Fixed-Rate HELOC: What It Is & How It Works

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Updated: Sep 29, 2021, 10:40am

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Fixed-Rate HELOC: What It Is & How It Works

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A home equity line of credit (HELOC) works similar to a credit card—it’s a revolving source of funds that you can tap into anytime you want with an amount based on the equity in your home—the home’s current value minus the remaining mortgage balance.

Most HELOCs have adjustable rates that fluctuate with market trends. But a fixed-rate HELOC lets you lock in the rate on some or all of your available credit balance.

To know which HELOC is right for you, let’s dive further into fixed-rate HELOCs (compared to other products) and how they work.

How a Fixed-rate HELOC Works

With a fixed-rate HELOC, you can request that all or some of the funds you borrowed be subject to a fixed interest rate. You then have the option of repaying the amount over a set number of years.

If approved by the lender, you’re typically able to access up to 80% of your home equity with a HELOC.

There is a draw period, usually no more than ten years, which is the timeframe during which you can access the funds as needed. Any payments you make during this period will only apply to the interest charged on the money you take out.

This is followed by the repayment period, usually no more than 20 years, when you no longer have access to the money and are expected to make monthly payments against the amount borrowed plus interest.

A note of caution: Taking out a HELOC means putting up your home as collateral, and your lender can repossess the collateral if payments are not met. This means failing to make the required payments can lead to default or foreclosure.

It is important to remember that each financial institution will have different terms governing how you can access your line of credit. In addition, you can expect some variation in the interest rates and fees each lender charges. So be meticulous in your research. Here are some examples of what to expect:

HELOCs can be a fixed-rate when you close on the line of credit, or you can elect to convert from an adjustable-rate HELOC during the draw period.
You might be required to borrow a minimum amount in order to get a fixed rate.
You might be able to lock in a fixed rate for the entire loan balance, or just a portion of it.
The fixed-rate HELOC is usually locked in for terms ranging from five to 30 years.

While the fixed-rate HELOC has the same broad features across banks, there could be critical differences in one product compared to another that makes it better suited to your needs. So be sure to shop around and pay attention to every detail before making a decision.

Fixed-rate vs. Variable-rate HELOCs

As mentioned, a HELOC usually comes with a variable interest rate. This means your payments may go up or down depending on current market rates. The fixed-rate option, on the other hand, locks in an interest rate for a portion or the entire lifetime of the HELOC.

The bank establishes the loan limit, using how much equity you have in your home. It then sets the interest rate, which is usually based on the prime rate as well as your creditworthiness and financial profile.

While most HELOCs have variable rates, more lenders are offering fixed-rate HELOCs as well. Deciding which one is right for you really depends on current market rates and your level of comfort with what risk you would like to take.

For example, when rates are low and you’re worried they could increase, you may want to consider locking in a rate with a fixed-rate HELOC. However, if rates drop further, so will your rate if you have a variable-rate HELOC that fluctuates.

Related: Compare Current Mortgage Rates

Pros and Cons of Fixed-Rate HELOCs

Like with any loan option, there are always pros and cons to each product. We’ll walk you through both when it comes to a fixed-rate HELOC.

Pros of a Fixed-rate HELOC

The fixed rate means your payments will not spike suddenly if market rates go up.
You don’t have to worry about low introductory rates that are designed to lure in new customers and then will jump once the promo period has ended.
As you repay the balance on the fixed-rate HELOC, your available credit line goes back up.
You only pay interest on the amount you draw, as opposed to the entire balance.
If the funds are used for a home improvement project, the IRS considers your interest payments tax deductible.

Cons of a Fixed-rate HELOC

It can have a higher starting interest rate compared to a variable-rate HELOC.
You could get locked into a higher interest rate if market rates drop.
A potential spike in your monthly payments once the draw period ends, as you are now repaying the entire balance and interest.

Is a Fixed-rate HELOC Right for You?

If you need money for a home improvement or renovation project, but you don’t like monthly payments fluctuating, a fixed-rate HELOC might make sense. It will provide you with the funds you need and offers transparency regarding what your monthly payments will be. Plus, spending the money on an addition to your home means the interest payments are tax deductible.

But keep in mind if you want to take out a fixed-rate HELOC for other purposes, then it is not tax deductible and poses some risk if you can’t make payments down the road.

As with any HELOC or lending product, make sure to do your research first, compare different lender rates and take inventory of your financial situation before closing.