How do fixed-rate HELOCs work, and which lenders offer them? #CashNews.co

When you take out a home equity line of credit (HELOC), you usually get a variable interest rate. This means your rate could decrease or increase drastically over your repayment period. While the current average rate on new HELOCs is roughly 8.50%, your APR could eventually skyrocket to 18% — the maximum annual percentage rate (APR) most HELOC lenders charge.

One way to keep your rate down is to look for a fixed-rate HELOC. These products can be tough to understand, but they essentially let you lock in a rate on some or all of your HELOC balance by turning it into a loan.

Before applying for a HELOC, homeowners must understand the details of a fixed-rate line of credit. This will help you take advantage of fixed rates and avoid putting your home in jeopardy.

In this article:

Dig deeper: Adjustable rates vs. fixed rates — how they work

A fixed-rate HELOC is similar to a traditional HELOC in that both products give you a line of credit with your home as collateral. The main difference between the two is that with the fixed-rate option, you can switch some or all of your balance from a variable rate (a rate that changes periodically) to a fixed rate.

With fixed-rate HELOCs, you can lock in a rate any time between when you close on the loan and when the draw period ends, which can be a 10-, 20-, or even 30-year timeframe, depending on the lender. Here’s what to know about converting to a fixed interest rate:

• You choose the portion of your existing HELOC’s balance to lock into a fixed rate.

• The balance with a locked rate will convert into a loan.

• You’ll have to cover your minimum monthly HELOC payment plus payments on the lock-rate loan.

• HELOC lenders typically let you lock separate rates in on several different balance amounts.

• You can usually unlock and relock rates multiple times.

• Depending on the lender, you may pay a fee each time you lock or unlock a rate.

Having the option to lock in a new rate can be advantageous when market rates drop or are expected to rise. However, your rates won’t match what’s available on the market since they’re impacted by personal factors, including your credit rating and the value of your home. The available fixed rates will also be higher than the variable rate.

Read more: How to get the lowest mortgage rates possible

HELOCs have complicated terms and conditions, and they get even more complex when you add all the rules accompanying the fixed-rate option. That means you have a lot of room to make expensive mistakes with these products, so you’ll need to take extra care to understand how your line of credit works up-front.

Here’s an overview of how to use a HELOC with fixed rates:

1. Find a lender that offers fixed rates on their HELOCs. If you already have a HELOC, check if your lender provides a rate-lock option.

2. Assuming you don’t have one yet, apply for the HELOC. This process includes submitting income documents and having your property appraised.

3. Once opened, monitor your account to see when interest rates drop. You should also keep an eye out for interest rate forecasts to see when rates are likely to rise.

4. When you want to lock in a fixed rate, follow the lender’s process, request to transfer some or all of your balance to a fixed-rate loan, and select your repayment plan.

5. If applicable, pay the transfer or conversion fee.

6. Make payments on the converted loan. Depending on the lender, the fixed-rate loan will either have separate payments from the rest of your balance, or your total minimum monthly payment will increase.

7. If rates drop further, you can unlock the rate to revert it to an adjustable rate or relock it to a lower rate.

HELOCs are unique home products that typically work more like credit cards than traditional home loans. You don’t receive all your money at once, and you can tap into the line of credit as needed.

While any HELOC can be used to achieve your financial goals — such as paying off high-interest credit card debt, renovating your home, or going back to school — these lines of credit also put you at risk of foreclosure if you miss payments. You could also end up with astronomical interest charges. Here’s what you should consider if you’re considering a fixed-rate HELOC to keep your rates down:

• Avoid paying higher rates when interest rates rise

• Pay off the principal sooner than if you had interest-only payments (which are common with variable-rate HELOCs)

• Monthly payments are more predictable with fixed rates than adjustable rates

• Available fixed rates are usually higher than variable rates

• The longer the rate-lock period, the higher your rate will be

• Rate-locked balances usually have separate repayment terms

• More complicated terms can lead to expensive mistakes

• When rates drop, you may have to unlock your rates in order to benefit

• You may have to pay a fee each time you lock and unlock your interest rate

Learn more: HELOC vs. home equity loan — which should you choose?

Let’s say you have a $50,000 HELOC and draw $20,000 right away for home renovations. During the draw period, you’ll begin making interest-only payments each month.

After a few years, interest rates drop. To save money, you draw $10,000 and request a rate lock on the draw.

As a result, you now have $20,000 left that you can draw from your HELOC. You also have a $10,000 rate-lock loan that you must pay back in monthly installments, along with minimum payments to cover interest charges on the original draw of $20,000.

A handful of trusted banks and credit unions offer fixed HELOC rates. Before choosing where to apply, compare creditors’ rates and fees since there’s a lot of variation from one lender to the next. Here’s a glance at some of your options.

Read Yahoo Finance’s review of U.S. Bank mortgages

Taking out a HELOC is always a risk since you’ll have to forfeit your home if you can’t make the payments. But if you plan to take out a HELOC, it’s best to look for one with a fixed-rate option.

Why? Because you can save a lot of money on interest charges.

With the fixed-rate HELOC, you convert some or all of your balance to a loan and start paying down the principal immediately. While you might not like the increased monthly expense, going this route can save you money on interest charges and prevent you from facing a large increase in your payments when the draw period ends.

Dig deeper: How to get a HELOC in 6 simple steps

If you’re considering a HELOC, choosing a fixed-rate option can help you save money by locking in your APR before market rates rise.

HELOCs are riskier than primary mortgages for several reasons. They increase the amount of debt backed by your home, and they often have variable interest rates with high rate caps, so it’s difficult to predict your future payments. Choosing a fixed-rate HELOC can offset some of the risks regarding interest rates.

A common HELOC rate is around 8% or 9%, but rates vary based on factors such as your personal finances, the lender you choose, and your term length. Also, remember that fixed HELOC rates are typically higher than variable ones.

This article was edited by Laura Grace Tarpley.