Adjustable vs. Fixed Rate HELOCs

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By Samantha Salazar


A prevailing myth about Home Equity Lines of Credit (HELOCs) is that they’re only available with adjustable interest rates. The fact is interest rate terms are set by the lender, and a few lenders are happy to offer fixed rate HELOCs. Here are a few reasons fixed rate HELOCs may be the right product for your needs.

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 that amount with interest over a set 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 and 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
In simple terms, an adjustable-rate may change over the course of repayment, possibly rising 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 and 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, leaving 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 is offering, as well as the repayment terms of the line of credit.

Other Considerations Regarding Interest Rate
The amount of interest a borrower pays will also be affected by the amount of money borrowed. In the state of Texas, a borrower who owns their house outright (meaning there is no mortgage on the house) may borrow up to 80% of the home value. If the house is not owned outright (meaning there is still a mortgage or lien on the house), a borrower may only borrow up to 70%.

However, if the borrower chooses to pay off a mortgage with a HELOC, they may at that time 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, making 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.