Typically, HELOCs have variable rates, meaning your interest rate may increase or decrease over time. However, some lenders offer fixed-rate HELOCs with a locked-in interest rate (though this usually comes with higher initial rates). But let’s take a step back to look at the bigger picture so you better understand all of your HELOC options. A home equity line of credit (HELOC) works like a revolving line of credit, leveraging the equity from your home as you need it instead of getting the cash all at once.
In this article, we’ll dive into the ins and outs of both variable- and fixed-rate HELOCs so you can determine which option is right for your unique situation.
In general, HELOCs are a powerful and flexible tool that you can use to tap into your home’s equity when you need it. Similar to a credit card, you’ll be given a line of credit to draw funds from for a set period (known as the draw period). Usually, this period is up to 10 years, during which you can borrow against your line of credit.
Though you only have to pay interest on the amount you borrow, a variable interest rate is determined by market fluctuations. A standard HELOC will have a variable rate, meaning it will most likely increase or decrease depending on the economy and trending market rates. It's vital to consider potential rate fluctuations when you’re planning your budget and repayment strategy, as a significant rate increase may result in your inability to manage payments.
The standard variable-rate HELOC is similar to a big credit card. A fixed-rate HELOC is more like a hybrid of a home equity loan and a HELOC as it allows you to lock-in a portion or the entirety of your balance at a fixed interest rate. That way, you’re protected against market fluctuations that may be impacting rates now or in the future.
You are able to withdrawal as much or as little of your credit line as needed, just like a variable-rate HELOC. However, opting for a fixed rate means that the interest rate on any amount you end up withdrawing will have the same interest rate applied throughout the draw period.
Locking in a HELOC rate
PROS of a fixed-rate HELOC:
- Stable monthly repayments
- Safeguard against rising rates/interest fluctuations
- Ability to revert to variable rate if rates go down (depending on your lender)
CONS of a fixed-rate HELOC:
- Higher initial APR
- Limited in the number of times you can lock in a rate (depending on your lender)
- Not offered by all lenders
If you’re considering a fixed-rate HELOC, you may also want to research home equity loans as another means of accessing the equity in your property. A home equity loan is offered at a fixed-rate, and you receive the funds up front rather than taking out portions over time.
Maybe you’re starting a home improvement project or have a large, unexpected expense. Regardless, it’s a good idea to look into both variable- and fixed-rate home equity options to determine what makes sense for you.