How Does a Fixed-Rate HELOC Work?

Predictability makes it easier to plan and budget.

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A fixed-rate home equity line of credit is similar to a variable-rate HELOC with one major difference: You lock in an interest rate -- hence the "fixed rate" -- for the life of the loan. That can help protect you from interest rate hikes, and there have been plenty of those recently. 

Both types of HELOC can help you tap into your home equity in order to finance a renovation, refinance debt or purchase a big-ticket item. But a fixed-rate HELOC offers greater predictability than its variable-rate counterpart. Here's everything you need to know.

What is a fixed-rate HELOC?

A fixed-rate HELOC combines elements of a home equity loan and a HELOC, letting you lock in a fixed interest rate on a portion of a loan or the full balance. That means all of your monthly payments, including principal and interest, can be calculated ahead of time. That provides predictability and consistency. 

How does a fixed-rate HELOC work?

HELOC serves as a revolving line of credit from which you can withdraw money over some period of time, referred to as the draw period. It's a useful setup if you anticipate needing money but you're not sure exactly how much. And a HELOC may offer a lower interest rate than some other types of home loans or personal loans.

A HELOC works particularly well when you're looking to make home improvements or pay tuition costs, because you can withdraw money repeatedly over the course of the draw period. And you pay interest only on the funds you withdraw. And while some HELOCs have a variable interest rate, a fixed-rate HELOC maintains the same rate over the life of the loan. 

"The interest on a fixed rate HELOC does not fluctuate. As a result, you'll have fixed monthly payments," said Jackie Boies, senior director, partner relations at Money Management International, a Texas-based nonprofit debt-counseling organization. 

One important thing to keep in mind: With a HELOC, your home serves as collateral for the loan. If you miss too many payments, you risk losing your home.  

Fixed-rate vs. variable-rate HELOC: What's the difference?

It's pretty simple. A fixed-rate HELOC keeps the same interest rate throughout the life of the loan. That's great if there's a likelihood of interest rates increasing -- which is currently the case. If rates decline, however, you're stuck with the rate you locked in. 

If you need cash to finance a longer-term project or expensive purchase, a fixed-rate HELOC can make it easier to plan and budget. Renovations and remodeling projects, which are prone to interruption or supply chain blocks, can take longer than expected. A fixed interest rate can help hedge against projects that take longer to complete than anticipated. 

Key things to consider with a fixed-rate HELOC

There are multiple factors to consider when shopping for a fixed-rate HELOC. Here are the four important things to keep in mind:

Inflation

Inflation can impact the trajectory of interest rates. Although the Federal Reserve doesn't set HELOC rates directly, it will attempt to mitigate inflation by hiking interest rates. That will eventually influence the HELOC market. 

Timing

If you're planning to use a HELOC to finance a series of home projects or tuition payments over a number of years, a fixed-rate HELOC can make sense. You won't have to worry about rates increasing over the course of your loan. 

Rates

There are risks in using a fixed-rate HELOC. If interest rates decrease, you'll end up paying more to finance your loan than you would with a variable-rate HELOC. And it's critical to remember that you risk losing your house if you miss multiple payments on a HELOC. 

Fees

It's always essential to understand the specific terms of a loan. Read the fine print and ask questions before signing any paperwork. Know if your lender will charge a fee if you pay off the loan early. 

Converting a variable-rate HELOC to a fixed-rate HELOC

"Some HELOCs are structured to initially start with a variable rate and then convert to a fixed-rate loan during the draw period," according to Jackie Boies. And though a HELOC with a variable interest rate can be converted to a fixed-rate HELOC, you can also open a new hybrid HELOC to refinance your old one. 

Before you make such a move, consider the following:

  • Are interest rates increasing or decreasing?
  • Do you know exactly how much you want to borrow?
  • Can you comfortably accommodate rate and monthly payment changes over time?

It makes the most sense to convert from a variable-rate loan to a fixed-rate HELOC when interest rates are low. You can "lock in that low rate for the long haul," said Boies, "and structure your payments to repay the debt more quickly."