What is it and how does it work?

A fixed-rate HELOC is considered a hybrid product because it combines a home equity loan’s fixed interest rate with a HELOC’s credit line. 

You can withdraw money (up to your credit limit) just like you would with a traditional HELOC. But unlike a variable HELOC, you lock in all or a portion of your balance at a fixed interest rate during the draw period. This can make it easier to plan and budget while protecting you from future interest rate hikes. 

Fixed-rate and variable HELOCs have two phases: the draw period and the repayment period. 

During the draw period (which usually lasts five to 10 years), you can borrow, repay, and repeat as often as you want. This is much like a credit card, where you charge up to the limit, pay off some or all of the balance, and charge up to the limit again. During this phase, you make monthly interest payments on the borrowed amount. 

If your lender allows it, you can convert all or some of your HELOC balance to a fixed rate when you close the loan or anytime during the draw period. Your lender may require a minimum outstanding balance or limit the number of times you can convert to a fixed rate. You can usually lock in the fixed-rate portion of a HELOC for five to 30 years — and some lenders may allow you to convert back to a variable rate if rates drop. Otherwise, you can refinance to a new home equity loan or HELOC to take advantage of lower rates. 

When the draw period ends, the repayment period starts. During this phase, you can no longer borrow from a HELOC, and you pay off the principal and interest. 

TIP: According to the IRS, you can deduct the interest paid on up to $750,000 ($375,000 if married filing separately) of home equity loans or HELOCs if you use the money to buy, build, or substantially improve the home securing the loan. To claim the deduction, you have to itemize your tax return.

Both types of HELOCs let you borrow against the equity you have in your home. And both use your home as collateral — meaning your lender can foreclose on the home if you fall behind on payments. The main difference between the two HELOCs is the type of interest you pay. 

Traditional HELOCs have variable interest rates, so your rate — and monthly payment — can increase or decrease as interest rates change. Still, many traditional HELOCs have periodic and lifetime caps that limit how much interest rates can increase each year and over the life of the loan. 

Conversely, fixed-rate HELOCs let you lock in all or some of your balance at an interest rate that doesn’t change. Fixed-rate HELOCs usually have higher starting interest rates than their traditional counterparts and may have higher fees. However, depending on what happens with interest rates, you can save money in the long run. 

Ultimately, a homeowner may opt for a fixed-rate HELOC vs. a variable-rate HELOC to have an interest rate that won’t fluctuate — and the peace of mind and easy budgeting that comes with it. It can also be a good option if you’re choosing between buying a home in a competitive market and renovating an existing home. 

With the Federal Reserve signaling two more rate hikes this year, the fixed-rate option might provide welcomed stability during uncertain economic times. Or, you might consider a home equity loan, which also has a fixed interest rate.

Fixed-rate HELOCs and home equity loans let you tap into your home’s value to pay for home improvements and other big expenses. Both are secured loans with fixed interest rates (for at least part of the balance in the case of a fixed-rate HELOC). The main difference between the two options is when you receive and repay the funds. 

Home equity loans are installment loans, and you receive an upfront lump sum and start making payments (with interest) immediately. HELOCs let you access a revolving line of credit, so you borrow what you need, when you need it, throughout the draw period. You make interest-only payments during the draw period and repay the principal and interest during the repayment period. 

It’s important to consider the benefits and drawbacks before deciding how to put your home equity to work. Here’s a rundown of the pros and cons of fixed-rate HELOCs. 

Pros

• Protects you from interest rate hikes.
• Simplifies your monthly budget and makes planning easier. 
• Some lenders let you revert to a variable rate if interest rates fall.
• The interest may be tax deductible if you use the funds to buy, build, or substantially improve your home. 

Cons

• Not all lenders offer fixed-rate HELOCs. 
• The initial APR might be higher than that of a traditional HELOC. 
• Your lender might cap the number of fixed-rate withdrawals you can make. 
• You could get stuck with a higher interest rate if rates drop. 

A fixed-rate HELOC can be an excellent way to fund a home improvement, consolidate debt, or pay for another large expense. As with any loan, it’s wise to shop around and compare at least three offers to ensure you get the best HELOC rates — or the best home equity loan rates if you decide that’s a better option.

Additionally, your credit score and history influence whether you’re approved for a HELOC and at what rate. For this reason, considerimproving your credit score before applying for a home equity loan or HELOC to ensure you get the best deal possible. 

Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected].