Nov 04, 2022 / Home Equity
Every HELOC can help you achieve your personal goals—upgrade your home, put together a big event, or plan a dream vacation. It’s a great way to have extra cash on hand for any reason, big or small. But not all HELOCs are alike. In fact, there are two very separate and distinct HELOC types and knowing the difference between them can help you save money and avoid much of the confusion and complication of borrowing money.
Almost every HELOC comes with a variable interest rate—a rate that goes up or down with changing market conditions. Those familiar with recent market fluctuations are fully aware of how a variable rate can change your plans to pay back money in an instant. When the Fed raises interest rates, variable interest rates rise too, along with your monthly payments.
By comparison, a fixed rate HELOC allows you to lock in your interest rate at any time, so you can keep the same rate and the same payment throughout the duration of your loan. With a fixed rate HELOC, you have the option to lock in a fixed rate for all or a portion of your HELOC funds. If you can see that interest rates may be rising (or you just like your current rate), locking in your HELOC can help you save money, plan out your repayments, and borrow money on your terms.
Saving money is undoubtedly the biggest and best reason to fix your interest rate. With either HELOC type, you never pay interest until you actually withdraw money. That means you can have a HELOC on hand in case of an emergency or when you’re ready to start a project. At that point, interest starts to accrue.
With a fixed rate HELOC, you have the luxury of getting out in front of changing market conditions to lock in your rate at any time during your draw period. You also have the luxury of reverting back to a variable interest rate if market conditions change in your favor. Not all financial institutions offer this feature (only the ones with their members/customers best interests in mind), but it’s a great way to help you save money.
With a variable rate HELOC, the amount you owe is never certain. When your interest rate changes, the amount you owe changes too. It could change tomorrow, even if you never withdraw another dime from your available funds. Among other things, this uncertainty can make it difficult for you to plan out your repayments.
With a fixed rate HELOC, the amount you owe is never in question. You can budget for an exact repayment amount every payment period, if you so choose. It’s a great way to take charge of your finances and plan out every penny of your loan repayment.
A HELOC is already a very flexible way to borrow money—you get to choose when and how much money to borrow without having to ask your bank or credit union for permission. Since it’s a revolving line of credit, you can also choose your own repayment plan. Many HELOC borrowers use funds for one project at a time and pay back the money they owe before moving on to something new. With the option to fix your HELOC rate at any time (or revert back to a variable interest rate), your HELOC is that much more flexible. You borrow and repay money on your terms, your conditions.
If you’d like to learn more about the differences between a fixed rate and variable rate HELOC, just ask Utah First. We’re one of the few financial institutions that offers a fixed rate HELOC feature. It’s our way of helping you save money, remove uncertainty, and borrow money on your terms. At the end of the day, helping you is our priority. Come meet with one of our helpful HELOC experts or browse our website to learn more.