Fixed-rate HELOC: Why it could be for you

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Fixed-rate HELOC: Why it could be for you

You’re ready. Ready to get rid of your high-interest debt. Ready for that bathroom remodel. Ready to plan your wedding. The only question is how to finance your high-priority expense. A fixed-rate HELOC is a great solution for many homeowners, Achieve reports.

With a fixed-rate home equity line of credit, you can borrow against your home equity to tackle just about any large expense or financial emergency. Since it’s a line of credit, you have the flexibility to borrow repeatedly. At the same time, the fixed interest rate gives you peace of mind that your costs are controlled and predictable.

Key takeaways:

• A fixed-rate HELOC combines the best features of a home equity loan (a fixed interest rate) and a home equity line of credit (the ability to borrow, repay, and borrow more during your draw period).

• Home equity loans tend to have lower interest rates and more flexible credit requirements compared to personal loans.

• With a fixed-rate HELOC, you will know upfront what your interest rate will be after the draw period ends, removing the uncertainty that comes with a variable-rate loan or credit card.

What is a fixed-rate home equity line of credit (HELOC)?

A fixed-rate HELOC is a home equity line of credit that has a fixed interest rate (one that doesn’t change over the life of the loan).

Fixed-rate HELOCs are a blend of the best features of home equity loans and HELOCs. It’s a line of credit, so for the first few years, it works like a credit card. Unlike a credit card, however, this loan comes with a fixed interest rate, which protects you from fluctuations that could increase your cost of borrowing.

Fixed-rate HELOCs are hard to find. The vast majority of HELOCs come with a variable interest rate.

Fixed vs. variable HELOCs

Here’s a breakdown of the similarities and differences between three types of home equity loans: fixed-rate HELOCs, variable-rate HELOCs, and traditional home equity loans.

How a fixed-rate HELOC works

A fixed-rate HELOC combines the best features of home equity loans (the fixed interest rate) and home equity lines of credit (the ability to borrow and pay back funds continuously for a period of time). Here’s a basic run-down of how a fixed-rate HELOC works.

HELOC draw period

A HELOC has a draw period, which is a number of years (typically five to 10) during which you can borrow repeatedly, up to your loan limit.

During the draw period, you can borrow, repay, and borrow again as often as you like. You’ll make a monthly payment in proportion to the amount of money you’ve drawn.

At the end of the draw period, the repayment period begins, and you may not withdraw any more funds. Your monthly payment will be set to a fixed amount that will pay off your entire balance over the loan’s term (typically 10 to 25 more years). Some home equity loans have a longer repayment period, which gives you a lower monthly payment but means you’ll pay more in interest over the life of the loan.

HELOC payments

With a traditional HELOC, you might only have to make interest payments during the draw period. However, if you make interest-only payments, you’re not paying down what you owe. Then, when the draw period ends, your payment could go up sharply because you’ll have to start making a regular principal plus interest payment each month.

In contrast, a fixed-rate HELOC allows you to begin repaying your principal balance and interest from day one. This lets you make progress against your debt. Also, you get a consistent and manageable monthly payment throughout the life of the loan. The only way your payment would spike when your draw period ends is if you borrowed more at that time.

HELOC interest rates

With a fixed-rate HELOC, the interest rate is locked when your loan is approved. Your rate will depend on your credit score and other factors in your credit history.

Whether you’re in your draw period or the repayment period, you’ll only pay interest on the amount you actually borrow, not on any additional credit limit that is or was available to you.

Traditional HELOCs come with a variable interest rate, which makes it harder to predict what your monthly payment will be in the future. Variable interest rates leave the borrower at the mercy of market conditions. Most variable rates are tied to a benchmark, such as the Federal Reserve’s federal funds rate. When rates are rising, you can expect your variable-rate loan or credit card to get more expensive.

Opting for a variable-rate HELOC means your interest rate and payment could change over time. With a fixed-rate loan, you are protected from rising interest rates.

HELOC minimum draws

HELOCs sometimes have a minimum loan amount and/or a minimum initial draw amount. If the lender has a minimum initial draw, you have to borrow at least that much money when your loan closes. If you didn’t need that much yet, you could repay it to save on interest charges, and draw it when you need it.

HELOCs also have a maximum. The maximum loan amount is calculated in two ways, and your limit will be the lower of the two:

• A dollar figure. Lenders set their own maximum loan amount. No matter how much equity you have, you can’t borrow above this limit.

• A percentage of your home’s value. This is called the combined loan-to-value ratio (CLTV) and includes your primary mortgage if you have one. Together, your mortgage balance and the new home equity loan may not exceed the lender’s CLTV limit.

Is a fixed-rate HELOC a smart option?

A HELOC is a great idea under certain conditions, such as when you:

• Need at least $15,000

• Want to use a lower interest HELOC to pay off higher interest debt

• Aren’t sure how much money you’ll need, and you want to have access to funds over time

A fixed-rate HELOC is also a solid option when you want to:

• Repeatedly borrow and repay for the next few years, but without the high interest cost associated with credit cards

• Have a line of credit without a changing interest rate

• Borrow money to improve your home

• Finance a large expense, and a traditional personal loan won’t give you enough time or money

Pros and cons of a fixed-rate HELOC

A fixed-rate HELOC combines the best features of home equity loans and HELOCs, but it’s not the right solution in every situation.

Fixed-rate HELOC pros

• Draw period. A fixed-rate HELOC allows you to borrow repeatedly, up to your loan limit, for your entire draw period. In contrast, traditional home equity loans are for one lump sum given to you the day your loan closes.

• Fixed interest rate. If you opt for a fixed-rate HELOC, your interest rate is set when your loan is approved. In contrast, a variable-rate HELOC could leave you with some financial uncertainty.

• Competitive rates. HELOCs tend to have lower interest rates compared with other borrowing options like credit cards. That’s because your home guarantees the loan, which lowers the risk to the lender.

Fixed-rate HELOC cons

• Not for small expenses. If your financial need is smaller than the minimum draw amount, it may make more sense to look at a personal loan instead.

• Won’t work for every borrower. If you don’t qualify for an interest rate you’re happy with, you might want to consider a cash-out refinance loan instead. That’s a new mortgage that replaces your old one. Primary mortgages tend to have lower interest rates than HELOCs.

Who should consider a fixed-rate HELOC?

Fixed-rate HELOCs are rare, but you can find them. Achieve Loans offers a fixed interest rate and a five-year draw period, combining the most popular features of home equity loans and HELOCs.

If any of the following points apply to you, you may be the perfect candidate for a fixed-rate HELOC:

• You don’t like the uncertainty of an interest rate and a loan payment that can increase at any time.

• You like the idea of being able to withdraw money only as needed and reborrowing it once it’s been paid back.

• You have a large project to pay for and may need a repayment period longer than you can get with a large personal loan.

This story was produced by Achieve and reviewed and distributed by Stacker.