What is a fixed-rate HELOC and how does it work?

What is a fixed-rate HELOC?

A standard HELOC is a revolving line of credit with a variable interest rate. As the interest rate changes, so will the minimum amount due each month. But there’s a less common kind of credit line: a fixed-rate HELOC, which charges the same percentage of interest each month, keeping your minimum payments stable. The interest rate on a fixed-rate balance won’t change for the length of the term.

If a regular HELOC is akin to a big credit card, a fixed-rate HELOC is similar to a second mortgage — or, actually, a home equity loan (which gives you a lump sum at a fixed rate). It allows you to freeze a portion or all of your balance at a fixed interest rate. This rate won’t change for the length of the HELOC term.

The fixed-rate portion of the HELOC can be locked in for terms ranging from five years to 30 years, during which time the loan is paid back like a typical mortgage, says Joe Perveiler, home lending product executive at PNC Bank.

How does a fixed-rate HELOC work?

Typically, lenders will let you freeze some or all of the balance on your HELOC when you establish it, or at any point during the draw period, says Laura Sterling, vice president of marketing at Georgia’s Own Credit Union. They might limit how many times you can lock in a fixed interest rate on your HELOC (for example, U.S. Bank allows customers to have up to three fixed-rate balances at any time, while Regions Bank offers the option to convert part of its HELOC into a fixed rate up to 10 times). Also, some lenders require a minimum balance to switch to a fixed interest rate.

Depending on your lender, you might be able to lock the rate yourself through your online account, or you may need to contact a representative to do so.

In other aspects, the fixed-rate HELOC operates the same as the variable variety of HELOC. You can withdraw as much or as little of your credit line as needed, whenever you need it. You will only pay interest on the sums you actually withdraw.

Pros and cons of a fixed-rate HELOC

As with any financial product, there are both benefits and drawbacks associated with a fixed-rate HELOC. Here are some of the considerations to keep in mind.

Pros of a fixed-rate HELOC

• Avoid interest-rate fluctuations: Regular, variable-rate HELOCs’ rates can change as often as monthly, following fluctuations in the prime rate or whatever index your loan follows. But if your HELOC is fixed, you won’t have to worry about interest-rate trends or market movements.
• Stable, predictable repayments: When you have a consistent interest rate, you know exactly how much your monthly payment will be. This can help with budgeting and planning for other expenses.
• Potential to lock future low rates: HELOCs can be very long-term debt, as long as 30 years. A lot can happen to interest rates in that time. But with a fixed-rate HELOC, you can grab a good rate and hang onto it. Even if interest rates go up, the payment on your HELOC won’t increase – you’re guaranteed a low rate for the duration.

Cons of a fixed-rate HELOC

• Higher interest rates and fees: The interest rates on fixed-rate HELOCs are often higher than the current rates on traditional ones. Plus, many lenders charge a fee when you lock a rate. Other closing costs and fees — such as the origination and account maintenance fees — may also be higher with a fixed HELOC.
• Harder to find: Fixed-rate HELOCs are becoming more popular, but they still aren’t as widely available as their traditional counterparts. If your lender does offer them, you might be required to have a minimum balance on the HELOC before converting to a fixed rate, or the lender might mandate a minimum or maximum amount whose interest rate you can freeze.
• More complex bookkeeping: If you convert only part of your balance or take out additional funds after your rate lock, you’ll have to keep track of the amount you’re paying back at a fixed rate plus how much you’re paying back at a variable rate. (Your statement should delineate the amounts, but it’s still a bit complicated.)

Fixed- vs. variable-rate HELOC

A variable-rate HELOC translates to some uncertainty when planning your monthly household budget. A fixed-interest HELOC’s payment can’t fluctuate.

So, what’s the downside? For starters, HELOCs with a fixed rate typically have higher initial interest rates than traditional HELOCs, says Sterling. You’re paying for the privilege of that potential rate freeze, in other words. Fixed-rate HELOCs might charge higher origination and maintenance fees than comparable traditional HELOCs, too.

Generally, the terms — length of draw period and repayment period — are the same on both types of HELOCs. However, the fixed-rate variety might impose parameters on borrowing that you won’t have with a variable-rate HELOC.

Why aren’t all HELOC rates fixed?

The traditional, variable-rate HELOCs have long been the predominant type of HELOC, and it continues to be the most widely offered. The interest rate on traditional HELOCs changes with the fluctuations in other interest rates, based on the benchmark rate set by the Federal Reserve.

