Definition and Examples of a Fixed-Rate HELOC
A fixed-rate HELOC, short for a home equity line of credit, allows you to borrow against your home equity, then repay some or all of what you borrow at a fixed interest rate. Unlike with a loan, you don't have to accept the full credit line upfront. Instead, you can make advances as needed during the draw period. As you repay any fixed-rate balance, you may be able to make additional draws from the principal you've repaid.
- Alternate name: Fixed-rate home equity line of credit
For example, if you have taken two HELOC advances of $5,000, both with variable annual percentage rates (APRs), you may be able to opt to convert one to a fixed-rate APR. Your HELOC then would have two balances: one with a fixed APR and the other with a variable APR.
How a Fixed Rate HELOC Works
Most HELOCs come with a variable APR, meaning the APR is tied to a market rate such as the prime rate. Your HELOC APR—and your monthly payment—will go up and down whenever the index rate changes.
With a fixed-rate HELOC, however, some or all of the balance has a fixed interest rate, which does not change for a specific term.
The first few years after opening a HELOC is known as the draw period, during which you can take advances up to your credit limit. After the draw period ends, the credit line closes and you're required to repay your outstanding balance for the remainder of the term.
One type of fixed-rate HELOC offers a fixed interest rate at the opening of the account that automatically applies to all your credit-line advances.
Another type of fixed-rate HELOC combines both fixed- and variable-rate balances on the same credit line. You have the option to lock in a portion of your balance at a fixed rate with a fixed term, or even switch between fixed and variable APRs to take advantage of lower interest rates. The rate you receive is based on your credit, balance, and the term you choose, and could be higher than the variable rate. Lenders may charge a fee to convert a draw to a fixed rate.
During the term, payments on the fixed-rate part of the balance will cover both the principal and interest, allowing you to pay off the principal on or before the maturity date. As you pay down the principal, that amount becomes available for you to receive during the draw period.
Because a fixed-rate HELOC relies on your home equity as collateral, you risk losing your home if you fall behind on payments.
The lender may limit the number of fixed-rate draws you can have outstanding at once, and there may be a minimum draw amount for the fixed-rate portion of your balance.
Fixed-Rate HELOC vs. Variable-Rate HELOC
|Fixed-Rate HELOC||Variable-Rate HELOC|
|APR is locked in for a specific term||APR changes based on an index rate|
|Fixed monthly payment||Monthly payment may change periodically|
|Payments apply to interest and principal||Payments may apply to interest only during the draw period|
Pros and Cons of Fixed-Rate HELOC
Predictable monthly payments on fixed-rate balance
Payments free up available credit
Only pay interest on the amount drawn
May miss advantage of falling interest rates
Keeping up with terms between multiple draws can be difficult
Options vary among lenders
- Predictable monthly payments on fixed-rate balance: Fixed monthly payments make it easier to budget since you know what your payment will be each month.
- Payments free up available credit: After reducing your outstanding balance, you can take additional draws against your credit line. With a variable-rate HELOC, your payments may only cover the interest, so you never free up additional credit to use.
- Only pay interest on the amount drawn: Unlike with a home equity loan, you're not subject to interest on the full amount of credit made available to you—only the portion you actually use.
Your monthly payment could increase on a fixed-rate HELOC if you make additional draws or if the rate increases on a variable-rate portion of your balance.
- May miss advantage of falling interest rates: Once the fixed rate is locked, you could miss out on interest savings when market rates drop if your HELOC doesn't offer the ability to convert to a variable rate.
- Keeping up with terms between multiple draws can be difficult: Each draw could have a different interest rate, depending on when you locked in a fixed rate, the amount of the advance, and the fixed-rate term.
- Options vary among lenders: While the basics are largely the same, specific loan features vary from lender to lender. Spending time comparing features is critical to making sure you get the HELOC product that will best meet your needs.
- A fixed-rate HELOC allows you to borrow against your home equity and repay some or all of your balance at a fixed rate.
- Payments on the fixed-rate balance will cover both principal and interest.
- Paying down your balance frees up available credit that you can later borrow against during the draw period.
- Some options allow you to switch between a fixed and variable interest rate.
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