Pros and cons of a fixed-rate HELOC

There are plenty of factors to consider with a fixed-rate HELOC, and some homeowners choose to use a variable-rate HELOC or alternative product like a home equity loan.

How does a fixed-rate HELOC work?

A fixed-rate HELOC works similarly to a variable-rate HELOC or a credit card. Whenever a need arises for some cash, you may draw upon your fixed-rate HELOC throughout the course of its draw period. This is the initial stage of the loan which typically lasts 5- to 10 years.

The amount of money you can draw is capped by your total overall credit line, like your credit limit on a credit card. During the draw period of a HELOC, you typically only make payments on the interest incurred.

Once the draw period is over, the HELOC transitions into the repayment period. This time frame varies depending on your lender but typically lasts 20 years. 

With a variable-rate HELOC, your interest may go up and down. However, with a fixed-rate HELOC, you can make consistent, predictable monthly interest payments since the loan is locked with a fixed rate.

READ MORE: Home equity line of credit (HELOC): Requirements, terms, and repayment

Pros and cons of a fixed-rate HELOC

While a fixed-rate HELOC may sound like a good fit for you, there could be benefits and drawbacks to using one. Compare the pros and cons of borrowing cash with a fixed-rate HELOC to determine whether it’s right for you.

Pros

• Protection from interest rate fluctuations: Interest rates can be volatile at times. A fixed-rate HELOC may protect you if interest rates increase in the future. If rates rise on a variable-rate loan, you may have to make higher monthly interest payments.
• The ability to change to a variable rate: This is not a feature all lenders offer however, you may be able to convert your fixed-rate HELOC to a variable-rate HELOC. Having this option might be nice if you anticipate lower rates.
• Predictable monthly payments: Since your interest rate won’t vary with changes in the market, you can count on paying a predictable monthly interest payment on a fixed-rate HELOC. That predictability may be helpful if you prefer to have consistent expenses or live on a fixed income.

Cons

• Higher initial interest rate than a variable-rate HELOC: Variable-rate loans typically come with a lower initial interest rate than fixed-rate loans. However, variable-rate loans may not protect you from fluctuations in interest rates. If you don't expect rates to rise significantly anytime soon, a variable-rate HELOC may provide more favorable rates.  
• Your home’s equity becomes collateral: When you take out a fixed-rate HELOC, your home secures the loan. If you default on the loan, the lender may foreclose on your property.
• Limited lender options: Not all lenders offer fixed-rate HELOCs. However, by doing some research, you may be able to find a reputable lender who offers terms that work for you.

Fixed-rate HELOC alternatives

Though fixed-rate HELOCs are one way to borrow against the equity in your home, they may not be the right product for everyone. You may want to consider these alternatives before you make a decision.