One of the reasons HELOCs are appealing to homeowners is because they typically have lower interest rates than home equity loans (not to mention the potential tax benefits)*. If you are considering a HELOC, it’s important to know the pros and cons so you can make an educated decision best suited for your financial life.
In This Article
What’s the difference between a fixed-rate HELOC and a variable-rate HELOC?
Most of the time, HELOCs are given at a variable interest rate. This means that the interest you pay can fluctuate monthly based on the changing market interest rate. This has its advantages and disadvantages.
When the market is doing well and interest rates are low, borrowers reap the benefits of paying a lower interest rate during that period. However, an unpredictable market means rates can increase at a moment’s notice, leaving borrowers with surprising upticks in monthly payments. And while it’s nice to pay less interest when market rates decrease, knowing that your payments are likely to change requires a little more thought while you’re planning and budgeting for the future. However, variable-rate HELOCs usually have a minimum and maximum cap for how much your rate can change during the lifetime of your plan.
What is a Fixed-rate HELOC?
However, HELOCs are also available at a fixed interest rate. A HELOC with a fixed rate locks in your interest rate for an extended period of time. This makes it easier to create and stick to budgets since your monthly payment will remain consistent throughout the draw period.
What you need to know about a fixed-rate HELOC
Fixed-rate HELOCs offer stability for borrowers as they know what their payments will be long-term. They bring greater peace of mind since you don’t have to worry about rising interest rates. If you can lock in a lower rate when taking out a HELOC, a fixed option is a good choice. However, if the market is competitive at the time you’re borrowing and rates are high, you may not be able to embrace a lower interest rate when the market subsides and rates decrease. Many people opt for a hybrid version of a fixed-rate HELOC, where you set up a period of time in advance where your interest will be fixed rather than variable.
Note that the longer the duration of your fixed-rate term, the higher your interest rate is. A 15-year fixed term will require a higher rate than a 10-year fixed term. You can establish a fixed rate for any period from one year to 30 years. And while your principal payment will be smaller the longer your HELOC term is, the interest rate will likely be higher in exchange.
Fixed-rate HELOCs are beneficial when you have large outstanding balances and are borrowing from your HELOC often, like for ongoing home improvement projects. The stability of your rate and frequent use of the line of credit make for a simple process that is much like using your credit card. However, if you don’t draw from your HELOC often, a fixed-rate may not be the best fit for you as variable interest rates may end up in your favor when you aren’t borrowing much.
However, many lenders allow for a hybrid set up where you can take advantage of both a fixed-rate HELOC and a variable-rate HELOC by establishing time periods for each rate when setting up your term. It’s important to talk to your lender about possibly unlocking that rate in advance if variable rates become a better option down the road. Fixed-rate HELOC terms vary greatly between lenders, so it’s important to shop around and discuss your advance options while establishing the term.
Converting a variable-rate HELOC to a fixed-rate HELOC
Let’s say you’ve already got a variable-rate HELOC, but you want to convert a portion of it to a fixed-rate HELOC. Luckily, you don’t need to submit a new loan application. Your lender will help you set up your new fixed-rate portion–but know that there are extra charges that come with it like a rate-lock fee or a conversion review fee.
If the extra fees (and any other requirements your lender may introduce) make sense for your financial plan, it’s time to consider your desired interest rate and fixed term length. Your lender should work with you on putting together a new fixed-rate HELOC plan.
* Prosper does not provide tax advice. Please consult a tax advisor regarding the potential deductibility of interest and charges.
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT.
To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.
What this means for you: When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver’s license or other identifying documents.
Eligibility for a home equity loan or HELOC up to $500,000 depends on the information provided in the home equity application. Loans above $250,000 require an in-home appraisal and title insurance. For HELOCs borrowers must take an initial draw of $50,000 at closing. Subsequent HELOC draws are prohibited during the first 90 days following closing. After the first 90 days following closing, subsequent HELOC draws must be $1,000 or more (not applicable in Texas).
The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Spring EQ borrowers get their cash on average in 26 days. The time period calculation to get cash is based on the first 6 months of 2022 loan fundings, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications.
Spring EQ cannot use a borrower’s home equity funds to pay (in part or in full) Spring EQ non-homestead debt at account opening. For HELOCs in Texas, the minimum draw amount is $4,000. To access HELOC funds, borrower must request convenience checks.
Interest rates may be adjusted based on factors related to the applicant’s credit profile, income and debt ratios, the presence of existing liens against and the location of the subject property, the occupancy status of the subject property, as well as the initial draw amount taken at the time of closing. Speak to a Prosper Agent for details.
Qualified applicants may borrow up to 95% of their primary home’s value (not applicable in Texas) and up to 90% of the value of a second home. Home equity loan applicants may borrow up to 85% of the value of an investment property (not applicable for HELOCs).
All home equity products are underwritten and issued by Spring EQ, LLC, an Equal Housing Lender. NMLS #1464945.
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