Adjustable vs. Fixed Rate HELOCs

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A prevailing myth about Home Equity Lines of Credit (HELOCs) is that they’re only available with adjustable interest rates. But interest rates are set by the lender, and a few lenders are happy to offer fixed rate HELOCs.

Loan vs. Line of Credit

Home equity loans are not the same as home equity lines of credit. A home equity loan is just that—a loan. This means a borrower receives a lump sum of money and repays it with interest over a period of time. But a home equity line of credit functions more like a credit card, allowing a borrower to pull money as needed. Accordingly, the borrower only pays interest on the amount borrowed.

HELOCs often come with 10- or 15-year terms, meaning the amount borrowed must be paid back within this time frame. Every lender sets their own terms, but at Generations, borrowers may use their HELOC like a credit card (borrowing and making payments on a rotating basis) for the first five years. On year six, the HELOC goes into repayment-only, meaning the borrower can no longer pull funds. At this point, the borrower must pay back any remaining balance. 10+ years is a long time for interest to accrue, which makes the rate, adjustable or fixed, all the more important.

Adjustable vs. Fixed Rate

An adjustable-rate may change over the course of repayment. This means it may rise as time goes by, costing the borrower more in interest. On the other hand, a fixed rate is locked in at the beginning of the lending process. It will not change during the life of the line of credit.

With an adjustable-rate HELOC, your interest rate may change every year or even as often as every six months. However, by locking in a fixed rate on your HELOC, you’re securing yourself against rising interest rates. And with experts predicting multiple interest rate hikes in the foreseeable future, this may benefit borrowers who want to save money.

Unfortunately, finding a fixed-rate HELOC may not be easy. The majority of lenders offer adjustable-rate HELOCs. This leaves the door open for the rate to go up as the line of credit remains open. However, some lenders (including Generations) offer competitive fixed-rate HELOCs that guarantee your rate will not rise. Before applying for a HELOC, it’s important to know which kind of rate—adjustable or fixed—your lender offers. You also need to understand the repayment terms.

Other Considerations Regarding Interest Rate

The amount of interest a borrower pays will also be affected by the amount of money borrowed. In Texas, a borrower who owns their house outright may borrow up to 80% of the home value. If the borrower does not own the house outright (meaning there is still a mortgage or lien), they may only borrow up to 70%.

However, if the borrower pays off a mortgage with a HELOC, they may qualify for up to 80% of their home value. (It should be noted that a Texas borrower may only have one home equity product at a time; they cannot have more than one home equity loan OR one home equity line of credit.)

Ready to Tap Into Your Home Equity?

HELOCs are long-term financing options that may take 10 or more years to pay back. This makes it even more important that you choose the right product for your situation. If you’re interested in learning more about your options at Generations, speak to one of our Home Loan Specialists by calling 210-230-9380.



Samantha Salazar is a University of Texas at Austin alum who has worked in the finance and marketing industry since 2011. She has a background as a CUNA Certified Credit Union Financial Counselor and is a Class II graduate of the Latina Leadership Institute (LLA). True to her millennial nature, Samantha loves coffee, covers her home in hanging plants, lives a frugal lifestyle, and works hard so that her dog, Olive, can have the backyard she deserves.