What Is a HELOC Fixed-Rate Option?

A home equity line of credit (HELOC) fixed-rate option is a line of credit based on your home equity, which you can borrow against as little or as much of that credit line as you want. The fixed-rate option comes in when you can convert all or some of the money you borrowed on the HELOC to a fixed interest rate. The borrower then pays back that amount over a set number of years. However, different lenders may have different rules about how you can use it.

Key Takeaways

  • Your lender may require that you borrow a minimum amount if you want to lock in a fixed rate.
  • Unlike with a traditional home equity loan, you aren’t shut off from access to further credit, and as you repay the fixed-rate balance, your credit line goes back up. 
  • Some lenders will let you convert your fixed-rate loan back to a variable-rate loan anytime during the draw period, which you would want to do if interest rates dropped.
  • When considering a HELOC, shop around for the best rates and loan features, as they may vary from lender to lender.

How a HELOC Fixed-Rate Option Works

Some lenders brand this product with special names, such as Santander Bank’s FlexLock Home Equity Line of Credit. However, the HELOC fixed-rate option generally works the same way no matter which lender you choose, though there are important differences in the details that might make one lender’s product better for your situation than another’s.

In fact, some of the biggest lenders, such as Bank of America and Wells Fargo, have used fixed-rate home equity lines of credit to replace home equity loans, possibly because of new mortgage regulations they might find burdensome.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

Length of the Fixed-Rate Term

Lenders will let you fix your rate for anywhere from one to 30 years. The longer the term, the smaller your monthly payment, but, all else being equal, the more interest you’ll pay.

You may be limited in the term you can choose. For example, one lender might restrict your choices to a three-, five- or seven-year term on a fixed-rate, interest-only lock, whereas if you pay both principal and interest, you can choose any term you want within the allowed range.

Number of Fixed-Rate Balances

The more fixed-rate balances you can carry, the better. Check if the lender charges for this increased flexibility through a higher interest rate or fees.

Minimum Fixed-Rate Balance

Keep in mind that lenders also require you to borrow a minimum amount on a traditional home equity loan and may have minimum withdrawal requirements on traditional HELOCs.

Annual Limits and Rate Lock Fees

Some lenders cap the number of fixed-rate balances you can lock in each year. For instance, you may be able to carry three fixed-rate balances total but only create two new ones in the same year.

Some lenders charge a nominal fee, such as $50 or $100, when you lock in a fixed rate on a balance. Others don’t.

When You Can Convert

You can usually convert all or part of your HELOC balance to a fixed rate with a definite term at closing or anytime during the draw period. You can’t convert during the repayment period; at that point, you’ll have to refinance if you want to convert a variable-rate balance to a fixed-rate one.

Fully Amortizing or Partly Amortizing Term

A fully amortizing term means you’ll pay off the whole fixed-rate balance during the fixed-rate term. A partly amortizing term means you’ll still have an outstanding balance at the end of the fixed-rate term, which will then revert to a variable rate.

Taking longer to pay off your balance means paying more interest, especially if the variable rate it reverts to is higher than the fixed rate you were paying.

HELOC Fixed-Rate Option vs. Home Equity Loan

Traditionally, if you wanted to borrow against the equity in your home, you could either get a fixed-rate home equity loan or draw money against a HELOC—a closed-end line of credit with a variable interest rate. Now, there’s a third choice: a HELOC with a fixed-rate option.

When you can’t decide whether a home equity loan or HELOC is the best option for you, a HELOC that lets you lock in part of your balance at a fixed rate is a great alternative. It doesn’t force you to choose between borrowing a large sum now and having the flexibility to withdraw funds as you need them later. It also doesn’t make you choose between knowing your interest rate and taking a chance on market rates.

No matter which lender you choose, your credit score and market interest rates will affect what rate you can get on a HELOC fixed-rate option. Still, as with any loan, some lenders have lower rates than others. Shop around and don’t overlook credit unions and small banks, which sometimes have better deals than the big banks.