Fixed-rate HELOCs: What are they?

Your home’s value is more than sentimental – you can use its built-up equity to help fund important projects. Whether it’s financing a remodel for accessibility, supporting your child’s education or consolidating debt, taking out a home equity line of credit (HELOC) against your house may be the most practical way to meet your needs.

However, you certainly don’t want high interest rates stacking against you while you attempt to accomplish whatever goal you have in mind. This is where a hybrid fixed-rate HELOC comes into play. While Rocket Mortgage® doesn’t offer this type of loan, it might be the best option for you and your situation. Let’s discover some ways this credit line can help support your endeavors.

Fixed-rate HELOCs at a glance

There are a few key points that make fixed-rate HELOCs different from ordinary, variable-rate HELOC options. At a base level, the important takeaways are:

• Fixed-rate HELOCs have a set interest rate for a set time.
• In some cases, higher fees may be required to protect the lender.
• Hybrid HELOCs like fixed-rate options may allow you to switch between periods of variable-interest rate and periods of fixed-interest rate.
• Typically, fixed-rate options help the borrower when interest rates are rising, since they lock in the current rate before it grows.

What is a fixed-rate Home Equity Line Of Credit (HELOC)?

Many homeowners rely on lines of credit like HELOCs for remodels, debt consolidation, home improvements or other purposes. These funds are secured through the equity in their home, which is the difference between the property’s value and the remaining mortgage balance. Factors such as your credit score influence the terms, but unlike with a home equity loan, you don’t have to pay interest on all the money you’re eligible to borrow – only the amount of credit you actually use.

Traditionally, the borrower pays this HELOC back at a variable rate. However, some lenders are beginning to offer fixed-rate HELOCs, which allow you to repay a portion of your debt on a fixed-interest rate plan. You then pay the rest at an adjustable rate.

Why aren’t HELOC rates fixed all the time?

For many years, HELOCs functioned much like credit cards. Generally, HELOCs issued by most lenders have a variable interest rate. The lender bases the interest rate on a benchmark rate, such as the federal funds rate plus a margin rate. The former is the interest rate that U.S. banks charge each other to borrow or lend overnight, while the latter is an additional amount determined by your lender and added to the prime rate.

Although this is the norm, hybrid fixed-rate HELOCs are growing in popularity. With this, you have the option to lock in your interest rate. Many lenders are looking for ways to help borrowers save money on the loans they receive, and a fixed-rate or hybrid HELOC option allows you to do just that.

How hybrid HELOCs work

The fixed-rate HELOC is considered a hybrid. It sits somewhere between a traditional HELOC and a home equity loan. So you can withdraw the amount of money you need from your credit line and then convert what you borrow to a fixed interest rate.

The exact amount you can convert from a variable rate to a fixed rate will depend on your lender and the terms of your HELOC. Some lenders only let you convert a set amount of what you borrow to a fixed rate. Others let you convert the entire balance to a fixed interest rate.

However, these loans can come with restrictions on their withdrawal terms, which may make them less desirable than a traditional HELOC. Weigh your options and consider how you’ll use your loan before making a decision.

Typical hybrid HELOC loan terms

Generally, HELOCs function on a 30-year term basis. Often, a fixed-rate HELOC comes with a draw period of 10 years and a 20-year repayment period. Most lenders allow borrowers to convert their debt at the closing of or during the draw period. Some lenders may also let you switch back to a variable rate so you can pay less in interest if market rates drop.

Pros of fixed-rate HELOCs

While adjustable-rate HELOCs and home equity loans have their upsides, a fixed-rate HELOC has certain advantages. Here are some of the ways you may find a locked-in rate on your loan beneficial.

More predictable payments

When you choose a fixed-rate HELOC, you choose predictability. Since your rate doesn’t vary, you know exactly what your monthly payments will look like. This makes it easier to plan ahead and budget your money accordingly.

While adjustable rates with traditional HELOCs may promise you the possibility of some savings, their payments aren’t predictable and can change when the market interest rate fluctuates.

Immunity against inflation

Fixed rates protect you from sudden interest spikes that become a financial burden. These interest rates won’t change in response to inflation, even if the market rates rise at a fast pace.

Traditional HELOCs with adjustable rates often start out with competitive, low rates. That may make them look tempting compared to fixed-rate HELOCs, which generally have a higher initial rate. That accounts for the possibility of interest rates rising in the future. If inflation kicks in, then it can be a rapid rise.

Conversion to a variable interest rate

More lenders are allowing borrowers to convert their loan balances depending on the market. So, while a fixed-rate HELOC is reliable, it may be more expensive than those with variable rates. That’s why borrowers can sometimes convert their fixed balances back to adjustable rates when interest rates drop. This can be done during the draw period, although your lender may put in certain limitations or require certain fees when converting from a fixed-rate HELOC to a variable-rate HELOC.

