Fixed-Rate HELOC: How It Works and When to Use One

Lenders typically offer home equity lines of credit (HELOCs) with a variable interest rate, which means borrowers can expect their minimum monthly payment to fluctuate over time. However, some lenders are now offering an alternative option that allows homeowners to switch all or some of their HELOC balance to a HELOC fixed interest plan that allows them to lock in a rate for a set number of years.

If you’re considering tapping into your home equity, here’s a look at how a fixed-rate HELOC works and some info that could help you decide if it might be a good fit for you.

What Is a Fixed-Rate HELOC?

A fixed-rate HELOC is a revolving line of credit, which means you can make purchases and payments on an ongoing basis, and you’ll only pay interest on the amount you’ve actually borrowed — not the entire amount that’s available to you.

If that sounds kind of like a credit card, it is. But because a HELOC is secured using your home as collateral, the interest rate lenders offer is generally lower than with other types of unsecured financing, including cards. Of course, because the HELOC is secured with your home, you risk foreclosure if you can’t keep up with your HELOC payments — regardless of what type of HELOC you choose. The amount of equity you have in your home will help determine your eligibility for a HELOC as well as how much you might be allowed to borrow. (Your equity is your home’s value minus the balance you still owe on your home loan.)

Another difference is that a HELOC has a set term that is split into two phases:

•  The Draw Period: During this first phase, which typically lasts 10 years, the borrower is able to withdraw any amount from the account at any time (up to the approved credit limit). Interest payments may be required during this period, but payments toward the principal are often optional.

•  The Repayment Period: This is when access to the line of credit ends and the focus turns to paying off your balance. The repayment period may last up to 20 years.

HELOCs traditionally come with a variable interest rate that can fluctuate, up or down, over the length of the term. With the less-common fixed-rate HELOC, however, your lender may allow you to repay part of what you’ve borrowed on a fixed interest plan.

Fixed-Rate vs. Variable-Rate HELOCs

Choosing between a HELOC with a fixed or variable rate usually comes down to two main factors: the predictability of your payments and the potential for lower costs. Are HELOC rates fixed as a matter of course? No. Consider these points when deciding whether or not to opt for a fixed rate:

•  If you like the idea of knowing exactly what your monthly payments will be over time, and you want to eliminate the risk of an interest rate increase (at least for a while), you might prefer a fixed-rate HELOC.

•  If you have the ability to make higher monthly payments should interest rates rise, but you want to take advantage of the savings you’d get if rates drop or stay the same, you might want to stick with a variable-rate HELOC.

Recommended: HELOCs Explained

How Does a Fixed-Rate HELOC Work?

If you choose a fixed-rate HELOC, you may be able to lock in your interest rate when you open your line of credit or at any point during the draw period, depending on your lender.

The amount you can convert to a fixed rate and how long you can keep that rate will also depend on what your lender allows, the terms of your HELOC, and your creditworthiness. For example, fixed-rate terms may range from five to 30 years. And though you might be able to withdraw your entire credit line and convert it to a fixed rate, you might be limited to a smaller amount.

You also may have the option to lock in different amounts at different rates at various points during your HELOC’s draw period. And some lenders may allow you to unlock your HELOC’s fixed rate and return to a variable rate if interest rates drop.

Recommended: Can You Get a HELOC on Investment Property?

How to Lock in a Fixed Rate

If you sign up for a new HELOC with a fixed-rate option, you should be able to contact a representative who can help you lock in a rate when you’re ready, or you may be able to go online and lock in the rate yourself.

If you currently have a variable-rate HELOC but you’d like to switch to a fixed-rate HELOC, you can talk to your lender about the steps required to make the change. You also may want to shop around and compare lenders that are offering fixed HELOCs.

Some lenders may have a minimum balance requirement to switch to a fixed interest rate, and/or you might have to borrow a minimum amount from your credit line. There also may be a limit on how many times you can lock in a fixed rate.

Pros and Cons of a Fixed-Rate HELOC

Here are some important points to keep in mind as you weigh the advantages and disadvantages of a fixed-rate HELOC:

thumb_up

Pros:

•   Predictable monthly payments. Once you lock in a fixed interest rate, you’ll know exactly how much your monthly HELOC payments will be during that time period.

•   Inflation protection. Though your interest rate may be lower initially with a variable-rate HELOC, if inflation causes interest rates to spike, your lender may raise your rate, and your monthly payments will increase. That won’t happen with a fixed-rate HELOC.

•   More accountability. The transition from interest-only payments during the draw period to higher principal-and-interest payments in the repayment period can sometimes catch borrowers off-guard. With a fixed-rate HELOC, principal-and-interest payments are required even during the draw period, and you’ll have completely paid off the debt by the end of the term you choose.

thumb_down

Cons:

•   Higher interest rates and fees. Lenders may offer a higher initial interest rate when you choose a fixed-rate HELOC option, and you could be charged extra fees when you lock in your rate.

