments.

No matter what you choose, be sure to take stock of your financial situation before committing to a home equity line of credit. Then evaluate and compare lenders that might fit your situation to find the one that’ll offer you the best deal.

With Credible, you can easily compare mortgage refinance rates from multiple lenders in as little as three minutes.