When interest rates climb, such as with a variable interest rate home equity line of credit (HELOC), your monthly expenses can become more unclear. Fortunately, you can lock in the interest rate for a portion of your outstanding balance. That way, your monthly payments will not vary during the lock term. But, before you ask yourself, “Should I lock in my HELOC rate?” read this article to make an informed conclusion.

Locking your HELOC rate can help you manage your monthly budget better as it gives you control over the monthly payments you make and the loan term. A traditional HELOC has a variable interest rate – making the interest you pay on the balance fluctuate based on market conditions. But, a fixed-rate HELOC can protect you from interest rate hikes. Locking in your HELOC provides you with the stability of predictable monthly payments. You may be able to lock your HELOC for five to 30 years.

However, keep in mind that if you lock the rate, it’s according to fixed-rate pricing – something that may be higher than the current variable rate.

Fixed-rate HELOC comes with its own pros and cons. If you’re thinking of locking in a part of your balance, do consider these factors before applying.

Inflation

A fixed-rate HELOC loan will make more financial sense during inflation when it’s a soaring rate environment. If the market changes for the worse, you’ll still be protected by the locked-in rate on your loan.

Raising interest rates is a way to combat rising inflation. But, if you have a fixed rate, it won’t affect your loan repayments. And that’s a big advantage. 

Timeline

If you’re locking in your HELOC for an ongoing home improvement project, it will be financially beneficial for you. Since it’s a fixed-rate loan, there’s no stress or hurry to begin the construction work before the interest rate increases.

A planned expense with certainty will also aid in better planning of your home renovation project.

Rate fluctuation

If you’ve locked in your HELOC at a fixed rate, you may get stuck with a higher interest rate than the current one. Keep in mind that interest rates may change often with a conventional HELOC. Therefore, you may have a chance to get lower rates. But, a locked-in HELOC doesn’t offer you this opportunity.

Minimum withdrawal loan amount

If you’re planning to lock your HELOC, the loan lender may make it mandatory for you to utilize a minimum amount of your HELOC. This condition may not work for borrowers who are trying to stay within a strict budget. Always confirm with your lender regarding minimum withdrawal amounts.

Higher fees

Typically, there may be prepayment penalties, penalties for closing the loan early or refinancing, or hidden fees. Moreover, some loan lenders may charge a fee for every rate lock in a year. If you’re applying for a loan or converting your existing HELOC into a fixed-rate one, always review your HELOC’s terms and conditions before signing on the dotted line. 

How Does a Fixed-rate HELOC Work?

If a regular HELOC is akin to a big credit card, a fixed-rate HELOC is similar to a second mortgage. Actually, it’s a hybrid of a home equity loan (which gives you a lump sum at a fixed rate) and a home equity line of credit. It allows you to freeze a portion or all of your balance at a fixed interest rate, protecting you against market fluctuations that impact rates.

With a fixed HELOC, you can withdraw as much or as little of your credit line as needed, just as with a variable-rate HELOC. Unlike a variable-rate HELOC, though, the interest rate on any amount you use will have the same interest rate applied throughout the draw period.

If your HELOC lender offers a fixed-rate option, you can usually do the conversion at closing or during the draw period, says Laura Sterling, vice president of Marketing at Georgia’s Own Credit Union. Locking in a fixed interest rate can provide the stability of predictable monthly payments.

The fixed-rate portion of the HELOC can be locked in for terms ranging from five years to 30 years, during which time the loan is paid back like a typical mortgage, says Vikram Gupta, executive vice president and head of Home Equity at PNC Bank.

Read Also: The Relationship Between HELOC Rates and Credit Scores

As with any financial product, there are both benefits and drawbacks associated with a fixed-rate HELOC. Here are some of the considerations to keep in mind.

Pros of a fixed-rate HELOC

• Avoid interest rate fluctuations
• Stable and predictable repayments
• Potential to lock in interest rate declines

Cons

• May have a higher initial interest rate than a traditional HELOC
• May carry more fees and penalties
• Harder to find: Not all lenders offer fixed-rate HELOCs

A variable-rate HELOC translates to some uncertainty when planning your monthly household budget. A fixed-interest HELOC’s payment can’t fluctuate.

So, what’s the downside? For starters, a HELOC with a fixed rate typically has higher initial interest rates than traditional HELOCs, says Sterling. You’re paying for the privilege of that potential rate freeze, in other words. Fixed-rate HELOCs might charge higher origination and maintenance fees than comparable traditional HELOCs, too.