However, fixed-rate offerings are becoming more common: Lenders began adding them amid the soaring-interest-rate environment of the last two years. Even though HELOC rates have been softening since late 2024, lenders are continuing to offer the option, figuring it’s a feature that appeals to borrowers. Some lenders offer HELOCs with fixed rates right off the bat. Mortgage-lending platform Upstart, for example, sets a percentage based on prevailing rates for your initial withdrawal and for each withdrawal thereafter. While you pay different amounts for different draws, each individual draw will carry the same rate throughout the HELOC’s lifetime.

Can I convert a fixed-rate HELOC to a variable-rate HELOC if rates drop?

When interest rates drop, a variable-rate HELOC might be tempting — and indeed, more financially beneficial than a fixed-rate one. If you’ve already converted your variable rate to fixed, “some lenders may allow the borrower to convert back to a variable rate” later on, says Sterling. The ability to switch back and forth between variable and fixed rates allows you to take advantage of lower interest rates when they become available.

If not, plan B could be a refinance of the HELOC (see FAQ).

Is a fixed-rate HELOC best for me?

If you fear inflation, a fixed-rate HELOC might be the smarter move. That’s because, regardless of what happens with the economy and interest rates, you’ll still have the security of a fixed rate. Remember, a regular HELOC’s rate will fluctuate, so if interest rates decline, you’ll get the benefit. So the-switching-to-a fixed-HELOC strategy works best if you think rates have bottomed out, and that they’ll soon be on the upswing again. If prevailing market rates drop, however, you might not be able to easily convert back to a variable rate and reduce your payments.

In deciding between HELOC options, ask yourself:

• What’s the interest rate environment? “If you are in a rising rate market, a fixed-rate HELOC could be a good option,” says Sterling. “If you anticipate rates remaining low, you may save more with a traditional HELOC.”
• Is there a set amount you need to borrow? “Establishing a fixed-rate lock on a HELOC can often make sense when a customer has a planned expense they need to finance, such as a home renovation project,” says Perveiler. “In that scenario, the customer will have full certainty about the cost of their financing.” Be aware, some lenders require that you borrow a minimum amount to lock in the rate.
• Are you comfortable with payments that could change over time? “If the answer is no, a fixed-rate HELOC could be a good choice,” says Sterling. If it’s yes, a traditional variable-rate HELOC will work just fine — just be sure to budget for big jumps, especially when your repayment period begins.

FAQ

• How does a fixed-rate HELOC compare to a home equity loan?

  Actually, they’re pretty similar. Both are backed by the equity of your property. Both also typically offer lower interest rates compared to unsecured loans. However, a fixed-rate HELOC starts as a revolving line of credit with a variable interest rate that can later be converted to a fixed rate for all or a portion of the current balance. A home equity loan, on the other hand, provides a lump sum of money that’s repaid in installments with a fixed interest rate from the beginning.

  When you fix the rate on a HELOC, you’re essentially turning it — or at least a portion of it — into a home equity loan. The main difference is that, with the HELOC, you can continue to withdraw funds as needed. And repaying them replenishes your credit line.

• Can I convert an existing HELOC to a fixed rate?

  Yes, many lenders will allow you to convert a variable-rate HELOC to a fixed rate during the draw period. To do so, you should contact your lender to express interest in a conversion, says Suslov. “The lender will then assess eligibility based on factors such as the current balance, loan-to-value ratio, and credit score,” says Suslov.

  On the other hand, if you’re in the repayment period and want to convert to a fixed-rate HELOC, there are a couple ways to go about it:

  • Open a new HELOC. The simplest way to get a fixed-rate HELOC is to take out a new HELOC altogether — a fixed-rate one or a hybrid that lets you convert.

  • Refinance your old HELOC. If you open up a new hybrid HELOC, you can use it to refinance your existing HELOC — you’ll simply pay off the balance of your old HELOC using funds from your new line of credit. This strategy will also give you a new draw period. Or, instead of a new credit line, you could refinance with a home equity loan. For example, FourLeaf Federal Credit Union offers the unique option to convert some or all of a variable-rate HELOC to a fixed-rate loan without a fee; you can choose between five-, 10- and 20- year repayment terms.

• Can you pay off a HELOC early?

  Yes, you can pay off and close a HELOC early — during the draw period or at the beginning of the repayment period. But before you do, check if your lender charges an early closure or termination fee, aka a prepayment penalty. Not all lenders impose these charges (it’s more common with banks), but if yours does, it could come in the form of a flat fee or a percentage of your HELOC amount.

Additional reporting by Taylor Freitas