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When you’re faced with a considerable expense, such as a renovation project or education costs, you may decide to tap your home’s equity. If you don’t know exactly how much you need — or if you’re planning a series of projects — a home equity line of credit, or HELOC, could be right for you. Through this second mortgage, you can draw on your home’s equity for a single purpose and pay it off, or use it as needed and make payments as you go.
HELOC rates tend to be variable, though some lenders allow you to lock in a fixed APR, meaning that no matter what happens in the market, you will continue to pay the same rate for each fixed withdrawal. Both fixed-rate and variable-rate HELOCs have advantages, so compare lender options before deciding.
Fixed rates vs. variable rates
A typical HELOC has an introductory rate that increases or decreases based on market conditions. As these loans can last for decades, it’s difficult to predict how your rate will change. Lenders have ceilings for APR (usually around 18%), but it’s unlikely you’ll ever pay the maximum. The current average rate is closer to 4%.
Still, some consumers are uncomfortable with this level of uncertainty. Fixed-rate HELOCs allow you to lock in some or all of your loan at a specific APR, giving you predictable payments. If you choose to freeze the APR for only part of the loan, the rate will vary for subsequent draws.
Lenders each have their guidelines around fixed-rate HELOCs, so it’s important to read the fine print. Bank of America, for instance, requires a minimum outstanding balance of $5,000 to convert from a variable rate to a fixed one. You also may be limited in the number of times you can choose a fixed-rate option. For example, Truist allows for a maximum of five open fixed-rate withdrawals at a time. You may also be required to pay a fee each time you make a fixed-rate withdrawal.
Benefits of a fixed rate
Fixed-rate HELOCs safeguard your loan from rising interest rates. This can save you money in the long run if interest rates go up, making financial planning easier. However, fixed-rate options could have a higher initial APR than variable-rate HELOCs.
Some lenders allow you to revert to a variable rate if rates go down, so locking your APR doesn’t necessarily mean gambling on a rate hike.
How to get a HELOC
Choosing a fixed rate is an option you might have when setting up a HELOC. The process for getting a fixed or a variable rate HELOC is essentially the same.
First, determine how much equity you have in your home and use a home equity calculator to estimate how much you could be eligible to borrow. Typically, you’ll need at least 15-20% equity in your home to qualify for a HELOC. The percentage of equity you withdraw can impact your offered rates, so knowing how much you’ll need before exploring lender options is essential.
Aside from at least 15% equity in your home, you’ll also likely need a debt-to-income ratio below 43%, a credit score above 620 and a strong track record of paying your bills on time to qualify for a HELOC.
HELOC lenders offer a variety of APRs, loan terms, borrowing limits and fees, so it’s in your best interest to shop around.
Fixed-rate options are a unique feature that not every HELOC lender will offer. Out of nearly 20 lenders surveyed by NerdWallet, only about half confirmed that consumers could lock in their loan at a fixed rate. If a fixed-rate HELOC is something that you want (or may want), you should ask about it when getting quotes from potential lenders. NerdWallet’s roundup of the best HELOC lenders is a good place to start your search. It notes which lenders offer a fixed-rate option.
Once you’ve selected your lender, you’ll need to gather your application documentation. The lender will outline their requirements, which will typically include pay stubs, W-2s, tax returns, bank and investment statements, your mortgage statement, proof of insurance and a home appraisal.
Once you get a HELOC, the window to withdraw from your equity (known as the draw period) usually lasts around 10 years. The repayment period varies depending on the lender and the terms of your loan, but it can be as long as 20 or even 30 years.
» MORE: How to get a mortgage
Consider a home equity loan
When comparing lenders that offer fixed-rate HELOCs, you might also want to consider a home equity loan. Home equity loans are offered at a fixed rate and, like HELOCs, are tools for accessing the equity in your home. However, unlike a HELOC that allows you to draw as much as you need over time, you receive the funds as one lump sum. So if you choose to explore home equity loans, you’ll need to know exactly how much you need to borrow upfront.