Last updated: November 05, 2024

Mortgage Products

Pros and cons of a fixed-rate HELOC

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Please note: Discover® Home Loans offers a home equity loan product but does not offer HELOCs.

A home equity line of credit (HELOC) can be a powerful way to tap into the equity you’ve built up in your home. Many homeowners enjoy a HELOCs’ flexibility, and fixed interest rates may make it easy to budget for repayments. However, not all lenders offer a fixed-rate HELOC, and this mortgage product isn’t the best option for everyone.

What to know about fixed-rate HELOCs

If you find a lender offering a fixed-rate HELOC, weighing the pros and cons can help determine whether it’s right for you.

  • A fixed-rate HELOC works like any other HELOC However, the rate is locked in throughout the life of the loan.
  • While a fixed-rate HELOC may protect homeowners from fluctuating rates, it could limit your options as not all lenders offer this product.
  • If a HELOC doesn’t match your needs, home equity loans and cash out refinances are alternative fixed-rate financing options.

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.

Home equity loan

Home equity loans are another way to tap into your home's equity. While a HELOC works much like a credit card, a home equity loan functions more like a second mortgage. You decide how much money you would like to borrow and the length of time (term) you would like to repay the loan. Home equity lenders typically have various payment term options — for example, Discover® Home Loans offers loan terms of 10, 15, 20, and 30 years.

Like a HELOC, you can use the cash from your home equity loan for whatever you would like. However, you receive a lump sum of money upfront and immediately start paying your loan back. The lump sum may be a good option if you have a planned expense coming up soon, such as a home remodel.

Learn more about the differences between a home equity loan and a HELOC.

Variable-rate HELOC

Instead of a fixed-rate HELOC, you can choose a more traditional variable rate HELOC. This type of HELOC may see its rates adjusted as often as each month, though no movements in the prime rate could keep interest rates flat. A variable-rate HELOC may make sense if you anticipate interest rates staying flat or even decreasing in the future. Also, you may have more flexibility in choosing a lender and terms with a variable-rate HELOC.

Cash out refinance

A cash out refinance is another financial product you can use to tap into the equity you have built up in your home. In simple terms, it involves refinancing your existing mortgage for a higher amount than its current balance and receiving the difference in cash.

If current mortgage rates are lower than the rate on your existing loan, refinancing could potentially lower your monthly mortgage payments. However, the additional amount of cash you borrow from your equity will also be a contributing factor to what your payments look like. 

Keep in mind that if you take out a cash out refinance with an interest rate that is higher than the one on your current mortgage, this may lead to an increase in your monthly payments.

Personal loan

Personal loans may offer an effective way to get cash for home projects, debt consolidation, or other uses. Unlike HELOCs or other types of home loans, personal loans don’t require collateral to secure the loan and so don’t usually require verification of your home’s value or equity. Because of this, the application and approval process for personal loans may be quicker in some cases, which might be ideal for anyone who needs cash sooner rather than later.

Personal loans typically come with a fixed interest rate, so your monthly payment stays consistent during the life of the loan. However, personal loans may come with higher interest rates than HELOCs. Also, unlike a HELOC, you take out the full amount of a personal loan instead of pulling cash as needed.

Credit card

Like personal loans, credit cards are usually an unsecured loan option that may let you get cash quickly. Credit cards typically have higher interest rates than loans, and those rates can vary widely from card to card. As a revolving line of credit, you only pull out what you need, so you won't have to borrow the full amount that's available to you.   

READ MORE: HELOC options & HELOC alternatives

Closing thoughts: Pros and cons of a fixed-rate HELOC

A fixed-rate HELOC can offer both benefits and drawbacks to homeowners wanting to tap into their equity. Predictable interest rates may help with budgeting for monthly expenses and protect against rising rates in the future. However, if interest rates are higher than a variable-rate HELOC borrowing costs may increase over time. A fixed-rate HELOC also limits the opportunity to take advantage of declining interest rates. 

While a fixed-rate HELOC may be a valuable tool for homeowners with specific needs and preferences, it’s crucial to weigh the pros and cons and evaluate your personal circumstances before making a decision.

Curious about alternatives to a fixed-rate HELOC? Discover Home Loans offers home equity loans and cash out refinances with flexible options and low fixed rates.

The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank, its affiliates, or successors.

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Loan Payment Example Disclosure

For example, if you borrowed $60,000 for a 20 year term at 8.86% APR, your fixed monthly payments would be $534.45.