A home offers value to homeowners in so many ways. One of the best ways to make that value work for you is actually through your home’s equity. But in a highly unpredictable interest rate market like right now, it may be a lot tougher to utilize your equity’s full potential. And that’s where a fixed-rate HELOC (Home Equity Line of Credit) really shines.
You might have heard of HELOCs before, but you might not have been sure if you can get a HELOC with a fixed rate. The answer is yes. While it can sometimes be difficult to find, many lenders such as RenoFi offer fixed-rate HELOCs that can be utilized for home renovation projects.
In this helpful guide, you’ll get answers to questions like how does a fixed-rate HELOC work? And what are the 5, 10, and 20-year fixed home equity loan rates? Plus, lots of other common questions about fixed-rate HELOC loans and its alternatives.
Let’s dive in!
How does a fixed rate HELOC work?
HELOCs are designed as a revolving line of credit, similar to a credit card. You can withdraw as much or as little of your line of credit as needed up to a certain limit and only repay what you took out. This limit on the amount you’re allowed to borrow is set by your lender based on your home’s value and the amount owed on your mortgage.
Traditional home equity lines of credit will have a variable rate structure, which means that interest rates will change depending on the market, so there’s a potential to pay back more than you expected. A fixed-rate HELOC allows you to lock in a portion or all of your balance at a fixed rate, protecting you from unforeseen fluctuations in the market. Essentially, these loans are a hybrid between home equity loans and HELOCs — all home equity loan rates are fixed, but their repayment terms and credit limits still differ.
Fixed Rate HELOC Expert Tip: While “fixed-rate” suggests a consistent interest rate, inquire whether the rate is fixed for the entire duration or just a portion of the term. Some HELOCs with fixed rate options to lock in a fixed rate for specific segments of the draw or repayment period. Seek advice from financial advisors or experts who can tailor fixed-rate HELOC solutions to your unique circumstances - such as RenoFi.
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Advantages of a Fixed-Rate HELOC for Home Improvement
If you’ve built up a solid amount of equity in your home and are looking for a flexible loan with predictable monthly payments, a fixed-rate HELOC has all the advantages you’re looking for…
- Stable Interest Rates: Fixed rates allow borrowers to better plan their budget for home improvement projects instead of having to account for the possibility of major changes based on the market conditions throughout the life of the loan. HELOCs can offer anywhere from 5-year fixed home equity loan rates to 20-year home equity loan rates based on your needs.
- Flexible Borrowing: These loans allow homeowners to access funds on an as-needed basis during the draw period, instead of all in one lump sum like many of the other renovation loans, making interest-only payments during that period.
- Budget Control: Since you can access funds as needed, and set your repayment terms for minimum monthly payments or all at once, homeowners have more control over their funds throughout the project.
- Competitive Interest Rates: HELOC loans often offer competitive interest rates compared to other renovation financing options.
- Being a Second Mortgage: If you were lucky enough to lock in a great low interest rate on your home, the fact that HELOCs allow you to tap into your home equity as a separate loan from your primary mortgage is a major bonus for you. As a second mortgage, you won’t be forced to refinance.
- Tax Benefits: There’s a chance that using a HELOC loan for qualified home improvements may be tax deductible. To know for sure, consult a tax professional for advice on your specific case.
Qualifications and Requirements for a Fixed-Rate HELOC
In order to qualify for any fixed rate home equity line of credit you have to have available equity in your home — at least 15-20%. In other words, the amount you owe on your home must be less than your home’s value.
Lenders will use this number to calculate your LTV (loan-to-value ratio). Your LTV divides your current mortgage balance by the appraised value of your home. This ratio will also determine how much you can borrow. You can usually borrow up to a combined loan-to-value ratio (CLTV) of 85 percent, meaning the sum of your mortgage and your desired home equity loan can make up no more than 85 percent of your home’s value.
A lender will also consider your credit score and history, employment history, monthly income and monthly debts, just like when you first applied for your mortgage. You may be eligible for funding if you meet these criteria:
- Credit score of mid-600s (without recent bankruptcies)
- 45% DTI (debt to income) ratio or below
- Steady source of income (this will also play a role in how much you can borrow)
- A reliable payment history
- You’re looking to borrow $20,000 or more
- You’re current on mortgage payments for the last two years
- You have not listed your home for sale in the last six months
- You live in the home you’re planning to renovate (multi-unit properties, investment properties, manufactured homes, and new construction homes are not eligible)
If you’re considering a HELOC for home renovation purposes, a RenoFi HELOC is the best way to get the most borrowing power possible. That’s because these loans are based on the after renovation value of your home, not the current value.
Click the button below to find the best fixed rate HELOC options for home improvements
Choosing a Fixed-Rate HELOC Lender
Different lenders will have different rates and terms for their fixed-rate HELOC products, so it’s important to get quotes from multiple lenders. Comparing different lenders within your area can help you find the best terms and conditions for the specific home improvement project.
