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 HELOCs’ flexibility, and fixed interest rates make it easy to budget for repayments. However, not all lenders offer a fixed-rate HELOC, and this niche 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, only the rate is locked in throughout the life of the loan.
While a fixed-rate HELOC protects homeowners from fluctuating rates, it does limit your options to lenders that 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 many homeowners choose to use a more common 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 normal, variable-rate HELOC or a credit card. Whenever a need arises for some cash, you can simply draw upon your fixed-rate HELOC throughout the course of its draw period. This is the initial stage of the loan that typically lasts 5-10 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. The repayment period varies depending on your lender but typically lasts 20 years. With a variable-rate HELOC, your rate and monthly payments change during this period.

However, during the repayment period on a fixed-rate HELOC, you make consistent, predictable monthly payments since the interest rate is locked.

Pros and cons of a fixed-rate HELOC

While a fixed-rate HELOC sounds great, there are both benefits and drawbacks to using one. Compare the pros and the cons of borrowing using a fixed-rate HELOC to help determine whether it’s right for you.

Pros

Protection from interest rate fluctuations: Interest rates may be volatile at times. A fixed-rate HELOC may protect you from this volatility if interest rates rise. If interest rates rise on a variable-rate loan, you’ll have to make higher monthly interest payments.
The ability to change to a variable rate: While this is not a feature all lenders offer, some allow borrowers to convert their fixed-rate HELOC to a variable-rate HELOC. Having the option to do so may 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 payment on a fixed-rate HELOC. That predictability may be helpful if you prefer to have regular expenses or live on a fixed income.

Cons

Higher initial APRs than variable-rate HELOCs: Fixed-rate loans typically come with a higher annual percentage rate (APR) than variable-rate loans. However, variable-rate loans do not protect the borrower from fluctuations in interest rates. If you don't expect interest rates to rise significantly anytime soon, a variable-rate HELOC may provide more favorable rates.
Your home’s equity is used for collateral: When you take out a fixed-rate HELOC or any other home lending product, your home is used to secure the loan. If you default on the loan, the lender may foreclose on your home. It’s important to note that this is a also possibility when taking out a mortgage loan.
Limited options of lenders: Because fixed-rate HELOCs are a niche product, you may have a limited number of lenders to choose from. By doing some research, you may be able to find a reputable lender who offers terms that will 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 financial instrument for everyone. You may also want to consider variable HELOC options and other loan alternatives you can use to borrow money using the equity in your home before you make a decision.

Home equity loan

Home equity loans are another way to tap into your home's equity with a second mortgage. While a HELOC works much like a credit card, a home equity loan functions more like a mortgage. With a home equity loan, 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, with a home equity loan, you must take a lump sum of money upfront and immediately start paying your loan back. The lump sum may be a good option for you if you have a planned expense that’s coming up soon, such as a remodel. To learn more about this option, check out more in-depth information about the differences between a home equity loan and a HELOC.

Variable-rate HELOC

Instead of a fixed-rate HELOC, homeowners can always choose a more traditional variable rate HELOC. A variable-rate HELOC sees its rates adjusted as often as each month, though small or no movements in the prime rate could keep interest rates for your HELOC flat. A variable-rate HELOC may make sense if you anticipate interest rates staying flat or even decreasing in the future. Also, as a more commonly available option than a fixed-rate HELOC, 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 that 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 allow you to obtain a lower interest rate. This could potentially lower your monthly mortgage payments, but 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 will lead to an increase in your monthly payments.

Personal loan

Personal loans 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 require verification of your home’s value or equity. Because of this, the application and approval process for personal loans may be relatively quick and may be ideal for anyone who needs cash sooner rather than later.

Personal loans come with a fixed interest rate, so you’ll know what your monthly payment is during the life of the loan. However, as unsecured loans, personal loans tend to come with higher interest rates than fixed-rate HELOCs and home equity loans. Also, unlike a HELOC, you must take out the full amount of a personal loan instead of pulling cash as needed.

Credit card

Like personal loans, credit cards are an unsecured loan option that lets you get cash quickly. Credit cards tend to have relatively high interest rates when compared to other borrowing options, and those rates can vary widely from card to card. However, credit cards are a flexible and a quick way to access funds for expenses. 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. Credit cards can often serve as a convenient resource if you have an urgent need for money.

READ MORE: HELOC options & HELOC alternatives

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

A fixed-rate HELOC offers both benefits and drawbacks to homeowners seeking to tap into their equity. On the positive side, predictable interest rates may help with budgeting for monthly expenses and protect against rising rates in the future. This may make it easier to conduct long-term financial planning. However, the higher interest rates compared to variable-rate HELOCs may increase borrowing costs over time. A fixed rate 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 weight 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.