Many homeowners use a home equity line of credit (HELOC) to help them complete projects and achieve goals that require large financial commitments. However, what many homeowners don't know is that there are now two types of HELOCs. The traditional HELOC is a closed-end line of credit that usually has a variable interest rate. The new HELOC features a fixed-rate option that gives homeowners full and immediate access to their funds, and still allows them to make additional draws once the balance has been paid.
What is a fixed-rate HELOC?
The fixed-rate HELOC is similar to a traditional HELOC with a few key differences and added benefits. Unlike a traditional HELOC that has a variable interest rate, a fixed-rate HELOC has a rate that does not change over time. The fixed-rate HELOC gives you full access to your funds at the start of the loan. As you repay the loan balance, your available credit line will go back up, which means that you will have the flexibility to borrow additional funds if they are needed to complete a large project, such as a home renovation.
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, will be dependent on the lender's terms. Keep in mind that the longer your term (30 years is usually the longest option), the lower your monthly payment and the more you might potentially pay in interest. In addition to the length of the term, you will want to consider the ways in which the lender will allow you to divide your credit line for different purposes, as well as any fees involved. Finally, you will want to see if you have a fully amortizing term, which means that you will pay off the entire fixed-rate balance during the specified term and not have part of the balance left over that will convert to a variable-rate loan. The Figure Home Equity Line† is a fully amortizing loan, with the opportunity to make additional draws once you’ve paid down enough of the principal.
Pros vs. cons of a fixed-rate HELOC
A fixed-rate HELOC has many positives and a few potential downsides. As you review the pros and cons, it is important to remember that every homeowner’s situation is different, which is why you should give careful consideration to how a home equity line might increase the value of your home and help you achieve your larger financial goals.
- No fees for cash withdrawal -- Unlike credit cards that charge a fee for a cash advance, a fixed-rate HELOC typically doesn't charge this hidden fee. This means that you can take out cash as often as you need without paying additional fees.
- Low interest rates -- Did you know that fixed-rate HELOCs typically have lower interest rates than other credit line options, including unsecured personal loans? You also have the peace of mind of knowing that your rate will not change year over year.
- You can use it as you wish -- Many loans will require you to justify how you want to use the money that you have received. A HELOC gives you the flexibility you need for life's unexpected curveballs. Once you have set up the fixed-rate HELOC, you will be able to use the money as you see fit. Whether this means tackling an entire home renovation or sticking to the original plan of an updated master bathroom, the choice is yours. Gain the flexibility and financial security that you need with a fixed-rate HELOC.
While there are numerous benefits to a fixed-rate HELOC, there are a few potential negatives that all HELOCs share.
- Low-payment temptation -- If your fixed-rate HELOC has an interest-only option and you choose to make only the minimum payments each month, you will not be able to pay off the balance during the term of the loan. This can result in the unpaid balance converting to a variable-rate loan at a higher interest rate. To avoid this potential problem, you should have a budget and a financial plan in place before acquiring a fixed-rate HELOC. The Figure Home Equity Line does not offer the interest-only option; You simply pay the same amount every month to pay off the entire loan over the course of the term. Please note that if you make additional draws, these will also be at fixed interest rates, but that rate will be set at the time of the additional draw in question.
- Using your home as a piggy bank -- In layman's terms, a fixed-rate HELOC uses your home as a piggy bank in the sense that it is security for your loan. Given the risk involved, a fixed-rate HELOC should be reserved for when you are borrowing to pay for projects and goals that will pay dividends over time, such as a college education. Using your home to guarantee a loan can be a smart move, but you do want to make sure that you’re using it for the right reasons.