What’s the Difference Between a Variable Rate HELOC and a Fixed Rate HELOC?
Structure
Most of the time, a HELOC automatically comes with a variable rate, but some lenders may offer a fixed-rate option. This may involve converting all or part of the HELOC balance to a fixed-rate loan during the HELOC’s draw period. That’s the period—typically 10 years—when you can borrow money using the line of credit. You also might be able to choose the fixed-rate option when you initially get approved for a HELOC.
Monthly Payments
When the interest rate for a HELOC is variable, the monthly payments can increase or decrease over time. But when the HELOC’s interest rate is fixed, the monthly payments are also fixed.
Special Considerations
The interest rate for a variable-rate HELOC is connected to an interest index that reflects overall market conditions (but does not reflect your financial situation) and changes from time to time. When that index changes, the interest rate for the HELOC might go up or down. At the outset, the rate for a variable-rate HELOC may be lower than for a fixed-rate HELOC. But because the rate is adjustable, the rate for a variable-rate HELOC may end up being higher than it is for a fixed-rate HELOC.
Which Is Right for You?
A variable-rate HELOC may be right for you if you’re looking for potential savings on interest charges. However, a fixed-rate HELOC may be the option that works best if you prefer the certainty of fixed monthly payments.
Variable Rate
With a variable-rate HELOC, you might wind up saving money on interest if, over time, you pay an overall lower interest rate. However, you run the risk of being stuck with an overall higher interest rate and monthly payments. In addition, a variable-rate HELOC might come with a shorter payoff period than a fixed-rate HELOC does.
Fixed Rate
If you have a fixed-rate HELOC, it can help you maintain your household budget since you’ll know what you’re responsible for on a month-to-month basis. On the other hand, you could miss out on interest savings that might be supplied with a variable-rate HELOC, and you might face a longer payoff period. Keep in mind that some lenders may let you flip back to a variable rate from a fixed rate.
What To Consider as You Choose Between the Two
Questions you should ask before signing on the dotted line for a variable-rate or fixed-rate HELOC include:
How is the interest rate determined?If there’s an introductory interest rate, how long will it last?If the interest rate is variable, what is the maximum rate allowed?What fees will I be charged?Are there any penalties for an early payoff?When will the draw period end?
The Bottom Line
Key differences between a variable-rate HELOC and a fixed-rate HELOC include whether or not the interest rate changes if the HELOC initially comes with a variable or fixed rate and how much the monthly payments will be. When looking at which kind of HELOC to get, consider how comfortable you’d be with rate changes and how confident you’d be with making monthly payments that may go up or down. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
