How do HELOC Fixed-Rate Options Work?

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If you have a home equity line of credit (HELOC), then you might have the ability to switch it from a variable-rate to a fixed-rate. And in a year when interest rates have hit rock bottom, the only way to go is up, so locking in your rate now could be advantageous. But there are a few things you need to consider.

First, make sure you understand exactly what is meant by a fixed-rate HELOC.

What Is A Fixed-Rate HELOC?

HELOCs are variable-rate products by nature, meaning your interest rate will fluctuate based on the benchmark prime rate. HELOCs usually operate on 30-year terms, with a 10-year draw period and 20-year repayment period.

In a worst-case scenario, “If the prime rate goes up substantially, which can happen, then people may not be able to pay the nominal payments that are based on the higher variable interest rate, and then you could get into the situation where they get foreclosed upon,” says Mike Caligiuri, founder of Caligiuri Financial in Columbus, Ohio.

A fixed-rate HELOC can prevent that from happening by locking in some or all of the remaining balance of your variable-rate HELOC at a particular interest rate. Essentially, this converts your HELOC to a fixed-rate loan after your draw period has ended, which can be helpful in a rising rate environment.

This may require more steps than just “flipping a switch” on your current HELOC to freeze it at the current interest rate. This might mean closing out your HELOC and converting the remaining balance into a fixed-rate home equity loan. For all intents and purposes, a fixed-rate HELOC functions the same as a home equity loan.

“Generally speaking, they’re two separate loans. So usually it’s not as simple as saying ‘I want to convert,’” says Yves-Marc Courtines, a CPA with Boundless Advice in California.

When Should You Get A Fixed-Rate HELOC?

If interest rates are rising, then locking in a lower rate guarantees you won’t be subject to paying a higher APY later on.

“Some lenders offer borrowers the option of fixing the interest rate on their outstanding balance, for example, so they are not exposed to rising interest rates after they’ve piled up a balance,” says Greg McBride, chief financial analyst at Bankrate.

This can be useful if you think it’s likely that rates will rise soon, and you want to avoid paying more interest. Remember, you’ll usually have a 10-year draw period to access those funds.

“If you’ve got a big balance on your home equity line of credit, you might want to convert to a fixed-rate loan to protect yourself from interest rate risk, which is when the interest rate goes up,” says Caligiuri. “Then if rates go up, that’s the bank’s problem.”

There’s also often a nominal fee associated with fixing your HELOC rate (usually $50 to$100). But saving yourself from rising interest rates can definitely make that fee worth it. Be sure to consider the rate environment and how steep the fee is before you decide.

Bottom Line

Right now, interest rates are low. This makes HELOCs harder to come by since credit is tighter, and “interest rates are low and unlikely to rise for a couple of years,” says McBride.

If you decide to go ahead and fix your HELOC rate, the first step is to talk to your lender. If you time it right, fixing your HELOC can help save money in interest over the course of the loan.

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