What It Is, How It Works

What Is a HELOC Fixed-Rate Option?

Most home equity lines of credit (HELOCs) come with variable interest rates that can change over time. However, some lenders offer HELOCs with a fixed-rate option, allowing you convert all or a portion of your balance to a fixed interest rate. Here is how HELOCs with a fixed-rate option work and how to decide if one is right for you.

How a HELOC Fixed-Rate Option Works

Fixed-rate HELOCs are a hybrid of a regular HELOC and a home equity loan. Like other HELOCs, they provide a credit line that you can borrow money from as needed, up to a certain agreed-upon limit. But, like most home equity loans, they also allow you to lock in a fixed interest rate.

The opportunity to lock in a rate typically occurs during your HELOC’s draw period, such as five or 10 years. That is the period of time when you can borrow money from your account while making only monthly interest payments. If your HELOC credit limit is $50,000, for example, you might draw out $10,000 at the beginning to cover a particular expense, then draw out another $5,000 a year or two later, and so on as long as you don’t exceed your limit.

The draw period is followed by a repayment period, often 10 to 20 years, during which you can no longer take money out and must repay both principal and interest.

Lenders that offer these types of HELOCs typically allow you to lock in all or a portion of your outstanding balance at a fixed rate during the draw period. U.S. Bank, to take one example, lets you lock in a fixed rate during as many as three successive draws. It also allows you to unlock your fixed rates and go back to a variable rate, which you might want to do if interest rates have fallen.

Note that when you elect a fixed-rate option you’ll have to make both principal and interest payments on that money rather than interest only, so your monthly payments will very likely rise.

Characteristics of a HELOC Fixed-Rate Option

Length of the Fixed-Rate Term

When you lock in a fixed rate, the lender may give you a choice of terms (or lengths) for repaying that portion of your HELOC. For example, PNC Bank, which calls its product the Choice Home Equity Line of Credit, says it offers terms of from five to 30 years.

You will have paid off that debt entirely by the end of whatever term you choose. The advantage of a shorter term is that you’ll pay less interest in total. A longer term, on the other hand, will mean lower monthly payments.

Number of Fixed-Rate Balances

These HELOCs typically allow you to lock in different amounts at different points and at whatever fixed rate is available at the time. However, the lender may set a limit on how many such balances you can carry. Bank of America, for example, allows borrowers up to three fixed-rate balances at any given time.

Minimum Fixed-Rate Balance

Lenders may also set minimums on the amounts you can lock in. U.S. Bank, for example, sets its minimum at $2,000, while PNC Bank has a $5,000 minimum.

Annual Limits and Rate Lock Fees

In addition to setting a limit on how many fixed-rate balances you can carry, lenders may also restrict how often you can lock in, such as a maximum of two times in a given year.

Lenders may or may not charge you a fee to lock in a fixed rate or to unlock one. When lenders do have a fee, it’s usually relatively small, but it’s worth asking before you apply.

When You Can Convert

Lenders that offer these HELOCs will often let you lock in one or more fixed rates during your draw period but not after that. Some will also allow you to lock in a rate when you first take out the loan.

Fully Amortizing or Partly Amortizing Term

Much like regular fixed-rate mortgages, the fixed-rate portion of the HELOC will amortize. In amortization, each payment you make is divided into principal and interest. At the outset, you’ll be paying mostly interest, with a small amount going toward principal. Over time, the interest portion will decrease and the principal portion increase. By the end of the loan term, you will have paid off both.

You may see fixed-rate options on HELOCs that are fully amortizing, as just described, or only partially amortizing. In the latter case, you will still have some outstanding balance left when the fixed-rate term ends. At that point the lender will reimpose a variable rate on it.

HELOC Fixed-Rate Option vs. Home Equity Loan

While fixed-rate HELOCs work something like home equity loans, there are significant differences between the two that might make one or the other a better option for you.

With a home equity loan, you borrow a fixed amount, usually at a fixed interest rate, which you then pay off in monthly installments. It can be a good option if you know how much you need to borrow for a particular purpose, such as a new roof.

With a HELOC, either fixed or variable rate, the lender makes a certain amount of money available to you, which you can draw from as needed and only pay interest on the amount you actually borrow. That can make HELOCs a good option when you’re anticipating a series of expenses but aren’t sure how much they’ll all add up to.

A HELOC with a fixed-rate option has the added advantage of protecting you from a large increase in your variable interest rate, although HELOCs typically come with caps that limit how far or fast you rate can go up.

The Bottom Line

If you want the flexibility of a HELOC and the predictability of a home equity loan, a HELOC with a fixed-rate option could be a good choice for you. Many lenders, including banks and credit unions, offer HELOCs, and it’s worth shopping around since their rates and terms can vary.