Fixed-Rate HELOC: The Key to Smart Home Financing

If you’re looking for a solution to high-interest debt, such as auto loans or credit card balances, at a lower interest rate, a fixed-rate home equity line of credit (HELOC) can be a solution. Homeowners sometimes use home equity to pay off other personal debts, finance college or make accessibility renovations to the home. 

While continuing to build home equity is the best financial option, a HELOC can give you the cash you need at a lower interest rate if you’re faced with unexpected medical bills or another emergency. A fixed-rate HELOC offers the same flexibility along with a fixed interest rate, so you know exactly what you’ll be paying. 

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What Is a Fixed Rate HELOC?

While a regular home equity line of credit is a flexible line of credit similar to a credit card, a fixed-rate HELOC is similar to a second mortgage. With a HELOC, you can freeze a portion or all of your home equity balance at a fixed interest rate, protecting you against market fluctuations that impact rates.

With a regular variable-rate HELOC and a fixed-rate HELOC, you can withdraw as much or as little of the available credit line as needed. The interest rate on any amount you use will be the set interest rate when you apply for the fixed-rate HELOC.

Most HELOCs are variable rate, meaning the interest rate changes based on market factors and current interest rates.  When you get a fixed HELOC rate, you know exactly how much you’ll pay in interest. 

What’s the Difference Between a Variable-Rate and a Fixed-Rate HELOC?

The main difference between variable and fixed-rate HELOCs is whether the interest rates are fixed or variable. With a fixed-rate HELOC, the interest rate can be locked in, ensuring your payments won’t vary. You may end up paying more in interest for the convenience of the fixed rate. 

A variable-rate HELOC offers potentially lower interest rates and a line of credit when needed. Interest rates are fixed to a benchmark rate like the federal funds and margin rates. You risk being locked in at higher interest rates because of the variable nature of interest. 

A fixed-rate HELOC offers greater stability — you know how much you’ll pay — but that comes with the price of a potentially higher interest rate you’ll pay for that convenience. For many borrowers, a fixed-rate or hybrid HELOC allows you to save money on the loans or at least plan for interest while gaining access to funds when needed.

How to Qualify for a Fixed-Rate HELOC

To qualify for a fixed-rate HELOC, you generally need a good credit score, a stable source of income and a sufficient amount of equity in your home. Lenders will look at your debt-to-income ratio, savings and ask for proof of income. 

Remember that approval criteria vary by lender. You can apply for a fixed-rate HELOC with multiple lenders for the best rates. 

How to Apply for a Fixed-Rate HELOC

The step-by-step process for obtaining a fixed-rate HELOC is relatively simple. Here's an overview of the steps to take:

Research and Compare Lenders 

Compare HELOC lenders’ interest rates, fees and terms to find the best option for your needs. Look at client reviews, ratings, total costs and approval criteria, then compare offers or estimates for your situation. Most lenders require a minimum credit score of 620, which could vary by lender. 

Gather Necessary Documents 

Necessary documents may include proof of income such as W-2s or pay stubs, tax returns, bank statements, documentation of your home’s value, tax assessment or a current appraisal. 

Determine Your Loan Amount 

The amount you can borrow depends on your home’s current value, your income, the equity you’ve built up on the home and your creditworthiness. Consider the maximum available and how much you will need to borrow, then consider available offers from lenders.

Submit an Application 

Once you’ve settled on a lender, the final step is to apply. This can typically be done online or by visiting a branch. Fill out the application accurately and provide all the required information, including additional documentation requested, such as tax returns, property assessments or pay stubs.

Factors to Consider Before Applying for a Fixed-Rate HELOC

When you’re considering applying for a fixed-rate HELOC, you’ll want to understand interest rates, repayment terms and the impact a HELOC can have on your credit score long term.

Interest Rates

Consider interest rates when choosing a fixed-rate HELOC as these will be locked in. Often fixed-rate HELOCs have higher interest rates than variable-rate HELOCs, as you’re paying for the convenience of locking in the rate. For that reason, before applying, you’ll want to carefully compare interest rates from lenders. 

Repayment Terms and Options

Consider repayment terms and options when choosing a fixed-rate HELOC. A fixed-rate HELOC often includes a draw period of 10 years and a 20-year repayment period. 

Sometimes, you can convert the debt at closing or during the draw period or shift to a variable-rate mortgage if market rates drop. Check this option before applying for a fixed-rate HELOC to give yourself maximum flexibility. 

Impact on Credit and Home Equity

When you take a fixed rate, you might see a dip in your credit score and an increase in your debt-to-income ratio. You’re essentially tapping into home equity when choosing a fixed-rate HELOC, potentially reducing the equity you build over time. 

Benefits of a Fixed-Rate HELOC

Fixed-rate HELOCs have numerous benefits. Here are a few reasons to choose these loans:

Interest Rate Stability 

Unlike a variable-rate HELOC, a fixed-rate HELOC offers stability in interest rates. You’re protected from potential increases in interest rates, providing peace of mind. With a fixed rate, you’re protected against sudden interest spikes, unpredictable payments and the possibility of inflation driving up interest in the future. 

Predictable Payments

With a fixed-rate HELOC, you know exactly how much you must pay each month, allowing for better budgeting and financial planning. Choosing a fixed-rate HELOC gives you predictability you can plan around. This makes it easier to build your HELOC into your overall financial planning and budget to hit financial goals. 

Flexibility in Use

You can use the funds from a fixed-rate HELOC for various purposes, such as debt consolidation, home improvements, education expenses or emergencies. The flexibility of a fixed-rate line of credit when you need it can protect your family when you need it most. 

Potential Drawbacks of a Fixed-Rate HELOC

While there are many advantages to a fixed-rate HELOC, there are some potential downsides you should be aware of. 

Initial Costs

Fixed-rate HELOCs may come with initial costs, such as application fees, closing costs and appraisal fees. Carefully consider total fees to understand the cost of borrowing and its impact on other financial goals. 

Limited Borrowing Capacity

The amount you can get through a fixed-rate HELOC is typically based on a percentage of your home’s value and your creditworthiness. If you’ve built up more equity and have a good credit score, you should be able to get what you need. But if you’re a new homeowner, don’t have much equity in the home or have a lower credit score, lenders might not be willing to give you enough through a HELOC.

Risk of Losing Collateral

With a fixed-rate HELOC, you’re using your home as collateral. If you fail to make timely payments, you risk losing your home to foreclosure. If you’ve been making mortgage payments on time and need extra cash, a personal loan or other option might present less overall risk. 

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Find the Best Home Equity Loan Rates

A fixed-rate HELOC offers flexible funding against your home’s equity to use as needed. While you might pay higher interest rates for a fixed-rate HELOC, it simplifies financial planning and gives you predictable payments. Should you use a fixed-rate HELOC? That depends on your financial situation and goals. For some borrowers, these loans offer a practical solution to get cash at a reasonable rate when they need it most. You can also consider mortgage refinancing, HELOC versus refinancing and finding the best HELOC rates. 

Frequently Asked Questions