• Fixed-rate HELOCs allow qualified homeowners to borrow against their home equity as needed without the unpredictable repayment schedule typical of traditional variable-rate HELOCs.
  • The stability of a fixed interest rate enables borrowers to calculate future payments, which simplifies budgeting and long-term financial planning.
  • Some lenders allow borrowers to “unlock” a fixed rate, which can be helpful if interest rates drop. Doing so allows the borrower to exchange their existing rate for a new, lower rate.

Are you looking for a way to repeatedly convert some of your home’s value into cash with a predictable repayment plan? Perhaps you're looking to improve your home, but you're not quite sure how much the project will cost. And you don't want to risk a variable interest rate, knowing that interest rates could potentially increase in the future. A fixed-rate home equity line of credit (HELOC) may be a good solution for you.

Fixed-rate HELOCs allow you to borrow against home equity with a revolving credit line you can tap into as needed. Unlike traditional HELOCs with interest rates that fluctuate with market conditions, a fixed-rate HELOC allows you to “lock in” a set interest rate for part or all of your balance. This means your interest rate would remain unchanged rather than move up and down as variable rates do. In turn, this results in greater stability and predictability for you.

In this article, we’ll:

  • Explain how fixed-rate HELOCs work,
  • Share common uses for HELOCs,
  • Explore the pros and cons of a fixed-rate HELOC, and
  • Compare alternatives to fixed-rate HELOCs.     

Here is what you need to know about fixed-rate HELOCs.

How Fixed-Rate HELOCs Work

Like traditional HELOCs, fixed-rate HELOCs are revolving lines of credit. Similar to a credit card, HELOC borrowers can charge purchases and repay the debt plus interest in manageable installment payments.

The life of a HELOC is often divided into a “draw period” and a “repayment period.”[1]

During the draw period, you can charge against the line of credit as needed, up to the maximum credit limit noted in the HELOC agreement. Depending on the terms of your HELOC, you may be able to pay interest only. When the draw period ends, you will no longer be able to borrow against the credit line.

During the repayment period, you make monthly payments to repay the amount borrowed plus interest. By establishing a fixed rate of interest upfront, you can calculate precisely how much your monthly payments will be. You can also count on stable monthly payments that will not be affected by changing market rates.

Additional Information About Fixed-Rate HELOCs

Before choosing a fixed-rate HELOC, you should be aware of the following details:

  • A minimum balance may be required to lock in the interest rate. At PNC Bank, for example, you need to have a balance of $5,000 or more to choose the fixed interest rate option. 
  • You may be able to lock and unlock the interest rate. If interest rates drop, you could potentially capitalize on the lower rates by paying a small fee to unlock your current rate and lock in the new, lower rate like the PNC Choice HELOC, which offers the ability to lock or unlock the rate on qualifying balances at any time during your draw period. 
  • You will need to qualify for the HELOC. Lenders have HELOC requirements relating to factors like credit scores, debt-to-income (DTI) ratios, and the home’s loan-to-value ratio (LTV). 
  • Terms and credit limits vary. The repayment period is often 10 or 15 years, but it can be longer or shorter, depending on the agreement with your lender.[1] The draw period often lasts up to 10 years. The credit limit can also vary, depending on the same factors that are considered when qualifying for the HELOC.

Common Reasons for Choosing a HELOC

HELOCs are a popular option for borrowers who want to access their home equity but don’t know exactly how much they will need to borrow. Common uses of HELOCs include:

  • To cover an unexpected expense (like car repairs or emergency medical bills, for example)
  • To finance home renovations or repairs
  • To free up capital for the down payment on an investment property
  • To consolidate existing debts
  • To pay for college
  • To start a business
  • To buy a second home or vacation property

Benefits of Fixed-Rate HELOCs

All HELOCs, both fixed-rate and traditional, provide certain advantages, such as:

  • The flexibility to borrow on an as-needed basis rather than taking a lump sum.
  • Lower interest rates than credit cards or unsecured personal loans.
  • Potential tax deductions when used specifically for home improvement projects.[2]

However, fixed-rate HELOCs offer a few key advantages over traditional HELOCs as well. Here is a closer look at the reasons a borrower may prefer a fixed-rate HELOC.

1. Interest Rate Stability

Locking in an interest rate means that your rate will not increase if market interest rates rise. This stability offers peace of mind to borrowers who don’t want to worry about the potential for rate increases. 

2. Predictable Monthly Payments

Interest rates directly affect monthly payments. With a variable interest rate, rising market rates could cause your monthly payment to increase, even if no additional amount has been borrowed since the previous billing period.

3. Potential for Future Financial Planning

Predictable monthly payments can make budgeting easier. This, in turn, makes it simpler to create financial plans for the future. For example, if you know your fixed-rate monthly payment during the repayment period will be $250, you can confidently allocate $250 per month to cover this expense. Meanwhile, variable interest rate adjustments make it more difficult to plan for future expenses or changes in income.

