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Many people borrow against the equity in their home to do home improvement, pay medical expenses, or cover tuition fees. To do this, they often take out a second mortgage – a home equity loan or a home equity line of credit (HELOC). These loans allow you to borrow large sums of money at low interest rates as long as you are ready to pledge your home as collateral.

Traditionally, choosing between these loans has meant choosing between a fixed rate on a home loan or a variable rate on a HELOC. But with a HELOC at a fixed price, you get the best of both worlds.

Here's what you need to know about Fixed Rate HELOCs:

What is a HELOC at a fixed price?

A fixed rate HELOC is just that: a home equity line of credit with a fixed rate.

Usually HELOCs have an adjustable interest rate. However, adjustable interest rates come with disadvantages that many borrowers find unattractive, especially the fluctuating monthly payments.

People may be reluctant to take out a loan if they don't know how much it will cost them in the long run or what they will owe month to month. And lenders may struggle to collect borrowers' debts if an interest rate hike makes loan payments unaffordable.

Tip: Fixed rate HELOCs are not offered by every lender. Check with your lender if they offer this option before entering into an adjustable rate HELOC.

Fixed income HELOCs are a cross between HELOCs and home equity loans

HELOCs and home equity loans are both considered secondary mortgages, but there are some noticeable differences between the two:

  • Home loan: A home loan allows you to borrow a lump sum against your home equity and repay it at a fixed rate over a set number of years. For example, you could borrow $ 30,000 at 5% for 30 years, similar to a first mortgage. Your monthly payment will never change.
  • HELOC: A HELOC works similarly to a credit card. You can borrow as much or as little of your credit line as you want for the first five to ten years of the loan period (also known as the "subscription period"). This is followed by a term of 10 to 20 years.

The initial interest rate on a HELOC is usually lower than the interest rate on a home loan, but the interest rate can be adjusted up to once a month as interest rates change in the broader market.

HELOCs with a fixed interest rate are used here. A fixed rate HELOC is like a mix of a home equity loan and a regular HELOC. It gives you the flexibility to draw on a line of credit as you wish, along with the option to set your interest rate on the sums you borrow, reducing the uncertainty of monthly payments.

You won't find any fixed income HELOCs with Credible, but for another way to tap your home equity, consider refinancing through payout. Credible can help you check the refinance rates of all of our partner lenders. Checking rates with us is safe and easy – and doesn't affect your creditworthiness.

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Advantages and disadvantages of a HELOC. with a fixed rate

If you are considering a fixed price HELOC, understand the pros and cons before you apply.

advantages

  • Consistent Monthly Payments: When you set your interest rate, you know what your monthly payment will be. It's easier to budget for.
  • Borrow as needed: Unlike a home loan, you don't need to know how much you want to borrow beforehand. You borrow as much money as you need and only pay interest on that amount. You could save money in interest this way, especially if your home improvement project ends up costing less than you expect.
  • Equal Qualifications: The qualifications for a second mortgage in terms of income, debt, home equity, and creditworthiness are more or less the same whether you want a fixed or floating rate HELOC (or a home loan). Which lender you choose is more important than which loan product you choose.

disadvantage

  • Miss out on interest rate cuts: If you set your interest rate and then the interest rates go down, you don't automatically benefit from the lower interest rate like you would with a floating rate.
  • Other Decisions To Make: A fixed rate HELOC is basically still a HELOC. By default, you get a variable interest rate. You have to choose how much of your credit you want to lock your plan and when you want to do so.
  • Fixed interest rate restrictions: Your lender may restrict you to lock your interest rate only on a portion of the money you borrow. They can require you to borrow a minimum amount to lock your interest rate and you can pay an additional fee.

Alternatives to the fixed price HELOC

A fixed rate HELOC is just one of several options for borrowing against your home equity. Consider these three alternatives to Fixed Rate HELOCs to help you decide which is best for your situation.

HELOC. with variable interest rate

Best if: Your HELOC is only for emergencies.

If you don't plan on actually using your HELOC but want to know that the money will be available in case of an emergency, then it makes sense to stick with a traditional variable rate HELOC.

That way, you don't pay interest on money you might never use, like a home loan. And you can potentially enjoy a lower interest rate down the road.

Tip: Be aware that lenders may freeze or reduce your line of credit if your creditworthiness goes down, the value of your home declines, or economic conditions worsen.

Home loan

Best if: You know how much you want to borrow and how long you will have to pay it back.

A home equity loan is very similar to a fixed-rate mortgage. If you know that it will take $ 100,000 to add an annex to your home, replace the roof, and paint the exterior – and that paying back the money will be affordable over 20 years – then a home loan can be a good one Be choice.

However, when interest rates go down, you need to refinance your home loan to get a lower interest rate.

Check Out: Second Mortgage Vs. Home Loan: Understanding the Difference

Cash-out refinancing

Best when: You want to borrow a lump sum and get a lower interest rate on your first mortgage.

Maybe your first mortgage rate is 5% and you could get a 3.5% interest rate from a refinance – but you also want a lump sum to pay off your high-yield debt.

A cash-out refinancing could be the cheapest option in this case. However, the closing costs can be significantly higher compared to a second mortgage.

Read Next: Home Equity vs. Personal Loans: Which One Is Right For You?

About the author

Amy Fontinelle

Amy Fontinelle is a mortgage and credit card agency and contributes to Credible. Her work has been published in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and others.

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source https://seapointrealtors.com/2021/08/12/fixed-rate-helocs-a-cross-between-helocs-and-home-equity-loans/

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