Fixed-rate HELOC: Why it’s the best kind
Key takeaways:
A fixed-rate HELOC combines the best features of a home equity loan (a fixed interest rate) and a home equity line of credit (the ability to borrow, repay, and borrow more during your draw period)
Home equity loans tend to have lower interest rates and more flexible credit requirements compared to personal loans
With a fixed-rate HELOC, you will know upfront what your interest rate will be after the draw period ends, removing the uncertainty that comes with a variable-rate loan or credit card
You’re ready. Ready to get rid of your high-interest debt. Ready for that bathroom remodel. Ready to plan your wedding. The only question is how to finance your high-priority expense. A fixed-rate HELOC is a great solution for many homeowners.
With a fixed-rate HELOC, you can borrow against your home equity to tackle just about any large expense or financial emergency. Since it’s a line of credit, you have the flexibility to borrow in exactly the amounts you need, without guessing on a lump sum loan amount that might turn out to be too little or too much. At the same time, the fixed interest rate gives you peace of mind that your costs are controlled and predictable.
What is a fixed-rate home equity line of credit (HELOC)?
A fixed-rate HELOC is a home equity line of credit that has a fixed interest rate (one that doesn’t change over the life of the loan).
Fixed-rate HELOCs are a blend of the best features of home equity loans and HELOCs. It’s a line of credit, so for the first few years, it works like a credit card. Unlike a credit card, however, this loan comes with a fixed interest rate, which protects you from fluctuations that could increase your cost of borrowing.
Fixed-rate HELOCs are hard to find. The vast majority of HELOCs come with a variable interest rate.
How a fixed-rate HELOC works
A fixed-rate HELOC combines the best features of home equity loans (the fixed interest rate) and home equity lines of credit (the ability to borrow and pay back funds continuously for a period of time).
HELOC draw period
A HELOC starts with a draw period. This is a number of years (typically five) when you can continue to draw money, up to your loan limit.
During the draw period, you can borrow, repay, and borrow again as often as you like. You’ll make a monthly payment in proportion to the amount of money you’ve drawn.
Typically, at the end of the draw period, the repayment period begins, and you may not withdraw any more funds. Your monthly payment will be set to a fixed amount that will pay off your entire balance over the loan’s term (typically 10 to 15 years). Some home equity loans have a longer repayment period, which gives you a lower monthly payment but means you’ll pay more in interest over the life of the loan.
HELOC payments
With a traditional HELOC, you might only have to make interest payments during the draw period. Then when the draw period ends, your payment could go up sharply because you’ll have to start making a regular principal plus interest payment each month.
It may be better to find a fixed-rate HELOC that allows you to begin repaying your principal balance and interest from day one. That gives you a more consistent and manageable monthly payment throughout the life of the loan.
HELOC interest rates
On a fixed-rate HELOC, the interest rate is locked when your loan is approved. Your rate will depend on your credit score and other factors in your credit history.
Whether you’re in your draw period or the repayment period, you’ll only pay interest on the amount you actually borrow, not on any additional credit limit that is or was available to you.
Traditional HELOCs come with a variable interest rate, which makes it harder to predict what your monthly payment will be in the future. Variable interest rates leave the borrower at the mercy of market conditions. When rates are rising, you can expect your variable-rate loan or credit card to get more expensive. With a fixed-rate loan, you are protected from rising interest rates.
HELOC minimum draws
HELOCs have a minimum draw, or minimum loan amount, typically around $15,000. Some HELOC lenders require that your initial draw meets this minimum.
HELOCs also have a maximum. The maximum loan amount is calculated two ways, and your limit will be the lower of the two:
A dollar figure, such as $150,000. Lenders set their own maximum loan amount.
A percentage of your home’s value, typically around 80%. This is called the combined loan-to-value ratio (CLTV) and includes your primary mortgage if you have one. Together, the primary mortgage and the new home equity loan may not exceed the lender’s CLTV limit.
Is a HELOC a good idea right now?
A HELOC is a great idea under certain conditions, such as:
You have equity in your home
You need at least $15,000
You want to use a lower interest HELOC to pay off higher interest debt
You aren’t sure how much money you need, and you don’t want to borrow more than necessary
You want the flexibility to repeatedly borrow and repay for the next few years, but without the high interest cost usually associated with credit cards
You want to borrow money to improve your home
You want to finance a large expense, and a traditional personal loan won’t give you enough time to repay it
Pros and cons of a fixed-rate HELOC
A fixed-rate HELOC combines the best features of home equity loans and HELOCs, but it’s not the right solution in every situation.
