What Is a Fixed-Rate HELOC and How Does It Work?

Published June 6, 2022

A home equity line of credit (HELOC) can be a great option for homeowners who need access to cash. If you've built up a lot of equity in your home, you could tap into it with a HELOC and get a competitive interest rate. Homeowners can use a HELOC for anything. However, some homeowners may feel uncomfortable with a HELOC’s variable interest rate. It's always risky to take on debt with a variable rate, as your minimum payments can fluctuate considerably from month to month.

Fortunately, an alternative is available in the form of a fixed-rate HELOC. Not all lenders that offer HELOCs will offer a fixed-rate line of credit, but this can be an excellent way to access your home's equity with a more stable repayment plan. 

How does a fixed-rate HELOC work?

In many ways, a fixed-rate HELOC is a hybrid of a traditional HELOC and a home equity loan. Like a regular HELOC, a HELOC with a fixed rate provides a line of credit based on the amount of equity you have in your home. While a home equity loan provides a lump sum payment, you can take money out of your HELOC as needed until you hit the credit limit.

Most lenders only require borrowers to pay the interest on HELOCs until the end of the draw period. This period usually lasts between five and 10 years. Once the draw period ends, you begin repaying the principal of the loan plus interest. 

The key similarity between a fixed-rate HELOC and a home equity loan is the fixed interest rate. Traditional HELOCs have variable rates, so your interest rate will fluctuate over the repayment period. Like home equity loans, though, fixed-rate HELOCs remain at a stable interest rate for the lifespan of the loan. 

Related: What is an Interest-Only HELOC?

Fixed-rate vs regular HELOC: Key differences

HELOCs with fixed rates function in essentially the same way as traditional HELOCs. You're approved for a line of credit based on your home equity, and you can use these funds for any purpose. You make interest payments during your draw period and then repay the debt in full once the draw period ends. 

The major difference between a fixed-rate and a regular HELOC is the interest rate. Because a traditional HELOC's interest rate fluctuates with the market, your monthly payment can change both during and after the draw period. With a fixed-rate loan, you lock in a set interest rate from the very beginning, so you always know your minimum payment. 

Pros of a fixed-rate HELOC

The most important benefit of a fixed-rate loan is its stability and predictability. By locking in a fixed interest rate, you can simplify your monthly budget and avoid any dramatic or unexpected rate changes. Even if you know that you have room in your budget to manage a variable rate loan, the constant fluctuations can be stressful. Instead, with a fixed-rate loan, you know exactly what to expect every month. 

A fixed-rate line of credit can be especially ideal if you finalize the loan while rates are low. Traditional HELOCs often begin with a low introductory rate, which can seem very appealing. However, the rate often increases substantially at the end of this introductory period. By choosing a fixed-rate option, you avoid this issue. 

In some cases, lenders allow borrowers with a fixed-rate HELOC to convert the loan to a variable interest rate when average rates drop. This option is typically only available during the draw period, but it can help you take advantage of the lowest possible interest rates. 

Related: What is a first-lien HELOC?

Cons of a fixed-rate HELOC

There are several advantages to a fixed-rate loan, but you should also be aware of the downsides. The interest rate for a fixed HELOC is usually higher than the starting rate for a variable loan. It's impossible to predict how the market will change, so you can never be completely sure whether a variable or fixed rate is the more cost-effective option.

Most lenders who offer HELOCs at a fixed rate have minimum borrowing requirements. If you only want to take out a small amount of money, you might not qualify for the fixed loan. Additionally, lenders sometimes limit the number of balances you can create on the HELOC. They might only let you take out funds from the line of credit once or twice per year, which may not align with your plan. If you’re curious about what American Financing offers, schedule an appointment to chat with a mortgage specialist.

You might also pay extra fees if you take out a HELOC with a fixed interest rate. Virtually all forms of borrowing include one-time or recurring fees, but you should be particularly careful to read the fine print with a fixed-rate HELOC. 

Can you convert an existing HELOC into a fixed-rate HELOC?

The easiest way to get a fixed HELOC is to apply for one at the beginning of the borrowing process. However, if you currently have a variable HELOC, you might be able to convert it into a fixed-rate loan. Some lenders allow borrowers to convert part or all of their HELOC balance into a fixed loan as long as they're still within the draw period. 

Another option is to refinance your existing HELOC by opening a new, fixed-rate line of credit and using the funds to pay off the balance on your old HELOC. This is usually the best choice if you're nearing the end of your draw period. Refinancing your HELOC also restarts the draw period, which can be helpful if you still need access to additional funds. 

Although there are a few downsides to a fixed-rate HELOC, many borrowers find that this option is preferable to a variable-rate loan. Not many lenders offer fixed HELOCs, though, so you should be sure to seek out a lender that does. As always, it's important to weigh the pros and cons of each option to make sure you choose the loan that best suits your needs. If you have any questions or concerns about your HELOC, you can consult with a mortgage expert for guidance.