Loans

Home Equity Rates Guide: Variable Vs. Fixed Rates

If you’re a homeowner, using your home’s equity can be a great way to borrow money if you’re considering a major purchase, funding a large expense, such as a home renovation, or thinking about consolidating debt. There are several ways you can take advantage of the equity in your home, so understanding your options and how they might affect your financial goals is important to decide what approach works best for you.

Knowing Your Options: HELOCs & HELOANs

There are two main ways to borrow money using the equity in your home:

  • HELOC: A home equity line of credit (HELOC) is essentially a line of credit secured by your home. Typically, you can borrow up to 85% of your home’s combined loan-to-value, which includes the amount you still owe on any first mortgage and other debt secured by your house. Like a credit card, a HELOC offers a revolving line of credit you can draw from as needed during the draw period. Unlike a credit card, the full amount of any balance remaining at the end of the draw period will have to be repaid during the repayment period in equal monthly payments fully amortized over the remaining term of your loan.  A HELOC often has a lower interest rate than some other types of loans, and the interest payments may be tax deductible.*
  • HELOAN: A home equity loan (HELOAN) is a closed-end loan, and not a line of credit. This means that the full amount of your loan is drawn at the closing of the loan, and you spend the remaining loan term repaying the draw, plus interest, in equal monthly payments, which are fully amortized over the term of the loan

Understanding How Variable & Fixed Rates Work

If you’re considering taking out a HELOAN or HELOC, one of the most important choices is whether you want to opt for a fixed or variable rate. The type of interest rate you select will make a difference in your total cost over time, so it’s important to understand which interest rate will best meet your needs. The specific interest rate you qualify for will also depend on several factors, which could include your credit score, market rates, income, home value and more.

As a rule of thumb, a HELOAN typically charges a fixed interest rate, while most HELOCs will charge variable interest rates. However, some lenders, including Bellco Credit Union, offer the option to take a draw with a fixed interest rate and repayment period, which may not exceed the remaining term on your HELOC.

A fixed-rate loan has the same interest rate for the duration of the loan. On the other hand, variable rates can change month to month based on an index. An index is a financial benchmark used by banks and credit unions to set rates for various loans. Most banks and credit unions use the U.S. Prime Rate as the index for HELOCs. This means a variable interest rate will fluctuate based on changes in that index.

The Benefits of Fixed Rates

Knowing a fixed rate will remain the same for the duration of your loan, there are several advantages to this approach:

  • Predictable monthly payments: With a fixed rate, you know exactly how much you will be charged each month and can budget for it without having to worry about the possibility of rising rates.
  • Protection against rate fluctuations: In inflationary times, a fixed rate can give you peace of mind. If you anticipate interest rates might rise, it could be good to lock in a fixed rate.
  • Long-term financial planning: Repayment periods can last anywhere between 10 to 30 years for HELOANs, so having a fixed interest rate can help you plan your finances for the future.

The Benefits of Variable Rates

With a variable interest rate, the rate could change from month to month based on changes in the index. If you have a higher level of risk tolerance, there can be certain benefits to a variable rate:

  • Lower initial interest rates: HELOCs with a variable rate may offer a lower starting interest rate than HELOANs. However, it’s good to remember that your interest rate could change over time based on U.S. economic trends.
  • Potentially decreased interest rates: If the index declines due to economic trends, your interest rate will decrease as well (down to any floor rates) and save you money each month.

Choosing the Right Option

There are several factors to consider when deciding if a fixed or variable rate is best for your personal and financial needs. If you have a specific project or expense in mind or prefer stability and predictability, a HELOAN with a fixed rate might be a good option for you. However, if you have ongoing expenses or need an emergency fund and are okay with potential fluctuations in interest rates, a HELOC might be more suitable.

Knowing how much interest you can expect to pay on what you borrow each month will help you make an informed decision and plan for your monthly payments. It’s also a good idea to discuss your options with your lender so you understand how your loan will affect your finances in the long run. Learn more about your options through Bellco for home equity loans, as well as Home Equity ChoiceLine, which enables you to have up to three fixed-rate subaccounts open at any one time.

*Please speak to a tax consultant about the deductibility of any payments made towards your HELOC.

Bellco is an Equal Housing Opportunity Lender.