Generally, the terms — length of draw period and repayment period — are the same on both types of HELOCs. However, the fixed-rate variety might impose limits on borrowing that you won’t have with a variable-rate HELOC.

Like any home equity loan or line of credit, the interest rate on your fixed-rate HELOC will depend on your credit score and current market rates.

Typically, lenders will let you freeze some or all of the balance on your HELOC at any point during the draw period. They might limit how many times you can lock in a fixed interest rate on your HELOC (for example, US Bank allows customers to have up to three fixed-rate balances at any time). Also, some lenders require a minimum balance (at Bank of America, it’s $5,000) to switch to a fixed interest rate.

Depending on your lender, you might be able to lock the rate yourself through your online account, or you may need to contact a representative to do so.

Factors to Consider With a Fixed-rate HELOC

Inflation/interest rate moves

In terms of inflation, a fixed-rate HELOC might be the smarter move. That’s because regardless of what happens with the economy, inflation and interest rates, you’ll still have the security of a fixed rate.

Case in point: The Federal Reserve raised its key lending rate throughout 2022 and 2023 in a continued effort to combat inflation. This strategy led to higher interest on variable-rate financial products, including HELOCs — which surpassed 10 percent in late 2023.

The flip side is also true, however—if prevailing market rates drop, you might not be able to easily convert back to a variable rate and get a lower payment.

Purpose of the HELOC

A fixed-rate can be especially beneficial if you’re using the HELOC to make home improvements. That’s because there’s no hurry to begin remodeling before the rate increases.

“Establishing a fixed-rate lock on a HELOC can often make sense when a customer has a planned expense they need to finance, such as a home renovation project,” says Gupta. “In that scenario, the customer will have full certainty about the cost of their financing.”

A fixed-rate HELOC might also come in handy in an emergency, such as an unforeseen medical bill, or to consolidate debt.

Cost and fees

While a fixed-rate HELOC lends certainty to your budget, there’s no telling how interest rates might change in the future. If rates fall, you might find you were better off with a variable-rate line of credit. There might also be hidden fees, such as penalties for paying the line off early or a fee for exercising the conversion option.

“Borrowers may want to look out for annual fees and rate locks,” says Sterling. “Some lenders cap the number of fixed-rate locks that a borrower can do annually and may charge a fee for each rate lock. Borrowers should also be aware of minimum withdrawal amounts.”

Minimum borrowing requirements

Some lenders require a minimum outstanding balance on the line of credit before you can get the fixed rate. This might not work well for you if you’re trying to stay within a certain budget, forcing you to borrow funds you don’t really need.

They might also restrict how many times you can switch from a variable rate to a fixed one.

The traditional, variable-rate variety has long been the predominant type of HELOC offered by lenders, and it continues to be the most widely offered. The interest rate on traditional HELOCs changes with the fluctuations in other interest rates, including the benchmark rate set by the Federal Reserve.

However, fixed-rate offerings are becoming more common as lenders look for ways to help consumers save money when borrowing amid the soaring interest-rate environment of the last two years. Fixed-rate HELOCs offer protection in such climates. That was mortgage lender Guaranteed Rate’s thinking in adding a fixed-rate HELOC to its product line in 2022.

Are HELOCs Ever a Good Idea?

Residential real estate just keeps on rising in value — and that means a home can be a valuable source of wealth to tap. One of the most popular ways to do so is via a home equity line of credit, or HELOC. Like a giant credit card, it allows you to borrow from your ownership stake (equity) as needed over a set time frame, then repay it over decades. If you own a sizable amount of your home outright, you may have access to a five or even six-figure sum — often, much more than you could borrow with a personal loan.

There’s a lot to like in a HELOC. However, it also comes with risks. You must put your home up as collateral, and you pay interest at a fluctuating rate — which means it could rise, boosting your repayments dramatically.

Let’s look at all the pros and cons of a HELOC.

Pros

While home loan interest rates overall have risen dramatically since 2022, HELOC rates still tend to be lower than those on credit cards and personal loans. If you qualify for the best rates, a HELOC can be a less expensive way to consolidate debt or finance a home renovation.

• Flexibility

With a HELOC, you use the funds as you need them, then repay only what you borrowed (with interest). If you wind up needing less cash than you thought, you’ll have smaller repayments, too. In contrast, home equity loans and personal loans offer a lump sum that has to be repaid in full (also with interest), whether you use all of the money or not.

Most home equity lenders also offer flexibility in terms of how you access your HELOC funds, such as debit cards, checks, ATMs and online transfers. In addition, some allow you to convert all or a portion of your HELOC balance to a fixed rate, so you won’t risk getting hit with higher interest later on.