Here are some important things to factor into your decision:
This is probably the most obvious. Rates can change daily based on the market, which is why a fixed-rate loan is so appealing. Are rates Rates will vary from lender to lender as well. Credit unions tend to offer lower, special rates for customers. How does the lender’s 20-year fixed home equity loan rates differ from 10-year fixed home equity rates? 5-year? Also ask about points, which are upfront fees that could possibly lower your interest rates
Expert Tip: You should consider lenders that provide fixed HELOC rate options that you can lock. When you lock in fixed rate HELOCs you will gain stability and predictable payments. Opting for a fixed rate can provide valuable insulation against potential interest rate fluctuations.
Click the button below to find the best fixed rate HELOC options
There may be some hidden fees grouped into your loan, such as application fees, annual fees, or fees for every rate lock you choose to initiate. There may also be penalty fees if you’re not well-informed on your HELOC’s requirements. Ask to know all the details before choosing your lender.
Experience is important, but so is customer service. Ask each lender what their policy is in regard to communication. Will they be available to answer questions you have throughout the application and underwriting process? Do they have any reviews or testimonials they can provide from previous happy customers? Knowing the actual person you’re working with is important to ensure they have your best interest at heart.
What is their background in lending? The renovation space? Does the lender have a lot of experience offering this specific type of loan? Since these fixed-rate HELOCs are fairly new, it’s important your lender understands all the ins and outs to ensure no surprises come up along the way.
Although fixed-rate HELOC loans are becoming more popular, many lenders are still hesitant to offer them as opposed to their variable rate alternative, so it can be more difficult to find one near you who does.
Don’t worry, RenoFi is here to help. We can help pair you with the right lender in your area to ensure you get the best 20, 10, or 5-year fixed home equity loan rates and terms for your renovation project.
Home Improvement Financing with a Fixed-Rate HELOC
When contemplating renovations and leveraging your home equity, you’ll confront two primary options: Home Equity Lines of Credit vs Home Equity Loans. As you plan improvements to your property, it’s crucial to consider the interest rate aspect. HELOCs frequently feature variable rates, which can vary, while Home Equity Loans, including fixed-rate HELOCs, present the advantage of a steady interest rate for the duration of your borrowing period. This stability can be particularly beneficial for financing renovations, ensuring consistent monthly payments and safeguarding against unpredictable rate changes.
HELOCs are best for homeowners who need flexibility in accessing funds for their home improvement projects, especially if they’re not certain how much money you’ll end up needing when all is said and done. And while home equity loan rates are fixed as well, they have a fixed repayment period which starts almost immediately. HELOCs, on the other hand, only require the homeowner to make equally monthly payments on the interest only during the 5-10 year draw period.
With these benefits in mind, here are some tips to help you make the most of your HELOC and the fixed home equity loan rates it provides:
- Create a Budget: Even though HELOCs give homeowners a lot more flexibility in terms of how much of their financing they use and when, that doesn’t mean you should go into it without an educated plan. Make a point to determine a realistic budget for your home improvement project accounting for all your wish list must-haves and other priorities, as well as a buffer. Set aside an emergency fund for any unwanted surprises.
- Use Funds Wisely: Similar to having a credit card, it can often be easy to overspend money you don’t technically have. Make sure you’re using your fixed-rate HELOC responsibly, tracking your spending, and focusing on value-add improvements that will give you the most return on your investment.
- Manage Your Repayment: A HELOC’s delayed repayment period is a major benefit to a lot of homeowners, but it’s even more important to make sure you’re hitting your regular payments during the repayment period to avoid potential financial strain.
Expert Tip for Fixed Rate HELOCs: Opt for a fixed-rate HELOC when anticipating a long-term project, as it shields you from interest rate fluctuations and provides consistent monthly payments.
How RenoFi Can Help
If a fixed-rate HELOC for your home renovation,contact us to learn more about RenoFi HELOCs. This financing takes all the benefits of these loans and further boosts your borrowing power based on the after-renovation value of your home versus its current value. They also offer lower fixed home equity loan rates and monthly payments than most alternatives.
RenoFi’s team of expert Renovation Advisors can help you learn more about your loan options and find the best lenders available to get you started. Through our extensive network of awesome credit unions, we can get you paired with the right lender to apply for a fixed-rate HELOC with lower rates and even more flexibility based on your financial situation.
We can even support you while reviewing your contractor contracts and application documentation along the way to ensure you have everything you need.
For more information on RenoFi loans and how we can help finance your renovation in the smartest way possible whenever you’re ready, try the RenoFi Loan Calculator to see how much you can borrow, or contact a RenoFi Advisor to explore all of your options.
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