Should You Convert Your HELOC to a Fixed-Rate Loan?

A home equity line of credit is a revolving line of credit with a variable interest rate similar to a credit card. The main difference is that you’re putting your home up for collateral when you take out a HELOC.

HELOC interest rates can increase or decrease as financial markets shift. If rates drop, you’ll save money. However, if rates rise, you will pay more interest than the loan’s original term when it was issued.

HELOCs increase based on market conditions, including the benchmark rate set by the Federal Reserve. 

To erase the uncertainty that accompanies a traditional HELOC, lenders also offer a fixed-rate HELOC that locks in payments throughout the loan.

With a fixed-rate HELOC, you can withdraw as much of your credit line as you want, just as with a variable-rate HELOC. Unlike a variable rate HELOC, the same interest rate will apply throughout the draw period.

If your HELOC has a conversion option, you can take advantage of lower interest rates and lock in a better deal during the draw period. Some lenders also allow borrowers to convert back to a variable rate later if market conditions become more favorable.

The fixed-rate portion of a HELOC can be locked in for five to 30 years. A locked-in HELOC is similar to a second mortgage when the repayment period kicks in, and the HELOC is paid back like a typical mortgage.

Typically, the draw period on a HELOC lasts ten years, during which time you can withdraw funds up to your line of credit as needed. As you borrow money, most HELOCs only require paying interest on your balance throughout the draw period.

Once the repayment term starts, you’ll switch over to principal and interest payments, which are higher.

Pros and Cons of a Fixed-Rate HELOC

There are benefits and drawbacks associated with a fixed-rate HELOC. 

You avoid interest rate fluctuations, which creates stable and predictable repayments, and you can lock in interest rate declines if you convert your loan at a favorable time.

However, the trade-off is that fixed-rate HELOCs may have a higher initial interest rate than traditional HELOCs. You’re paying for the privilege of rate freeze stability.

In addition, depending on how the conversion takes place, you could lose your remaining time with your HELOC’s draw period. If you want the security of that line of credit for future emergencies or large purchases, you might lose this option.

What Factors Impact Fixed-rate HELOC Loans?

Interest rates on all home equity products vary based on the following:

• Market rates
• Your location
• How much you’re looking to borrow against your home
• Length of your term 
• Your credit score
• Your debt-to-income ratio (DTI)

What are Your Conversion Options?

If you’ve taken out a variable-rate HELOC and want to convert to a fixed rate, there are a couple of ways to accomplish this.

You can open a new HELOC. The simplest way to get a fixed-rate HELOC is to take out a new HELOC altogether. This is best if you’re near the end of the draw period for your current HELOC.

You can refinance your old HELOC. If you open up a new HELOC, you can use it to refinance your existing HELOC by paying off the balance of your old HELOC using funds from your new line of credit.

The terms and conditions of what you can do with a HELOC will vary by lender.

HELOC lenders may allow you to convert some or all of your variable-rate HELOC to a fixed rate during the draw period, but once you enter the repayment period, your lender might not allow this option. 

For example, you may only be able to lock in new HELOC withdrawals at a fixed rate rather than convert existing debt.

A lender might allow you to convert part of your current balance from a variable to a fixed rate but limit it to a specific period or dollar amount. 

Sometimes, your lender may waive loan fees if you roll a variable-rate HELOC balance into a fixed-rate HELOC or home equity loan. If you borrow from a new lender, expect the application, loan origination, appraisal, and annual fees to be passed on to you.

Also, check with your HELOC lender to see if you’ll be subject to early prepayment penalties to pay off and close your HELOC account.

Take out a fixed-rate home equity loan.  You can pay off your HELOC and lock in your rate for the life of your home equity loan. However, the payoff period for a fixed-rate home equity loan may be shorter, so the monthly cost could still be higher.

Some lenders may let you roll your HELOC balance into a fixed home equity loan. You can sometimes keep your HELOC open after the rollover, allowing you to continue borrowing against your remaining home equity. 

A lender may also apply fixed rates to a specified number of individual draws based on when the money is withdrawn.

Refinance your mortgage loan.  If you took out a home equity loan, rolled into a new HELOC, or used a cash-out refinance, you can refinance again when interest rates are more favorable.

However, the fees involved with a refinance could cancel out any savings you’d recognize from a rate drop, so work with your lender to see if the numbers pencil out in your favor. The upside is that you only have to deal with one monthly payment, and this option will likely get you the lowest fixed rate. Depending on your mortgage, you can also stretch out your payments for up to 30 years.

With a cash-out refinance of your current mortgage, you can use the cash portion to pay off the HELOC. This has relatively high up-front costs since your origination fees are based on the entire mortgage amount. So this option works best if you have a fairly large balance on your HELOC, or refinancing will also allow you to reduce your current mortgage rate.

Ask your lender to renegotiate your rate. If your HELOC lender knows you’re shopping for a new loan, you may be able to ask for a reduced loan rate. If rates have dropped since you locked in your fixed rate, consider calling your lender to ask about your options.

One Final Thing to Consider

Most HELOCs are regulated, so there are limits to how fast and high their interest rates can rise. Still, these upper limits are often as high as 18%. Interest rates may not climb that high anytime soon, but the risk of a HELOC during inflationary periods is similar to the risk of credit card borrowing.

And credit card borrowing is hardly ever an inexpensive financial strategy.