What is a fixed rate HELOC and how does it work?

If you prefer the predictability and stability of fixed loan payments, there’s good news for you. You can convert the balance on your variable-rate home equity line of credit (HELOC) to a fixed-rate HELOC if your bank allows it. 

That is to say, your interest rate will remain the same for the selected term — protecting you from the possibility of rising monthly payments. A fixed-rate HELOC offers you the best features of both a home equity loan and a home equity line of credit. Let’s see how.

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What is HELOC?

A HELOC is a type of home equity loan that allows the borrower to draw funds from a credit line as required. And, the borrower pays back the money at a variable interest rate during the repayment period. It’s the best loan option for people who need more time to repay debt or have an ongoing home improvement project. 

A HELOC has lower interest rates than a home equity loan, an unsecured personal loan, or a credit card. However, to qualify for the best interest rates, you’ll need a high credit score, a low debt-to-income ratio, and sufficient equity in your home.

What is a fixed-rate HELOC?

A fixed-rate HELOC is a hybrid loan option – with some features of a home equity loan and some of a HELOC. You can lock in a portion or all of your HELOC balance at a fixed interest rate. This will protect you against market fluctuations and rising rates.

How does a fixed-rate HELOC work?

Just like a traditional HELOC, you can use as much or as little of your credit line as you need with a fixed-rate HELOC too. The difference is that, unlike a variable-rate HELOC, the interest rate on any amount you utilize will remain constant during the draw period.

Some HELOC lenders allow borrowers to convert to fixed-rate at closing or during the draw period. Some may even allow them to convert back to a variable rate when needed.

By switching between variable and fixed rates HELOCs, the borrower is able to take advantage of dropping interest rates. Plus, can enjoy the stability of predictable monthly payments when required.

The fixed-rate part of HELOC can be locked for a loan term ranging from five to 30 years – during which time the loan can be paid back like a typical mortgage.

Read more: How long does HELOC take?

Fixed- vs. variable-rate HELOC

An interest rate that may fluctuate daily can cause a lot of uncertainty – especially when it’s time to plan your monthly household as well as home maintenance budget.

A fixed-interest HELOC payment, on the other hand, doesn’t fluctuate. However, it will typically have higher starting interest rates than a standard HELOC. Additionally, it may have higher fees too. Another disadvantage is that a fixed-rate HELOC may have a borrowing limit – a feature you won’t find in a variable-rate HELOC.

Factors to consider before applying for this loan

Fixed-rate HELOC comes with its own pros and cons. You need to consider all the factors before applying for this type of HELOC. Always make sure to thoroughly review the loan terms and conditions to ensure that they work for you.

Pros of fixed-rate HELOC

• Helps in times of inflation

This may be a smart loan option during inflation when the economy starts overheating. If the market changes and the rates increase significantly, you’re still protected.

• There’s no hurry to stick to a low interest rate period

A fixed-rate option gives you peace of mind as there’s no fear of the interest rates increasing. So, you can take your time to plan your home renovation project, a new construction, or any other ongoing project. 

• Is an ideal solution for home remodeling

The interest rate will not fluctuate throughout construction. This loan type will help you budget more reliably; you can estimate the cost of financing with certainty.

• Is a cheaper loan option for family emergencies and debt consolidation

When dealing with expensive medical bills, a fixed HELOC may be cheaper and easier to pay off. Moreover, unlike a debt consolidation loan, this loan option allows you to have more than one withdrawal. And, you’ll know what your monthly payments will be.

Cons of fixed-rate HELOC

• Cost may be higher than a variable rate HELOC

Such a type of HELOC may mean paying a higher interest rate than the current interest rates in the market. A variable-rate HELOC may offer you a chance for lower monthly rates.

• It may have stringent lender requirements

Your loan lender may require you to use a minimum withdrawal amount from your HELOC. If you’re running on a strict budget, or are planning a home renovation after a while, this rule may not work for you.

• It may have higher fees and hidden fees

The annual fees of a fixed-rate HELOC are higher than a variable one. Moreover, there may be hidden fees, such as prepayment penalties for paying the loan off and closing it early. 

Some lenders have a limit on the number of fixed-rate locks a borrower can make each year; they may impose a fee for each rate lock.

Can I convert an existing HELOC to a fixed rate?

If you want to convert your existing variable-rate HELOC into a fixed-rate one, you can do it in several ways. These include: 

1. Creating a new hybrid HELOC account altogether – especially if you’re nearing the end of your current HELOC’s draw time. This is the easiest way to obtain a fixed-rate HELOC.
2. Refinancing your existing HELOC through a new hybrid HELOC. You’ll have to pay off the balance of your old HELOC using funds from your new HELOC. And, your draw period will reset.

Is a fixed-rate home equity loan option best for me?

It’s always a good idea to carefully evaluate both variable-rate and fixed-rate HELOC to determine which one makes better financial sense to you.

• If it’s a falling rate market, you may save more money with a traditional HELOC.
• Do you need to pay off a student loan or fund an ongoing home improvement project? A fixed-rate HELOC may give you more flexibility in terms of the borrowing amount. 
• If you’re not comfortable with fluctuating rates and payments, a fixed rate is better for you.

The ultimate goal while applying for a loan is to borrow the money you need and pay as little as you can for it. Whichever loan you choose, it’s a good idea to keep an eye on the ever-changing financial market.

Key takeaways

• A fixed HELOC lender may require that you have a minimum withdrawal amount.
• As you repay the fixed-rate balance, your credit line resets. 
• Some lenders allow you to convert your loan from a variable-rate loan to a fixed-rate one or vice versa during the draw period.
• If you’re applying for a HELOC, always shop around for the best lenders, the best rates, and the most suitable loan features.

This type of hybrid HELOC comes in handy for those who are not prepared for the rising interest rates and want predictable monthly payments throughout the life of the loan. It helps you manage your monthly expenses better as it gives you control over how much to pay and for how long.

Written by Ramona Sinha. October 10, 2022

Ramona is a content writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. An avid traveler, she’s a digital nomad at heart and an animal lover from the depths of her soul.