Fixed-rate HELOC pros
Draw period. A fixed-rate HELOC allows you to borrow smaller amounts, only drawing more if and when you need it. In contrast, traditional home equity loans are for one lump sum given to you the day your loan closes. It might end up being more or less than the amount you need.
Fixed interest rate. If you opt for a fixed-rate HELOC, your interest rate is locked when your loan is approved. In contrast, a variable-rate HELOC will leave you with some financial uncertainty.
Competitive rates. HELOCs tend to have lower interest rates compared with other borrowing options like credit cards. That’s because your home is collateral against default, which lowers the risk to the lender.
Fixed-rate HELOC cons
Not for small expenses. If your financial need is smaller than the minimum draw amount, it may make more sense to look at a personal loan instead.
Won’t solve every financial need. If you need more than your lender’s maximum loan amount, you might want to consider a cash-out refinance loan instead.
Fixed-rate HELOC - HELOC - home equity loan comparison
| Fixed-rate HELOC | Variable-rate HELOC | Home equity loan |
|---|---|---|---|
Loan funding | Draw funds as needed during the draw period | Draw funds as needed during the draw period | Receive one lump sum at funding |
Interest rate | Locked in when your loan is approved | Can vary during the draw period but may convert to a fixed rate when repayment period begins | Locked in when your loan is approved |
Borrowing limit | Typically around 80% of your appraised value | Typically around 80% of your appraised value | Typically 80%-95% of your appraised value |
Draw period | 5 years | 5-10 years | None |
Repayment period | 5-15 years | 10-20 years | 10-20 years |
Minimum credit score needed | 620-680 | Typically 620-700 | Typically 620-700 |
Can you get a Home Equity Line of Credit (HELOC) with a fixed rate?
Fixed-rate HELOCs are rare, but you can find one. Most HELOCs are variable-rate loans. Achieve offers a fixed interest rate and a five-year draw period, combining the most popular features of home equity loans and HELOCs.
Home equity loan from Achieve
The Achieve home equity loan is a fixed-rate HELOC. It comes with a low fixed interest rate and a five-year draw period, maximizing the flexibility you’ll have for using the funds to cover a large expense.
If you use the loan to pay off other debts, we guarantee that you’ll save at least $200 per month. Members who take an Achieve home equity loan for debt consolidation save an average of $10,000 per year.
If you’re happy with your current mortgage, you can leave it just the way it is. You can take advantage of an Achieve home equity loan without making any changes to your current home loan.
An interest rate discount is available when you sign up for automatic payments, and funding is fast. Qualified applicants can get their loans approved and funded in as little as 15 days.
At Achieve, it’s not what we stand for but who. We help real people reach real goals. Contact us today. Our loan specialist will listen to your situation and help you understand your options. We’re committed to helping you choose the right program, even if it’s not one we offer.
Frequently asked questions
Is a fixed-rate better than a variable-rate HELOC?
Borrowers tend to like fixed-rate loans better than variable-rate loans because fixed-rate loans are predictable. You’ll know what your rate is and how much your payment will be for the entire term of the loan.
When interest rates are volatile or rising sharply, variable-rate loans can get expensive really fast, and the only way to get off the interest rate roller coaster is to refinance the debt to a fixed-rate loan.
How does a home equity loan work?
A home equity loan is secured by your home. It’s a second mortgage. Most home equity loans have a fixed interest rate, which means you’re protected from rising rates in the future. You get a lump sum when the loan is finalized, and a set period of time to pay it off.
What are the differences between a home equity loan and a HELOC?
Home equity loans and HELOCs are similar but not the same. Home equity loans are given in a lump-sum amount. You’ll pay interest on the total amount borrowed, even if you’re not ready to use it yet. A HELOC gives you the flexibility to withdraw only as much as you need, up to your maximum loan amount. Also, a HELOC lets you borrow, make payments, and then borrow again as often as you like during the first few years after you get the loan. So a HELOC is more flexible than a home equity loan.
Home equity loans typically have a fixed interest rate that won’t ever change. Standard HELOCs have a variable rate that makes the cost of borrowing unpredictable. Fixed-rate HELOCs let you lock your interest rate in and also take advantage of a draw period.
