How does a fixed rate HELOC work?

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A Home Equity Line of Credit (HELOC) is a revolving line of credit secured by the equity in your home, and you can borrow against it as needed.

Most HELOCs have variable interest rates, which means the rate on the balance you owe can go up and down depending on market conditions. However, more and more banks have started offering fixed rate HELOC options, where you can lock in an interest rate and potentially save money.

What is a fixed rate HELOC?

A fixed rate HELOC is considered a hybrid of a home equity loan and a HELOC. It allows you to lock in some or all of your balance at a fixed interest rate, protecting you against market fluctuations that impact rates.

How it works

With a fixed rate HELOC, you can withdraw as much or as little from your line of credit as you need, and you can convert all or part of that balance to the fixed interest rate.

Borrowers can usually convert their HELOCs to a fixed rate at closing or during the drawdown period, says Laura Sterling, vice president of marketing at Georgia’s Own Credit Union. “Some lenders may also allow the borrower to retrain at a variable rate.”

The ability to switch between variable and fixed rates allows borrowers to take advantage of lower interest rates when they become available. At the same time, freezing a fixed interest rate can ensure the stability of predictable monthly payments.

The fixed rate portion of the HELOC can be locked in for terms ranging from five to 30 years, during which time the loan is paid off like a typical mortgage, says Vikram Gupta, executive vice president and head of home equity at PNC Bank.

HELOC fixed rate vs variable rate

Since most traditional HELOCs come with interest rates that can fluctuate on a daily basis, they can lead to enormous uncertainty when planning your monthly household budget.

“Be prepared for your payment to double every month or more, should the rate rise significantly,” says Mark Charnet, founder and CEO of American Prosperity Group, a retirement and estate planning firm.

The payment of a fixed interest HELOC cannot fluctuate. However, fixed rate HELOCs generally have higher starting interest rates than traditional HELOCs, explains Sterling. There are also market factors to consider.

“Borrowers could pay more than they need to for a fixed rate HELOC if interest rates fall,” Sterling said.

Factors to consider with a fixed rate HELOC

HELOC fixed rate options have their own advantages and disadvantages; consider these factors before applying.

Inflation

With inflation, a fixed rate HELOC can be a good idea for your loan. If the market changes, you are still protected by the frozen rate on your loan.

“Inflation is a key variable that determines the interest rate environment,” says Gupta. “Inflation usually rises when the economy starts to overheat and prices start to rise rapidly.”

Chronology

A fixed rate option is also particularly beneficial when your loan is for home renovations or other ongoing projects. With a fixed rate loan, there is no rush to start construction before the interest rate increases.

“Establishing a fixed rate lock on a HELOC can often make sense when a client has a planned expense that they need to finance, such as a home improvement project,” Gupta explains. “In this scenario, the client will have complete certainty about the cost of their financing. “

Cost

A HELOC does not work for everyone. If interest rates are rising quickly, you may not have time to get the lowest rate possible. Some lenders also require minimum amounts for a fixed rate loan, so there is less flexibility for budget-conscious borrowers.

Hidden fees

There may also be hidden costs, such as penalties for repayment of the loan and its early closing or refinancing. Be sure to carefully review the terms of your HELOC to make sure they work for you, as these penalties and fees can add up quickly.

“Borrowers may want to look for annual fees and rate freezes,” explains Sterling. “Some lenders cap the number of fixed rate locks a borrower can perform each year and may charge a fee for each rate lock. Borrowers should also be aware of minimum withdrawal amounts.

Can I convert an existing HELOC to a fixed rate?

If you have purchased a variable rate HELOC and want to switch to a fixed rate, there are several ways you can do this.

  1. Open a new hybrid HELOC. The easiest way to get a fixed rate HELOC is to purchase a new HELOC in total. It is best if you are near the end of the draw period for your current HELOC.
  2. Refinance your old HELOC. Opening a new HELOC Hybrid allows you to refinance your existing HELOC – you will simply pay off your old HELOC balance using funds from your new HELOC. This will also reset your draw period.

Here are a few cases where it may make sense to convert your HELOC from variable interest rate to fixed rate.

Remodeling

A fixed rate loan can be the ideal solution when renovating a home. Throughout construction, the interest rates on a variable rate HELOC could fluctuate, giving you a higher rate during the renovation. When it comes to home renovations, converting part of your HELOC to a fixed rate protects you against rate fluctuations.

Family emergencies

Disasters often strike without warning, and when it happens to your health, the costly medical bills you have left could require a loan. An emergency unsecured loan is one option, but a fixed rate HELOC can be cheaper and easier to repay.

Debt consolidation

Maybe your oldest went to college this year around the same time a tree fell on your roof. There are two very important financial needs on your plate: preserving your child’s education and repairing your house. Unlike a debt consolidation loan, a fixed rate HELOC doesn’t limit you to just one withdrawal. You can even take out a fixed rate advance on the entire HELOC amount, and with the fixed interest rate, you’ll know exactly what your payments will be so you can schedule them.

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

Whether it’s a home improvement project or a big unexpected expense, it’s a good idea to carefully consider the HELOC Variable Rate and Fixed Rate options to determine which one is best for you. .

Both have their advantages; it’s just a matter of your needs. Here are some questions to ask yourself to determine which one is the best:

  • Is it a rising or falling interest rate market? “If you are in a rising rate market, a fixed rate HELOC might be a good option,” Sterling says. “If you anticipate rates that will stay low, you can save more with a traditional HELOC. “
  • Is there a fixed amount that you need to borrow? Are you in the process of paying off a student loan or do you need flexibility in how much you borrow for a large or ongoing home improvement project? Fixed rate HELOCs can give you more flexibility. However, some lenders require that you borrow a minimum amount to lock in a fixed rate.
  • Are you comfortable with the rates and payments that can change over time? “If the answer is no, a fixed rate HELOC might be a good choice,” Sterling says.

The ultimate goal is to borrow the money you need and pay as little as possible. A variable or fixed rate HELOC can get you there, especially if you keep an eye on the ever-changing financial market.

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