Does a fixed-rate HELOC make sense in today's elevated rate environment?
There's no question that the current interest rate environment is vastly different than it was just a few years ago. With the Federal Reserve's benchmark rate paused at a 23-year high, today's borrowing rates are much higher. And, while mid-year Fed rate cuts were expected at one point, inflation has been ticking back up. So, it's unclear if or when those rate cuts will happen.
However, one area where borrowing remains relatively affordable, and accessible, is home equity. Right now, the average homeowner has approximately $300,000 in home equity, with around $193,000 of that being accessible. And with the average home equity rate around 9% currently, home equity is one of the best options to consider now if you need to borrow money.
And, there are a few different options for accessing it, including home equity loans and home equity lines of credit (HELOCs). A HELOC functions like a revolving line of credit, allowing borrowers to draw funds as needed up to a predetermined limit. And, while traditional HELOCs typically have variable interest rates, some lenders offer fixed-rate HELOCs, which can provide borrowers with more stability and predictability in their payments.
But in today's interest rate climate, the question of whether a fixed-rate HELOC makes sense is a pertinent one.
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Does a fixed-rate HELOC make sense in today's elevated rate environment?
When deciding whether a fixed-rate or variable-rate home equity line of credit (HELOC) makes the most sense, there are several key factors to consider, like your overall financial situation, income stability and the intended use of the HELOC funds.
That said, there are several reasons why a fixed-rate HELOC may or may not be an attractive option for homeowners in the current rate climate. Here's what you should know.
3 reasons a fixed-rate HELOC could make sense right now
Here are a few reasons why you may want to consider a fixed-rate HELOC right now:
Interest rate stability
The primary benefit of a fixed-rate HELOC is the stability and predictability it provides in terms of interest costs. With rates locked in, monthly payments will remain unchanged even if the Fed raises rates further in the future. And, it's feasible to think that future rate hikes could be on the table if inflation continues to grow, so a fixed rate could be a pretty big benefit in today's rate environment. After all, having a guaranteed, consistent payment amount can provide valuable peace of mind if you're concerned about the potential for your payments to increase later on.
Learn more about the best home equity loan rates available to you now.
Potentially lower rates vs. other options
While fixed HELOC rates are certainly higher now than they were a few years ago, these types of equity-accessing options may still carry lower interest rates compared to alternative borrowing options like personal loans and credit cards. For example, the average personal loan rate hovers above 12% currently and the average credit card rate is now over 21%. This makes a fixed-rate HELOC a potentially more cost-effective choice in today's rate environment, especially if you're looking to borrow larger amounts of money.
Access to equity without disrupting your mortgage
Another key advantage of a fixed-rate HELOC is that it allows you to tap into your home equity without having to refinance your entire mortgage, which can be an expensive and time-consuming process — especially given today's mortgage rates.
For example, if you opted for a cash-out refinance instead, you may get struck trading that ultra-low mortgage rate you secured when rates were hovering near 3% levels for a mortgage loan with a rate that's over twice as high. But by choosing a fixed-rate HELOC, you would get access to the line of credit to draw from with a rate that won't change while leaving your first mortgage intact.
3 reasons a fixed-rate HELOC may not make sense right now
While there are potential benefits of a fixed-rate HELOC, these home equity tapping options also have some potential drawbacks to consider:
Higher rates compared to recent history
Even though fixed HELOC rates may beat out other consumer loan options, they are still significantly elevated compared to the ultra-low rate environment of a few years ago. So, if you're going to borrow money with a fixed-rate HELOC, you will pay markedly more in interest now than you would have during that period. That said, you'll pay more with nearly any borrowing option right now, so this downside certainly isn't unique to fixed-rate HELOCs.
Missed opportunity if rates decline
If interest rates were to decrease substantially in the coming years, borrowers with an outstanding fixed-rate HELOC balance would be stuck paying the higher interest rate and unable to benefit from any drop in rates until the fixed period expires. And, considering that rates are still likely to drop at some point when inflation is under control, this could be a big gamble to take.
Limited options
Fixed-rate HELOCs aren't the norm, as not all lenders offer these types of HELOCs to borrowers. Traditional variable-rate HELOCs are a lot more common. So, if you're uncomfortable with the idea of only having a handful of lenders to choose from, you may find that the fixed-rate HELOC options are simply too limiting.
The bottom line
Ultimately, the decision of whether a fixed-rate HELOC makes sense in today's elevated rate environment will depend on your circumstances and financial goals. Those seeking stability and predictability in their monthly payments, and who plan to borrow a substantial amount over the next several years, may find a fixed-rate HELOC to be an attractive option. However, those who are more risk-tolerant or who prefer to have more options when borrowing money may be better served by a traditional variable-rate HELOC or other borrowing alternatives.