Cons of fixed-rate HELOCs

Fixed-rate HELOCs come with some advantages that other lines of credit or loans lack. However, they’re not the perfect solution for everyone. It’s just as important to consider where these credit lines fall flat as it is to compare interest rates when shopping around. Next, we’ll consider some of the downsides to using a fixed-rate HELOC.

Limits on the number of fixed-rate balances

Depending on the institution you borrow from, your lender may install a cap on the number of fixed-rate balances you can carry at one time. They may also limit the number of balances you can create in a year. For example, you may be able to hold four fixed-rate balances in total but only incur two additional or new ones in that same year.

Fees

Your lender may incorporate hidden fees with your fixed-rate home equity line of credit. These can include an annual fee, origination fee and fees for every rate lock you choose to initiate. You may also be subject to certain penalty fees if you do not abide by the terms of your HELOC arrangement. These fees can add up very quickly, so it’s important to know before closing on your line of credit what your lender may expect you to pay.

Minimum required borrowing amount

When you borrow from a lender, they require a minimum loan amount to qualify for the fixed-rate option. That amount may not work for you financially. So, you should research and shop for the minimum that’s good for you and your goals.

Fewer lenders to choose from

Although fixed-rate HELOCs are becoming more popular, many lenders are still hesitant to offer them. You may find it more difficult to find a lender that offers fixed-rate home equity lines of credit versus variable-rate lines of credit.

How to convert n existing HELOC into a fixed HELOC

You may already have an existing variable-rate HELOC but want to convert it to a fixed-rate version. If so, let’s discuss how you can go about achieving this.

1. Consider your options

Most borrowers can get a fixed-rate HELOC in one of two ways: by applying for a new line of credit or refinancing their existing HELOC. Let’s take a closer look at these.

Apply for a new HELOC

Opening a brand-new hybrid or fixed HELOC is likely the most straightforward way to obtain a HELOC with the interest rate you want. However, it’s best to do this if you’re at the end of your current HELOC’s draw period. By opening a new HELOC, you’ll find a lender offering the type of interest rate you want. However, you’ll need to go through the application process just like you did with your original HELOC. This can take time, but it may be worthwhile if you can save on interest payments.

Refinance your old HELOC

You may be able to refinance your old HELOC, but you’ll want to speak with your current lender and see if they offer hybrid, or fixed-rate, HELOCs. If so, you may be able to convert your existing HELOC into a fixed-rate loan. If your lender doesn’t offer this option, you may need to open a new HELOC with a different lender.

2. Talk with your current lender or shop around

If your existing lender offers fixed-rate HELOCs, you may be able to convert your current variable interest rate into a fixed-rate line of credit. Let your lender know you’re interested, and they’ll be able to tell you what steps you must take to convert your HELOC.

If your current lender doesn’t offer fixed-rate HELOCs, you’ll want to find a lender that does. Your best bet is to shop around. Not all lenders offer a fixed-rate option, so it’s important to explore different possibilities. Some will only offer fixed-rate HELOCs with certain conditions or fees, or in specific locations.

3. Apply for your HELOC

Every lender’s requirements will differ. But once you find a lender you’re comfortable with, you’ll need to go through their application process to receive your HELOC money. In most cases, you’ll fill out an application and provide your lender with the financial statements and home information that are necessary to qualify.

4. Close on your loan

After your lender approves your application, you’ll be able to close on your new line of credit. Once everything is finished, you can start using your HELOC however you see fit.

Fixed-rate HELOC FAQs

Take a peek below to get answers for some of the most common questions about fixed-rate HELOCs, how they work and whether they are worth it. It cannot be said enough that it’s important to do your research and speak with your mortgage provider or a personal finance expert before making any serious decisions about taking out a home equity loan or HELOC.

Can I pay off a HELOC early?

As with personal loans or mortgages, you should check the arrangement with your HELOC lender to determine what stipulations apply. In many cases, you should be able to pay off HELOC debt early. This can help save you money in the long run, as you would pay less interest over time.

Is a HELOC high-risk?

Taking on any debt can come with some amount of risk. In the case of HELOCs, there are additional risks like home foreclosure that may not be present in other loan types. It’s best to consider factors like your debt-to-income ratio and the HELOC’s repayment terms before signing off on an agreement.

Can I sell my house if I have a HELOC?

Yes, you can sell your house even if you have taken out a home equity loan or home equity line of credit. However, you will have to pay off the outstanding balance of the loan or HELOC before you get any profits from the home sale. If the value of your home sale now exceeds the amount you need to repay, you can put the sale money toward the outstanding balance and pocket the rest of the proceeds.

The bottom line: Hybrid HELOCs aren’t for everyone

A hybrid HELOC can be a good option when interest rates are on the rise or you have a home renovation project with a defined timeline. They offer a stable solution with reliable payments you can budget for and depend on. However, they might not be the right choice for you, especially if market interest rates are set to drop and lower rates are around the corner.

Rocket Mortgage® doesn’t offer HELOCs, but we do offer home equity loans. If you’re ready, apply for a Home Equity Loan today.