Can I Convert My HELOC Balance to a Fixed Rate?

Why does a HELOC start out with a variable rate?

A typical HELOC is set up as an adjustable-rate product, with the interest rate tied to a benchmark such as the prime rate. That means your rate, and your payment, can move up or down as that benchmark changes over the life of the credit line.

Federal law protects borrowers from unlimited rate increases. Any variable-rate loan secured by a home, including an open-end HELOC, must state a maximum interest rate the lender can ever charge, known as a lifetime cap. This is not optional. It is a legal disclosure requirement under Regulation Z. Lifetime caps vary by lender and loan, but figures around 18% APR show up in some published disclosures as an example of how high that ceiling can be set.

Can I switch to a fixed rate on my HELOC?

Often, yes. Many lenders offer a feature that lets you lock in a fixed rate on part or all of your HELOC balance, converting that portion into something closer to a traditional installment loan while the rest of your credit line stays variable. Other lenders offer a separate, standalone fixed-rate home equity loan as an alternative to a HELOC from the start. The exact mechanics, minimum amounts, and any fees vary by lender, so this is a question to ask directly when you are shopping.

Fixed rate or adjustable: how do I decide?

Short-term adjustable products, such as 3, 5, or 7-year initial-rate structures, typically start out priced lower than a comparable fixed-rate loan during that initial period. That makes them attractive in some situations, but not all.

It depends on your situation:

• If you expect to sell the home, refinance, or pay off the balance before the rate can adjust, an adjustable rate may work in your favor since you benefit from the lower starting rate without much exposure to a future increase.
• If the gap between available fixed and adjustable rates is large, roughly a percentage point or more, taking the adjustable option can make financial sense given the size of the savings.
• If the gap between fixed and adjustable rates is small, well under a percentage point, the modest savings usually do not justify taking on the risk of a future rate increase.
• If you are retired or living on a fixed income and value predictable payments, a fixed rate is generally the more comfortable choice regardless of the size of the rate gap.

What should I check before converting?

Before locking in a fixed rate, ask the lender exactly which portion of your balance can be converted, whether there is a fee for the conversion, and whether the fixed rate applies to the entire remaining term or just part of it. Also compare that fixed rate against current market ranges so you know whether the trade-off is worth it for your situation.

Related questions

• HELOC vs home equity loan vs cash-out refinance
• what Is the Minimum Loan Amount for a HELOC or Home Equity Loan
• is there a prepayment penalty if I pay off my mortgage, HELOC, or home equity loan early
• can I get a cash-out refinance or HELOC on an investment, rental, or non-primary property
• what determines your mortgage rate quote

Sources

• https://www.consumerfinance.gov/rules-policy/regulations/1026/40
• https://www.consumerfinance.gov/rules-policy/regulations/1026/30
• https://www.usbank.com/home-loans/home-equity/home-equity-line-of-credit/fixed-rate-heloc.html
• https://files.consumerfinance.gov/f/documents/cfpb_charm_booklet.pdf