iQuanti: Most Home Equity Line of Credits (HELOC) offer variable interest rates: not always the best option for homeowners that are looking for fixed, consistent payments every month. 

The latest trend in lending is the introduction of fixed-rate HELOC options, which offer the traditional flexibility of HELOC borrowing with the stability of a fixed interest rate.  

Why Choose a HELOC?

With home values on the rise across the country, homeowners are experiencing massive equity increases and are choosing to pull money out to:

• pay off consumer debt like high interest credit cards, 
• make major renovations to the home, 
• take a much needed vacation, or 
• upgrade the family lifestyle after years of hard work.

HELOC interest rates are very competitive when compared with personal loans and much more sensible than putting charges on credit cards. With the ability to convert variable-rate HELOCs to fixed interest rates, the attractive appeal of HELOCs is starting to make even more financial sense for many families.

How Does a Fixed Rate HELOC Option Work?

For HELOCs with a fixed-rate option, borrowers first move through a withdrawal period, where the borrower can take out funds up to their agreed borrowing limit. Most HELOC lenders will allow borrowers to make only interest payments against their borrowing during this withdrawal period. When the withdrawal period ends, the borrow can't take out more funds, and starts the repayment period, where the borrowers pays back both the principal and any remaining interest.

With a fixed-rate option, lenders can adjust the HELOC's variable rate at the start of the repayment period. Sometimes lenders will allow the entire amount of HELOC borrowing to be converted to a fixed-rate loan, while other instances split the HELOC borrowing into a fixed-rate loan and a portion that remains under the original HELOC's variable rate. 

With a traditional HELOC that has a variable interest rate, borrowers cannot control the monthly payment because the rate is determined by the market. When the market interest rates are lower, monthly payment will move lower. But, when the market interest rates rise (as the Fed funds rate is rising in 2022), the monthly payment rise with it. 

The threat of rising Federal rates in 2022 can make any variable-rate loans, including HELOCs, unattractive. A HELOC with a fixed-rate option aims to soften the blow by giving borrowers a stable fixed-rate against their HELOC.

Choosing the Best HELOC Option

While a traditional HELOC offers high borrowing limits based on your equity, competitive interest rates (especially when compared with personal loans), monthly payments of only interest within a ten-year withdrawal period, tax deductions for funds used for home improvements, and flexible borrowing, a variable interest rate in a rising-rate economy could make alternatives like home equity loans or cash-out refinancing a bit more appealing.

But with the emergence of HELOCs that feature fixed-rate options, borrowers can enjoy the benefits of HELOCs with the ability to convert some of the HELOC debt to a fixed rate that will stabilize monthly payments in an inflationary economy. 

By combining the borrowing power of a HELOC with the predictability of fixed rates, lenders are starting to make HELOCs a preferred option for borrowers of all types.