Fixed Rate Home Equity Line of Credit: A Hybrid HELOC

When you need money to pay off debt, cover emergencies, upgrade your home, or make large purchases, a home equity line of credit (HELOC) offers big advantages. It gives you the flexibility to borrow as needed, at a lower rate than unsecured loans.  New HELOC products offered through Achieve provide the added bonus of a fixed interest rate. 

So, what does this all mean for you? Here’s what you need to know:

What is a fixed rate home equity line of credit (HELOC)?

Traditional HELOCs have a variable interest rate, which can make budgeting harder for you as a borrower. That’s because you won’t always be able to predict what will happen to your interest rate or monthly payment over time. Some lenders refer to their fixed-rate HELOCs as “convertible HELOCs” or “hybrid HELOCs.”

However, the fixed rate HELOC offered through Achieve is like a cross between the variable home equity line of credit noted above, and a fixed home equity loan. It allows you to fix the interest rate for some or all of your loan balance, which makes your payments and overall budget more predictable. 

How a fixed rate HELOC works

The fixed rate HELOC is a fairly new product, and its rules vary from lender to lender. They do have a few things in common, however:

• All HELOCs are mortgages. This means your home is used as collateral for the loan.

• Most HELOC programs allow you to borrow against 80% of your home’s value. Some lenders may even allow a higher percentage.

• Similar to a credit card, you only pay interest on your balance—the amount of credit used—not the entire HELOC credit limit.

• At closing, your HELOC becomes active and enters a “draw period,” which indicates the number of years in which you can borrow as needed.

• Eventually, the loan will enter the “repayment period,” which is usually twice as long as the draw period. During the repayment period, you will lose access to the credit line and must make monthly payments until your balance is paid in full. 

• The term of most fixed-rate HELOCs is usually 5 to 30 years, which is inclusive of both the draw and repayment periods.

Before you select and close on a fixed-rate HELOC, be sure to review the rules of the loan so you understand how to draw against it and fix your rate. For instance:

• Your HELOC might have a fixed interest rate at closing. Or you may be able to convert from a variable rate to a fixed rate at one or more times during the term of your loan. 

• You may be able to lock in a fixed rate for the entire loan balance, or just a portion of it.

• You may need to meet minimum draw amounts in order to get a fixed rate.

• There may be a maximum number of times you are able to convert your rate.

• Some lenders may let you revert back to a variable rate if interest rates go down during your loan term.

Fixed rate HELOC terms

Draw period

HELOC terms are divided into two periods—a draw period and a repayment period. Your loan enters the draw period when you close. Most lenders set a draw period that covers the first third of the loan term. For instance, if you choose a 15-year HELOC, your draw period would be five years. With a 30-year HELOC, the draw period would be ten years. 

During the HELOC draw period, your minimum payment will typically be interest-only, based on your current balance and interest rate. In this case, the minimum payment will not reduce your loan balance. However, you can always pay more. 

When your draw period ends, your loan will enter the repayment period. At this time, your payment will increase to cover both the interest due and the monthly amount needed to pay off your balance over the remaining term of your loan. 

It’s important to note that fixed-rate HELOC lenders will only allow you to fix or convert your interest rate during the draw period, not the repayment period.

Interest rates

Variable rate HELOCs usually start with very low introductory rates, which can be less than 3% in some cases. These rates typically apply for 6-to-12 months, and then increase sharply. This increase will dramatically affect your payment. 

With a fixed-rate HELOC, you may have the option to fix your rate for the entire term, or fix it at different points during the term. These benefits usually come at the price of a slightly higher  interest rate. 

Minimum draws

This refers to the minimum amount you will need to draw in order to fix or lock a rate. It can  also be referred to as a “minimum lock” by some lenders. $1,000 is a typical minimum draw amount. In addition to setting this amount, the lender may also limit the number of times you can lock your rate over the life of your HELOC. Because of this, be sure to review your loan package in advance, and plan ahead for at least some of your future draws.

Converting to a fixed rate

With most fixed-rate HELOCs, you will be able to secure the rate on some or all of your current balance, for a term of one to thirty years, depending upon your overall loan term. The longer the fixed term, the smaller your monthly payment. However, by stretching out your total repayment, you will pay more interest over the life of the loan.

As you continue to use your HELOC, you may add to your balance and choose to fix the new amount. Keep in mind that your lender may restrict the number of times you are able to do this. You may also be required to make a minimum draw in order to fix the rate. And, you may be charged a fee to fix your rate. This is yet another reason to review your HELOC loan package ahead of time to make sure you are aware of and understand the fine print. When in doubt, ask questions. 

Pros and cons of a fixed rate HELOC

The pros:

• Protection from interest rate increases

• Predictable payments

• Easier budgeting

• Ability to revert back to a variable rate if rates drop

The cons:

• Higher interest rates than a variable rate HELOC introductory rate

• Harder to find

• Possible restrictions on the number and amount of locks allowed

• Limited ability to revert back to a variable rate if federal interest rates decrease

In general, if you expect to pay off your HELOC quickly, then a variable HELOC, with a lower introductory interest rate, might be the best option for you. Otherwise, it could be safer for your finances to go with the fixed-rate loan.

Fixed rate versus variable rate HELOC

Fixed-rate HELOC

• Interest rate does not change

• Fixed rate is available at closing or during the draw period

• Monthly payments for fixed draws do not change

Variable-rate HELOC

• Interest rate can change monthly

• Rate changes are based on movements in the economy

• Payments can change monthly

Fixed Rate HELOC - HELOC - Home Equity Loan Comparison 

The main difference between a fixed-rate HELOC and a fixed home equity loan is that with a home equity loan, you take the entire loan amount at closing. With a HELOC, you can also take the entire loan amount when you close, or you can access smaller amounts as needed.

Fixed home equity loans offered through Achieve

When you're ready to use your home’s equity to consolidate debt, fund a major purchase, pay for home improvements, or get some much-needed cash, Achieve can help. That’s because we offer a home equity loan product through Achieve Loans that works like a fixed-rate line of credit. By choosing this option, you’ll be able to take advantage of the following benefits:

• Available 14-day quick close

• Fixed interest rate

• Less than perfect credit (down to 600 FICO credit score) is eligible

• Customizable payment terms and schedule

• Autopay discount

We understand that this is a lot to take in, which is why you’ll have plenty of assistance along the way. Your Achieve Mortgage Advisor will help you through the entire application process.  They will also help you understand your total debt situation, and provide realistic pay-off and debt consolidation options. And fear not, this is not a high-pressure sale. In fact,  Achieve Advisors won’t even recommend a debt consolidation loan unless it will save you at least $200 a month.