What is a fixed-rate HELOC?

A fixed-rate HELOC is a home equity line of credit with an interest rate that's set when the HELOC is opened and doesn't change over the life of the loan. That can give you the borrowing flexibility of a HELOC with the stability of a fixed interest rate. A fixed-rate HELOC protects you from interest rate swings and the risk of payments becoming unaffordable down the road.

If you're considering a HELOC, it's worth finding out whether a fixed rate HELOC might be the best fit for your needs.

How a fixed-rate HELOC works

A fixed-rate HELOC is a revolving line of credit secured by your home. The interest rate is set when your loan is approved and stays the same for the life of the loan.

With a HELOC, you can repeatedly borrow, repay, and borrow again up to your credit limit during the draw period. A fixed rate means that once the HELOC is in place, you’ll get the same interest rate no matter when you borrow. Also, there's no risk of rising interest rates making your payments more expensive. 

Let's say you anticipate different needs for financing over the next few years. Perhaps you want to consolidate debt now and then tackle some home improvements once your debt is paid down. A fixed rate HELOC allows you to lock in your interest rate up front, but have the flexibility to pay down balances and then borrow again at any time during the HELOC's draw period.

In contrast, with a variable rate HELOC, your interest rate could go up or down over time. This means that you don't know what your rate will be when you borrow in the future. If the HELOC doesn't have a lock-in feature, it also means that the rate you're paying on your existing balance could change as well.

In exchange for allowing you to lock in a rate, the interest rate on a fixed-rate HELOC may look a little higher than the starting rate on some variable-rate HELOCs. Many variable-rate loans have a temporarily lower teaser rate. A variable rate HELOC may have a lower interest rate at first, but it carries the real risk of rate hikes later on. 

In short, the cost of borrowing is much more predictable with a fixed-rate HELOC. 

Fixed-rate HELOC vs. traditional variable HELOC

Here's a summary how these two options compare:

Is a fixed-rate HELOC the same as a home equity loan?

No, HELOCs and home equity loans aren’t the same. A home equity loan delivers a one-time lump sum, typically at a fixed rate, and repayment begins right away. 

A fixed-rate HELOC gives you a revolving credit line at a fixed rate. This lets you borrow, repay, and then borrow again as often as you like during the draw period, up to your credit limit. 

Potential drawbacks of a fixed-rate HELOC

A fixed-rate HELOC offers rate stability, but consider the full picture before you choose any type of financing. Here are some of the potential downsides to a fixed-rate HELOC:

• Your home is collateral. If you can't repay, you could lose your home. 

• Any loan or line of credit is likely to have closing costs in addition to interest charges. Closing costs vary by lender and loan amount. Consider those closing costs alongside the interest rate in deciding which form of financing will be most cost-effective in your situation.

• Fixed-rate HELOCs can be hard to find. Most lenders offer variable rate HELOCs, or HELOCs that let you lock in an interest rate on different portions of your balance at different times. Achieve Loan’s HELOC has a fixed rate.

• Even with a fixed interest rate, payments during the draw period can vary. Those payments are based on the amount you owe. When the balance owed changes, your monthly payments can change.

When does a fixed-rate HELOC make sense?

A fixed-rate HELOC is one financing option. Other options include a variable-rate HELOC or a one-time home equity loan. 

When you weigh the pros and cons, a fixed-rate HELOC may make sense if you: 

• Want to borrow against your home's equity without changing your first mortgage

• Want a rate that stays the same for the life of the loan

• Need the flexibility to borrow repeatedly during the draw period

• Want protection from rising interest rates

• Have sufficient equity in your home and meet the lender's qualification requirements

This option may be worth exploring if you're consolidating higher-interest debt and want a rate that won't change. It can also be a good choice if you're planning a series of home improvements and want to lock in a rate now for those future projects. 

The benefits of a fixed-rate HELOC depend somewhat on the specific loan terms you can get. One way to find out whether it would be a good option for you is to check out terms and qualification requirements through an Achieve Loan mortgage advisor.