What Is aHELOCFixed-Rate Option?
You may borrow as little or as much against a fixed-rate home equity line of credit (HELOC), which is a credit line based on the equity in your property. The fixed-rate option allows you to convert all or a portion of the HELOC loaned funds to a fixed interest rate. The borrower then repays that sum over a certain period of time. However, the guidelines for using it may vary amongst lenders.
- If you want to lock in a fixed rate, your lender could ask that you borrow a certain minimum amount.
- As you reduce the fixed-rate sum, your credit line increases, unlike with a standard home equity loan, so you aren’t cut off from getting more credit.
- If interest rates fell, you could choose to change your fixed-rate loan back to a variable-rate loan at any point during the draw term. This is possible with certain lenders.
- Shop around for the best rates and loan features when thinking about a HELOC as they may differ from lender to lender.
How aHELOCFixed-Rate Option Works
Some lenders give a HELOC a unique name. Although there are significant variances in the specifics that can make one lender’s product better for your case than another, the HELOC fixed-rate option nevertheless functions in a broad similar manner regardless of which lender you choose.
In reality, some of the largest lenders, including Bank of America, have switched from home equity loans to fixed-rate home equity lines of credit, partly as a result of new mortgage laws that they may find onerous.
It is forbidden to discriminate in mortgage financing. There are actions you may take if you believe you have experienced discrimination because of your race, religion, sex, gender, marital status, use of public assistance, national origin, handicap, or age. Making a report to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development is one of these steps (HUD).
Length of the Fixed-Rate Term
You may lock your rate with a lender for one to thirty years. Even though your monthly payment may be reduced with a longer term, you will end up paying more interest overall.
The word you may pick may be limited. For instance, one lender could limit your options to a fixed-rate, interest-only lock with a three-, five-, or seven-year term, but if you pay both principle and interest, you can choose any period within the permitted range.
Number of Fixed-Rate Balances
You should carry as many fixed-rate balances as possible. Verify if the lender imposes additional costs or a higher interest rate in exchange for this more flexibility.
Minimum Fixed-Rate Balance
Remember that lenders may also impose minimum withdrawal limitations on conventional HELOCs and minimum borrowing requirements on traditional home equity loans.
Annual Limits and Rate Lock Fees
The total amount of fixed-rate balances you may lock in a year is limited by certain lenders. For instance, you could only be permitted to add two new fixed-rate balances in a given year yet be permitted to carry three overall.
Some lenders impose a small fee—50 or $100, for example—when you commit to a fixed rate on a debt. Some don’t.
When You Can Convert
At closing or at any point throughout the draw period, you may often convert all or a portion of your HELOC amount to a fixed rate with a certain duration. You cannot change a variable-rate debt to a fixed-rate balance during the repayment term; instead, you must refinance at that time.
Fully Amortizing or Partly Amortizing Term
You will pay off the whole fixed-rate debt during the fixed-rate period if the term is completely amortizing. A partially amortizing term implies that if you still owe money at the conclusion of the fixed-rate period, the rate will change to one that is variable.
The longer it takes to pay off your balance, the more interest you’ll accrue, particularly if the variable rate it switches to is higher than the fixed rate you were previously 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.
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