What is a fixed-rate HELOC and how does it work?

You might know how a home equity line of credit (HELOC) works — a revolving line of credit with a variable interest rate, sort of like a credit card. That’s your standard HELOC. But there’s a less common variety: a fixed-rate HELOC, whose interest rate can be locked in — so your payments won’t vary.

Here’s how a fixed-rate HELOC works and how it differs from a traditional home equity line of credit.

What is a fixed-rate HELOC?

If a regular HELOC is akin to a big credit card, a fixed-rate HELOC is similar to a second mortgage. Actually, it’s a hybrid of a home equity loan (which gives you a lump sum at a fixed rate) and a home equity line of credit. It allows you to freeze a portion or all of your balance at a fixed interest rate, protecting you against market fluctuations that impact rates.

With a fixed-rate HELOC, you can withdraw as much or as little of your credit line as needed, just as with a variable-rate HELOC. Unlike the variable variety, though, the interest rate on any amount you use will have the same interest rate applied throughout the .

If your HELOC lender offers a fixed-rate option, you can usually do the conversion at closing or during the draw period, says Laura Sterling, vice president of Marketing at Georgia’s Own Credit Union. Locking in a fixed interest rate can provide the stability of predictable monthly payments.

The fixed-rate portion of the HELOC can be locked in for terms ranging from five years to 30 years, during which time the loan is paid back like a typical mortgage, says Joe Perveiler, home lending product executive at PNC Bank.

How does a fixed-rate HELOC work?

Like any home equity loan or line of credit, the interest rate on your fixed-rate HELOC will depend on your credit score and current market rates.

Typically, lenders will let you freeze some or all of the balance on your HELOC at any point during the draw period. They might limit how many times you can lock in a fixed interest rate on your HELOC (for example, U.S. Bank allows customers to have up to three fixed-rate balances at any time, while Regions Bank offers the option to convert part of its HELOC into a fixed-rate loan, up to 10 times). Also, some lenders require a minimum balance to switch to a fixed interest rate.

Depending on your lender, you might be able to lock the rate yourself through your online account, or you may need to contact a representative to do so.

Pros and cons of a fixed-rate HELOC

As with any financial product, there are both benefits and drawbacks associated with a fixed-rate HELOC. Here are some of the considerations to keep in mind.

Pros of a fixed-rate HELOC

• Avoid interest-rate fluctuations
• Stable, predictable repayments
• Potential to lock in a low rate

Cons of a fixed-rate HELOC

• May have a higher interest rate/more fees than a traditional HELOC
• Harder to find: Not as widely offered
• More complex bookkeeping if you convert only part of your balance

Fixed- vs. variable-rate HELOC

A variable-rate HELOC translates to some uncertainty when planning your monthly household budget. A fixed-interest HELOC’s payment can’t fluctuate.

So, what’s the downside? For starters, a HELOC with a fixed rate typically has higher initial interest rates than traditional HELOCs, says Sterling. You’re paying for the privilege of that potential rate freeze, in other words. Fixed-rate HELOCs might charge higher origination and maintenance fees than comparable traditional HELOCs, too.

Generally, the terms — length of draw period and repayment period — are the same on both types of HELOCs. However, the fixed-rate variety might impose parameters on borrowing that you won’t have with a variable-rate HELOC.

Factors to consider with a fixed-rate HELOC

Inflation/interest rate moves

If you fear inflation, a fixed-rate HELOC might be the smarter move. That’s because, regardless of what happens with the economy and interest rates, you’ll still have the security of a fixed rate.

Remember, a regular HELOC’s rate will fluctuate, so if interest rates decline, you’ll get the benefit. So the-switching-to-a fixed-HELOC strategy works best if you think rates have bottomed out, and that they’ll soon be on the upswing again. If prevailing market rates drop, however, you might not be able to easily convert back to a variable rate and reduce your payments.

Purpose of the HELOC

A fixed rate can be especially beneficial if you’re using the HELOC to make home improvements. It relieves you of any rush to draw funds and begin remodeling before the rate increases.

“Establishing a fixed-rate lock on a HELOC can often make sense when a customer has a planned expense they need to finance, such as a home renovation project,” says Perveiler. “In that scenario, the customer will have full certainty about the cost of their financing.”

A fixed-rate HELOC might also come in handy in an emergency, such as an unforeseen medical bill, or to consolidate debt.

Cost and fees

While a fixed-rate HELOC lends certainty to your budget, there’s no telling how interest rates might change in the future. If rates fall, you might find you were better off with a variable-rate line of credit.

There might also be hidden fees, such as penalties for paying the line off early or a fee for exercising the conversion option. For example, Bank of America charges an early closure fee of $450 if you shut down your HELOC within 36 months of opening it. Meanwhile, U.S. Bank’s prepayment penalty applies if you close and pay off a HELOC within the first 30 months. It equals 1 percent of the original line amount (up to $500).

“Borrowers may want to look out for annual fees and rate locks,” says Sterling. “Some lenders cap the number of fixed-rate locks that a borrower can do annually and may charge a fee for each rate lock. Borrowers should also be aware of minimum withdrawal amounts” (at Bank of America, it’s $5,000, for example).

