Fixed-Rate HELOCs: The Hard-To-Find Hybrid Rate Loan
Victoria Araj5-minute read
November 29, 2022
You love your home and every memory stored in it. But its value is more than sentimental – you can use its built-up equity to help fund important projects. Whether it’s 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 solution to supporting these needs.
However, the last thing you want is rising interest rates stacking against you while you pay off these milestones. That’s where the rare hybrid fixed-rate HELOC comes into play. While Rocket Mortgage® does not offer this type of loan, it might still be the best option for you and your family. Read on to see the ways this credit line can support your goals.
What Is A Fixed-Rate Home Equity Line Of Credit (HELOC)?
Many homeowners rely on lines of credit like HELOCs to achieve goals, like remodels or debt consolidation. They secure these funds through the equity in their home, or the difference between the property’s value and remaining mortgage balance. Factors such as credit also influence the terms. Unlike a home equity loan, you do not have to pay interest on all the available money you’re eligible to borrow, only the amount of credit you actually use.
Traditionally, the borrower pays these HELOCs back at a variable rate. That said, some lenders are beginning to offer fixed-rate HELOCs. These allow you to repay a portion of your debt on a fixed-interest rate plan. You then pay the rest at an adjustable rate.
Aren’t HELOC Rates Fixed?
Generally, HELOCs come at 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 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.
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 it to a fixed interest rate.
You may be able to get a fixed-rate HELOC or a hybrid that allows you to convert the entire loan or a portion of it from a variable rate to a fixed one. However, these loans can come with restrictions on their withdrawal terms, which may influence your decision.
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. Borrowers are allowed to convert their debt at the closing of or during the draw period. Some lenders may also allow you to switch back to a variable rate.
Pros Of Fixed-Rate HELOCs
While adjustable-rate HELOCs and home equity loans have their upsides, there are certain advantages to a fixed-rate HELOC. Here are some of the ways you may find a locked-in rate on your loan beneficial.
Easier To Budget
When you choose a fixed-rate HELOC, you choose predictability. Since there is no variation in your rate, you know exactly what your payments will look like. That makes it easier to plan ahead and budget your money accordingly. You don’t have to deal with uncertainty, which can put a lot of stress on your plate.
While adjustable rates with traditional HELOCS may promise you the possibility of some savings, they are not reliable. A fixed-rate HELOC affords you the comfort of an easily met expectation.
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 higher beginning rates. That accounts for the possibility of interest rates rising in the future. But it will not change to accommodate those fluctuations. A HELOC with a variable rate, however, will also increase to match the market. If inflation kicks in, then it can be a rapid rise.
Fixed rates protect you from sudden interest spikes that become a financial burden.
Ability To Convert Rates
More and more banks are allowing their lenders 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 they drop. This can be done during the draw period, although your lender may put in certain limitations or require specifics fees when converting rates.
Cons Of Fixed-Rate HELOCs
Fixed-rate HELOCs come with many advantages that other lines of credit or loans do not have. However, they are 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. Here are some of the ways a fixed-rate HELOC may trouble you.
Limit On 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.
Your lender may incorporate hidden fees with your fixed-rate HELOC. That can include an annual fee and fees for every rate lock you choose. Additionally, there may be some underlying penalty costs waiting if you do not know everything your HELOC entails. These fees can add up very quickly, so it’s important to know ahead of time what your lender may include with your credit line.
Minimum Borrowing Requirements
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 works for you and your goals.
How To Convert An Existing HELOC For A Fixed HELOC
You may already have an existing variable-rate HELOC but want to convert it to a fixed-rate version. If so, you have options to achieve this.
Foremost, you can open a brand-new hybrid or fixed HELOC. This 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.
On the other hand, you can refinance your old HELOC. You can open up a new HELOC with your preferred interest rate and use those funds to pay off the original HELOC. This also starts your draw period over.
If you want to find a lender that offers fixed-rate HELOCS, your best bet is to shop around. Not all lenders offer a fixed-rate option, so it’s important to compare offerings. Some will only offer them with certain conditions, fees, or in specific locations. In contrast, you can focus on converting your variable-rate HELOC instead. Watching the market will also help you decide the best times to talk to your lender about converting all or some of your loan.
The Bottom Line: Hybrid HELOCs Aren’t For Everyone
Hybrid HELOCs can be a good option to have on the table when you have a project with a defined timeline, or the market’s interest rates are on the rise. They offer a stable solution with reliable payments that you can budget for and depend on. However, they might not be the right choice for you, especially if the market’s interest rates fall instead.
Rocket Mortgage® does not offer HELOCs, but we do offer home equity loans - or for an alternative route, consider researching other ways to refinance your home to pay off debt.
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