The Potential Drawbacks of a Fixed-Rate HELOC

Both traditional and fixed-rate HELOCs come with potential disadvantages, including:

  • Using your home as collateral for the loan, which means your home could be foreclosed on if the loan is not repaid. 
  • Having an open credit line can tempt some borrowers to overspend. 

In addition to these general HELOC risks, there are a few considerations specific to fixed-rate HELOCs.

1. Higher Initial Rates Compared to Variable Options

Generally speaking, lenders offer lower interest rates for variable-rate HELOCs and higher rates for fixed-rate HELOCs.[1] This is because having a fixed rate shifts the market risk of raising interest rates from the buyer to the lender. If interest rates increase, lenders are essentially losing money to fixed-rate borrowers. So lenders offer lower rates on variable-rate HELOCs to incentivize borrowers to take the risk. 

2. Less Flexibility in Interest Rate Adjustments

If interest rates decline, variable-rate HELOCs automatically adjust to the new lower rates. However, if you have a fixed-rate HELOC, you may need to unlock the current rate manually to take advantage of the new lower rate. Some lenders,  PNC Bank among them, allow you the convenience of unlocking the existing rate and locking into the new rate online. 

However, you may be charged a fee for unlocking and locking, and there may also be limits to the number of locks a borrower can make on a single HELOC. Check your fixed-rate HELOC contract to learn about any fees or restrictions on changing rates.

3. Possible Fees and Penalties

As with any loan type, fixed-rate HELOCs may come with fees and/or penalties. Similar lending options, like home equity loans and HELOCs, often charge upfront fees for a home appraisal, loan application processing, and closing.[1] It is also common practice to charge a late payment penalty on any loan in which the payment is not received on time. 

Fixed-rate HELOCs may charge a pre-payment penalty if the loan balance is paid off ahead of schedule. This penalty is enforced to help offset lost interest for the lender. 

Alternatives to a Fixed-Rate HELOC

Before deciding on a fixed-rate HELOC, it may be helpful to see how similar options compare.

Fixed-Rate HELOCs vs. Traditional HELOCs

Traditional HELOCs work in much the same way as fixed-rate HELOCs but with a variable interest rate rather than a fixed rate. For the borrower, a traditional HELOC can mean a lower introductory interest rate. Plus, because the rate automatically fluctuates with the market, a decline in rates means your interest rate would go down without any fees or any action taken on your end. On the other hand, if market rates increase, the rate on your traditional HELOC would automatically increase as well.

Fixed-Rate HELOCs vs. Home Equity Loans

Like fixed-rate HELOCs, home equity loans allow you to borrow against the value of your home with a fixed interest rate, using the home as collateral for the loan. However, the disbursement from a home equity loan comes in one lump sum rather than the revolving line of credit offered by a HELOC. This lump-sum payout may work well for those who know precisely how much money is needed and are concerned about the possibility of overspending if given an open line of credit. The interest on a home equity loan may be tax-deductible if used to finance home improvements. If tax deductions are a serious consideration, please discuss this possibility with a tax professional to fully understand how each option could affect your tax liability.

Fixed-Rate HELOCs vs. Personal Line of Credit

Like HELOCs, personal lines of credit are revolving credit lines that allow you to borrow as needed up to the line maximum. Unlike HELOCs, personal lines of credit are not secured by collateral. This means your home will not necessarily be at risk of foreclosure if you cannot repay the loan. This also means greater risk for the lender, so personal lines of credit often come with higher interest rates than HELOCs.[1] Personal lines of credit generally have a variable interest rate rather than the steady rate of a fixed-rate HELOC. 

Fixed-Rate HELOCs vs. Credit Cards

Credit cards offer open credit lines, just like HELOCs. Credit card interest rates can be variable or fixed, although variable rates are more common. Some credit cards offer 0% introductory rates, which provides a good opportunity to save on interest expenses for those who plan to repay the balance before the introductory period expires. Some cards offer benefits, like cash back or points that can be redeemed for travel, gift cards, or merchandise. Credit cards do not require collateral, so they typically come with a higher interest rate and lower credit limit than HELOCs.

Fixed-Rate HELOCs vs. Cash-Out Refinancing

Cash-out refinancing is a special type of mortgage refinance ("refi" for short) in which the homeowner replaces their current mortgage with a new mortgage of a higher loan amount than the current mortgage balance. The refinance loan repays the original mortgage loan and allows the borrower to pocket the difference between the new mortgage amount and the original loan's balance. Interest rates on the refi loan are based on current rates. So, a cash-out refi works best when interest rates are lower than the rate on the original mortgage. When interest rates are lower, the borrower gets access to the cash needed while potentially saving money on interest expenses over the life of the loan.

    The property securing the CHELOC must be located in a state where PNC offers home equity products. PNC does not offer the CHELOC product in Alaska, Hawaii, Louisiana, Mississippi, Nevada and South Dakota.