•   Fewer lenders to choose from. Because fixed-rate HELOCs aren’t available from as many lenders as variable-rate HELOCs, you may not have the same opportunity to shop around and compare what other lenders are offering and how your HELOC interest is calculated.

•   May lose interest-only payment option. If you choose a fixed-rate HELOC, you can expect to make interest-and-principal payments instead of the interest-only payments that are common with variable-rate options. If you need or want to keep your monthly payments lower during the draw period, you may decide to stick with a variable-rate HELOC.

Fixed-Rate HELOC vs. Home Equity Loan

Though fixed-rate HELOCs have some similarities to home equity loans, there are important differences in how you’ll receive and repay the money you borrow.

Both are based on the amount of equity you have in your home and secured with your home as collateral. But unlike a home equity loan, which you receive as a lump sum and repay in fixed monthly payments, a HELOC allows you to borrow and make payments on an ongoing basis. And you’ll often have the option of only paying interest on the amount you’ve actually borrowed — not the entire amount that’s available to you.

If you know how much money you need upfront (for a home renovation project, for example, or debt consolidation), a home equity loan might be a good option to consider. You may want to consider a HELOC, however, if you expect to use the money for several different expenses or on a staggered basis, and you don’t want to pay interest on funds you aren’t using.

There is another way to take advantage of your home equity when borrowing money. With a cash-out refinance, you refinance your mortgage and take out extra money that is delivered as a lump sum. You’re left with one larger home loan payment instead of a mortgage payment plus a HELOC or home equity loan payment. Whether or not a refinance is a wise idea will depend in part on how current mortgage rates compare to the rate you have on your original loan.

When Should You Consider a Fixed-Rate HELOC?

If you like the idea of working with a flexible line of credit rather than a lump-sum loan — but you prefer the stability of a fixed interest rate and predictable monthly payments — you may want to look into whether you’d benefit from choosing a fixed-rate HELOC.

Some things to consider as you do your research may include:

•  What is the current interest rate environment? If you’re concerned that rates could rise in the future, you might choose to lock in all or a portion of the amount you borrow. If it looks as though rates may drop or stay the same, a more traditional, variable-rate HELOC might save you some money.

•  How much can you afford to pay monthly? If you have the financial wherewithal to absorb a higher monthly payment if interest rates rise, but you don’t want to pass up the savings you’d get if rates stay the same or drop, you might want to go with a variable-rate HELOC.

•  How disciplined are you about staying on top of your debt? With a fixed-rate HELOC, you’ll have a set payment schedule that can help you keep your balance under control.

•  What are some other borrowing options? It can be a good idea to research and compare all your borrowing options (a home equity loan vs. a HELOC vs. a cash-out refi, for example) before making a choice.

The Takeaway

If you’re looking for an affordable way to get the money you need for home projects, unexpected bills, health care, or just about any other important expense, a HELOC fixed rate or variable rate may be your answer.

With a HELOC, you can turn your home equity into cash using a revolving line of credit that’s secured by your home. And you may have a choice between a variable interest rate or a fixed interest rate.

If a HELOC sounds like it might be a good fit for you, check out what SoFi has to offer. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. Applying online is quick and convenient, and you can always ask for one-on-one assistance if needed.

SoFi now offers flexible HELOC options to turn your home equity into cash. Access up to 85% of your home equity, or $350,000, to finance home improvements or consolidate debt. Competitive interest rates and repayment terms up to 20 years could result in lower monthly payments versus other loans. And the online application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi.

FAQ

What is the difference between a fixed-rate HELOC and a traditional HELOC?

Traditionally, HELOCs have been offered with a variable interest rate, which means borrowers can expect their minimum monthly payment to fluctuate over time. With a HELOC fixed rate, homeowners may choose to convert all or some of their HELOC balance to a fixed interest rate that’s locked in for a set number of years and offers more predictable payments.

Can you convert an existing HELOC to a fixed interest rate?

If your current lender offers this option, you may be able to refinance your existing HELOC from a variable rate to a fixed rate. Or you can apply for a new HELOC with a lender that offers a fixed-rate option.

Are fixed-rate HELOCs harder to find than variable-rate HELOCs?

Yes, fixed-rate HELOCs are a relatively new and less-common option than traditional variable-rate HELOCs. For many years, the answer to “are HELOC rates fixed?” has usually been “no”. But that may be changing.

Do fixed-rate HELOCs have higher rates than variable-rate HELOCs?

The initial rate on a variable-rate HELOC is typically lower than a fixed-rate HELOC. But because the variable rate can fluctuate, it may end up being higher in the long run.

Can you pay off a fixed-rate HELOC early?

Some lenders allow prepayments, but if that’s your goal, be sure to check the terms of your loan agreement and ask about different types of prepayment penalties.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
^²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945.
All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOHE-Q226-077