Another point of flexibility: repayment. Many lenders also offer an interest-only HELOC, with which you only pay interest — no principal — during the draw period (typically 10 years). Doing so helps keep your payments manageable. Of course, you can always opt to pay back the principal, all or in part, which in turn elevates your credit line.

• Possible tax deduction

Even after the Tax Cuts and Jobs Act of 2017, you can still deduct interest paid on a HELOC if you use the money for home renovations. Specifically, the IRS allows deductions on the interest if the HELOC funds are used to “buy, build or substantially improve the residence.” You can only take the deduction up to a certain threshold, however, based on your total mortgage debt. You must also itemize deductions to take advantage of this write-off.

• Potential boost to credit

Two of the most important components of your credit score are your payment history and credit mix. Adding a HELOC to your history and paying it on time can help boost your score. (However, keep in mind that changing your credit utilization ratio by taking on the HELOC could actually make your score go down, too.)

• High loan limits

HELOCs are intended for large amounts — at least five figures. Frequently, $10,000 is the minimum credit line you can establish. The benchmark HELOC whose rate Bankrate tracks is for $30,000. Many lenders offer credit lines as high as $500,000 or $750,000.

How big your line of credit is, however, depends on the equity in your home — that is, how much of it you own outright. Generally, you can borrow up to 80 percent of your equity stake — sometimes as much as 90 percent, depending on the lender and your financials. However, your outstanding mortgage also impacts the amount of equity you can tap. When they say you can borrow up to 80 percent, they mean the sum total of all your home-based debt (current mortgage plus new HELOC) can’t exceed 80 percent of your home’s value. In financial-speak, this is called your combined loan-to-value ratio (CLTV).

For example: Assume your home is worth $425,000 and your outstanding mortgage balance is $250,000. This means you have $175,000 in equity and a loan-to-value (LTV) ratio of 59 percent ($250,000 / $425,000 * 100). Your lender lets you borrow up to 80 percent of your equity. That means if the lender approves you for a HELOC, your maximum credit line is $90,000 ($425,000 *.80 – $250,000).

Cons

• Rates are variable

While home equity loans come with a fixed interest rate, HELOCs have variable rates. This means that your rate can go up or down based on economic conditions,  the Fed’s monetary policy and other factors, which in turn affects your payments. Even if you take out a HELOC at a lower rate, you could face much higher interest rates when it comes time to repay.

House is on the line

A HELOC is a secured loan, meaning you put your home up as collateral. While secured loans tend to have lower rates, you’re taking on some additional risk by putting your house on the line. “Because you are borrowing against your home, if you can’t make your monthly payments, you risk foreclosure,” says Sean Murphy, assistant vice president of mortgage operations, closing at Navy Federal Credit Union.

• Reduced equity cushion

When you borrow through a HELOC, you’re borrowing against your home’s equity. If home prices drop, you could wind up owing more than your home is worth. In addition, if your home is your largest asset, tying up your equity with a HELOC might limit additional opportunities to borrow, as well as the ability to leverage your equity in an emergency.

• Potential to run up balance quickly

Because many HELOCs allow interest-only payments during the draw period, it’s easy to access cash without considering the financial ramifications. “If the borrower is not returning funds to this line of credit, then the loan eventually begins to amortize and the payments go up significantly,” says Joseph Polakovic, owner and CEO of Castle West Financial in San Diego. Bottom line: An unwelcome surprise can await you when the repayment period starts if you haven’t expected/budgeted for a jump in your monthly payments.

HELOCs can be a good option if you have substantial equity in your home and you know you’ll need access to cash with some regularity over a period of time — college tuition bills over the course of several years, for example. If you’re looking to spend as you go, and only pay for what you’ve borrowed when you’ve borrowed it, a HELOC is probably a better option than a lump-sum home equity loan, says Murphy.

However, HELOCs can be risky. The variable interest rate could increase, and if you’re unable to pay back the loan for whatever reason, you could lose your home. In addition, you might end up with a false sense of bottomless funds during the draw period, which can make for a stark return to reality when the payback period begins.

Potential prepayment or early termination penalties

Some lenders assess a fee if you pay off and close your HELOC early — during the draw period, or soon into the repayment period. This can be problematic if you want to retire your debt promptly, instead of taking 10 to 20 years to pay it off. And if you plan to sell your home soon, you could also be penalized since you’re required to repay the balance in full when the home changes title.