Something else to consider: The fixed rate you lock in will likely be a few percentage points higher than your HELOC’s current rate. This increases the cost of borrowing and requires you to pay more in interest.

Minimum borrowing requirements

Lenders sometimes require a minimum outstanding balance on the line of credit before you can get the fixed rate. This might not work well for you if you’re trying to stay within a certain budget, forcing you to borrow funds you don’t really need.

“Some lenders may mandate a minimum amount to be converted to a fixed rate, often starting around $5,000,” says Alexander Suslov, head of capital markets for A&D Mortgage.

They might also restrict how many times you can switch from a variable rate to a fixed one.

Why aren’t all HELOC rates fixed?

The traditional, variable-rate variety has long been the predominant type of HELOC, and it continues to be the most widely offered. The interest rate on traditional HELOCs changes with the fluctuations in other interest rates, based on the benchmark rate set by the Federal Reserve.

However, fixed-rate offerings are becoming more common: Lenders began adding them amid the soaring-interest-rate environment of the last two years. Fixed-rate HELOCs offer protection in such climates. That was mortgage lender Rate’s thinking in adding a fixed-rate HELOC to its product line in 2022.

Can I convert a fixed-rate HELOC to a variable-rate HELOC if rates drop?

When interest rates drop, a variable-rate HELOC might be tempting — and indeed, more financially beneficial than a fixed-rate one. If you’ve already converted your variable rate to fixed, “some lenders may allow the borrower to convert back to a variable rate” later on, says Sterling. The ability to switch back and forth between variable and fixed rates allows you to take advantage of lower interest rates when they become available.

If not, plan B could be a refinance of the HELOC.

Is a fixed-rate HELOC best for me?

Whether it’s a home renovation project or a large unexpected expense, it’s a good idea to examine both variable-rate and fixed-rate HELOC options carefully to determine which one makes sense for you. Both have their benefits; it’s just a matter of your needs. Here are some questions to ask:

• What’s the interest rate environment? “If you are in a rising rate market, a fixed-rate HELOC could be a good option,” says Sterling. “If you anticipate rates remaining low, you may save more with a traditional HELOC.”
• Is there a set amount you need to borrow? Are you paying off a student loan or financing a large or ongoing home improvement project? Fixed-rate HELOCs might give you more flexibility; however, some lenders require that you borrow a minimum amount to lock in the rate.
• Are you comfortable with payments that could change over time? “If the answer is no, a fixed-rate HELOC could be a good choice,” says Sterling. If yes, a traditional variable-rate HELOC will work just fine — just be sure to budget for big jumps, especially when your repayment period begins.

The bottom line: Take your budget and risk tolerance into consideration. If you’d rather not have to keep an eye on interest rates, and have borrowed the bulk of your credit line, the “set it and forget it” approach of a fixed-rate HELOC might be the best for you.

FAQ

• How does a fixed-rate HELOC compare to a home equity loan?

  Actually, they’re pretty similar. Both are secured by the equity of your property and can be used for similar purposes, such as home improvements or debt consolidation. Both also typically offer lower interest rates compared to unsecured loans, says Suslov. However, a fixed-rate HELOC starts as a revolving line of credit with a variable interest rate that can later be converted to a fixed rate for a portion of the balance. A home equity loan on the other hand, provides a lump sum of money that’s repaid in installments with a fixed interest rate from the beginning.

  Another way to think about it: When you fix the rate on a HELOC, you’re essentially turning it — or at least a portion of it — into a home equity loan. The main difference is that, with the HELOC, you can continue to withdraw funds as needed. And repaying them replenishes your credit line.

  “A fixed-rate HELOC may feature variable payments during the initial draw period and fixed payments after conversion,” says Suslov. “Additionally, HELOCs offer greater flexibility since homeowners can borrow as needed during the draw period, unlike home equity loans that disburse a one-time lump sum.”

• Can I convert an existing HELOC to a fixed rate?

  Yes, many lenders will allow you to convert a variable-rate HELOC to a fixed rate during the draw period. To do so, you should contact your lender to express interest in a conversion, says Suslov. “The lender will then assess eligibility based on factors such as the current balance, loan-to-value ratio, and credit score,” says Suslov.

  On the other hand, if you’re in the repayment period and want to convert to a fixed-rate HELOC, there are a couple ways to go about it:

  • Open a new HELOC. The simplest way to get a fixed-rate HELOC is to take out a new HELOC altogether — a fixed-rate one or a hybrid that lets you convert.

  • Refinance your old HELOC. If you open up a new hybrid HELOC, you can use it to refinance your existing HELOC — you’ll simply pay off the balance of your old HELOC using funds from your new line of credit. This will also reset your draw period. For example, Bethpage Federal Credit Union offers the unique option to convert some or all of a variable-rate HELOC to a fixed-rate loan without a fee; you can choose between five-, 10- and 20- year repayment terms.

• Can you pay off a HELOC early?

  Yes, you can pay off and close a HELOC early — during the draw period or at the beginning of the repayment period. But before you do, check if your lender charges an early closure or termination fee, aka a prepayment penalty. Not all lenders impose these charges (it’s more common with banks), but if yours does, it could come in the form of a flat fee or a percentage of your HELOC amount.