Variable-Rate HELOC vs. Fixed-Rate HELOC: What’s the Difference?

It’s all about if and how the interest rate changes

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A home equity line of credit (HELOC) is a revolving line of credit, similar to a credit card, that’s backed by your home. There are two types of a HELOC: a variable-rate HELOC and a fixed-rate HELOC. The key difference between the two is how the interest rate works. The rate for a variable-rate HELOC can periodically go up or down during the term of the loan, while the rate for a fixed-rate HELOC never changes. Most HELOCs charge a variable rate.

What’s the Difference Between a Variable Rate HELOC and a Fixed Rate HELOC?

Variable Rate HELOC Fixed Rate HELOC
Interest Rate Can change as often as each month Does not change
Structure Typically built into loan Available when loan is taken out or during loan term
Monthly Payments Fluctuating Fixed

Interest Rate

The standard HELOC offers a variable interest rate. This means the rate can change during the life of the loan, even from month to month. Some lenders let you pick the fixed-rate option for a HELOC, meaning the interest rate remains the same.

A fixed-rate HELOC is sometimes called a hybrid HELOC because it is a cross between a traditional variable-rate HELOC and a fixed-rate home equity loan.

Structure

Most of the time, a HELOC automatically comes with a variable rate, but some lenders may offer a fixed-rate option. This may involve converting all or part of the HELOC balance to a fixed-rate loan during the HELOC’s draw period. That’s the period—typically 10 years—when you can borrow money using the line of credit. You also might be able to choose the fixed-rate option when you initially get approved for a HELOC.

Monthly Payments

When the interest rate for a HELOC is variable, the monthly payments can increase or decrease over time. But when the HELOC’s interest rate is fixed, the monthly payments are also fixed.

Special Considerations

The interest rate for a variable-rate HELOC is connected to an interest index that reflects overall market conditions (but does not reflect your own financial situation), and changes from time to time. When that index changes, the interest rate for the HELOC might go up or down.

At the outset, the rate for a variable-rate HELOC may be lower than it is for a fixed-rate HELOC. But because the rate is adjustable, the rate for a variable-rate HELOC may end up being higher than it is for a fixed-rate HELOC.

Which Is Right for You?

A variable-rate HELOC may be right for you if you’re looking for potential savings on interest charges. However, a fixed-rate HELOC may be the option that works best if you prefer the certainty of fixed monthly payments.

Variable Rate

With a variable-rate HELOC, you might wind up saving money on interest if, over time, you pay an overall lower interest rate. However, you run the risk of being stuck with an overall higher interest rate and monthly payments. In addition, a variable-rate HELOC might come with a shorter payoff period than a fixed-rate HELOC does.

Some HELOCs start with a lower introductory interest rate that’s fixed. After the introductory period ends, the interest rate moves up to a higher variable rate.

Fixed Rate

If you have a fixed-rate HELOC, it can help you maintain your household budget since you’ll know what you’re responsible for on a month-to-month basis. On the other hand, you could miss out on interest savings that might be supplied with a variable-rate HELOC, and you might face a longer payoff period.

Keep in mind that some lenders may let you flip back to a variable rate from a fixed rate.

What To Consider as You Choose Between the Two

Questions you should ask before signing on the dotted line for a variable-rate or fixed-rate HELOC include:

  • How is the interest rate determined?
  • If there’s an introductory interest rate, how long will it last?
  • If the interest rate is variable, what is the maximum rate allowed?
  • What fees will I be charged?
  • Are there any penalties for an early payoff?
  • When will the draw period end?

The Bottom Line

Key differences between a variable-rate HELOC and a fixed-rate HELOC include whether or not the interest rate changes; if the HELOC initially comes with a variable or fixed rate; and how much the monthly payments will be. When looking at which kind of HELOC to get, consider how comfortable you’d be with rate changes, and how confident you’d be with making monthly payments that may go up or down.

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