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Can I get a fixed interest rate HELOC?

How does a fixed-rate HELOC work?

HELOCs are available in fixed-rate, variable rate (or adjustable rate), or hybrid rate. A fixed-interest HELOC can provide payment predictability and peace of mind for borrowers, in comparison with a traditional variable interest rate HELOC. With a fixed-rate HELOC, your interest rate remains the same throughout the duration of the loan. Variable interest HELOCs have interest rates adjusted throughout the loan's course based on a prime index rate.

Fixed interest rate HELOCs: An Overview

  • Home equity lines of credit (or HELOCs) are available with either a fixed-interest rate or a variable-interest rate

  • Determining which is best for you depends on how you intend to use the loan, and how you plan to pay it back

  • Borrowers often prefer the safety and predictability of a fixed interest rate over the volatility of a variable interest loan

How does a fixed-rate Home Equity Line of Credit work?

A home equity line of credit, or HELOC, is a savvy tool to meet your personal and financial goals by accessing the equity that you have built up in your home. It is a specific type of home equity loan or second mortgage, that operates more like a credit card than a traditional loan. 

With a HELOC, you are approved for a line of credit, with a maximum based on the amount of equity you have built up in your house, your credit score, and the perceived ability to pay back the loan. During the first period of the loan, the draw period, you can make withdrawals from your credit line up to your credit limit. You are often only required to make payments on accruing interest during that time. 

As you repay the loan balance during the draw period, your available credit line will go back up, which means you can borrow additional funds if needed to complete a large project, such as a home renovation. 

The draw period lasts for a predetermined amount of time depending on the terms agreed to with your lender. Most commonly, the draw period is 5-10 years long. After the draw period, the HELOC goes into repayment. During the repayment period, which typically lasts 10-20 years, you can no longer make draws from your credit line and must pay off the outstanding balance in accordance with your loan agreement.

It is important to note that several options are available within a fixed-rate HELOC. Each of these options, such as the length of the loan and interest rate, will be dependent on the lender's terms.

Can I get a fixed interest rate HELOC?

In today’s uncertain economic climate, it can be beneficial to consider a fixed-rate Home Equity Line of Credit (HELOC). A fixed-rate HELOC offers the protection of interest rate security, which is beneficial for both short- and long-term budgeting.

This type of loan is especially helpful for those who are planning home improvements such as remodeling projects or renovations. With a fixed-rate loan, there’s no need to rush into the project before the interest rates increase. A fixed-rate HELOC may also come in handy in an emergency or to consolidate debt. Getting a fixed-rate on a HELOC can often make sense when you have a planned expense to finance, such as a home renovation project. Having that fixed rate and interest provides certainty about the cost of financing.

Access to this type of loan product can be invaluable in helping individuals plan for their future and avoid any surprises from fluctuating interest rates. With the stability provided by a fixed-rate HELOC, individuals are able to confidently budget now with the knowledge of what they will pay later down the line.

Make sure to keep in mind, that if the market rate declines, you could be left with an interest rate that is above the market value. You should also keep in mind any fees or penalties that can be charged down the line, such as early repayment/prepayment fees or usage fees. Best fixed-rate HELOCs have straightforward policies regarding penalties and fees, such as Figure, which only charges one "origination fee" instead of many smaller fees that add up to a larger sum. 

What is the interest rate on fixed-rate HELOCs?

The interest rate on a HELOC depends on current market conditions and the borrower's credit score, credit history, income, and debts. HELOC interest (fixed and variable) is generally tied to a prime index interest rate (usually set by the Federal Reserve),

Lenders determine HELOC APRs using a prime rate as a guide. In the United States, this is usually the federal funds rate set by the Federal Reserve, and this can rise and fall depending on when and how the Fed adjusts the rate. Currently, rates are on an upswing due to inflationary concerns in the market. Check out your rate here!

Pros and Cons of a fixed-rate home equity line

The difference between fixed-rate and variable-rate home equity lines is that with a fixed-rate HELOC, your interest rate remains the same throughout the duration of the loan. In contrast, with a variable interest HELOC, interest rates are adjusted based on the prime index rate throughout the lifespan of the loan.

Many homeowners prefer the predictability of a fixed-interest home equity line over the uncertainty of an adjustable-rate loan.

The risk of variable-rate loans was seen after the  2008 financial crisis. Many homeowners found themselves owing more on their properties than their properties were worth, and they were stuck with unsustainable variable interest rates on their mortgages, home equity loans, and HELOCs.

Pros of a fixed-rate HELOC

Interest-rate predictability

With a variable-interest loan or credit line, you might end up paying way more in interest if the prime index goes up or the economy takes a turn for the worse. But, with a fixed-rate HELOC, you can relax knowing that your rate won't change even if things get crazy.

No cash withdrawal fees

Unlike credit cards that ding you with a fee for taking out cash, a fixed-rate HELOC usually won't hit you with hidden charges. You can keep getting extra cash when you need it and not have to worry about extra costs.

Low-interest rates

HELOCs with fixed rates usually have lower interest rates than other credit line options, like unsecured personal loans. Plus, you won't have to worry about your rate changing every year. 

No limits on how funds can be used

Most loans require justification on how you will use the money. A fixed-rate HELOC provides flexibility for unexpected life events. After setting it up, you can use the money as you see fit. Whether it's a home renovation or updating a master bathroom, the choice is yours. Enjoy financial security and flexibility with a fixed-rate HELOC.

Cons of a fixed-rate HELOC

Low payment temptation

If you have a fixed-rate HELOC with an interest-only payment option which you make minimum monthly payments each month, you won't be able to pay off the balance during the loan term. This could lead to the unpaid balance becoming a variable-rate loan with a higher interest rate. To prevent this, create a budget and financial plan before getting a fixed-rate HELOC.

Your interest rate could be higher than market

Having an interest-only fixed-rate HELOC can lead to higher interest rates if the market rates fall. If you find yourself in this situation, there are a few things you can do. You can try to refinance your HELOC, or you can take out a second HELOC at a lower rate. Using the second HELOC to pay off your current one can lower your interest rate over time.

How can I get a low-interest, fixed-rate HELOC?

Apply for a fixed-rate HELOC to see what rate you are eligible for based on your credit score, and what credit limit you are eligible for based on your home equity. With Figure, the application processing and loan approval is all done online. Home values are estimated using an automated appraisal model, keeping costs down, and speeding up the process. 

The bottom line

If you're looking for an alternative to variable-rate home equity lines, a fixed-rate HELOC may be the perfect fit. It offers interest rate predictability and no limits on how funds can be used. Be sure to find out all the details associated with the loan before signing up and make sure it meets your needs over time. A low-interest, fixed-rate HELOC could A fixed-rate HELOC is a great choice if you want the predictability of a fixed interest rate and the flexibility to use funds for multiple reasons without incurring additional fees. Be sure to research your options before deciding on one and talk to a financial advisor if you have any questions. Taking out a HELOC is an important decision, so make sure you understand all the details involved with it.

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