Home equity lines of credit (HELOCs) allow you to turn your home equity into usable cash.
You should be aware that many HELOCs have a variable rate. This means your interest rate—and your payments—can fluctuate over time. Because of this, budgeting for your payments could be a challenge. If your HELOC includes a fixed rate, it won’t fluctuate.
Read on to find out what causes rates to change, how you’ll know if your rate changes, and how a variable rate will affect your monthly payments.
In this guide:
- What causes HELOC interest rates to change?
- Will I be notified if my interest rate changes?
- How do interest rate changes affect my monthly payment?
- Is there a maximum rate that HELOCs can’t exceed?
- Can I choose between a fixed and variable rate?
- What if my interest rate becomes higher than I can afford?
- When you may want to consider HELOC alternatives
What causes HELOC interest rates to change?
If your HELOC has a variable rate, your interest rate isn’t locked in for the entire term. It’s tied to an index rate—a rate that mirrors the performance of a specific financial product (or bundle of them).
The prime rate is a common index that HELOCs are tied to. This tracks the rate that banks pay to borrow from each other. In this example, when the prime rate changes, so would the rate on your HELOC.
To calculate your interest rate, your lender takes your margin—the buffer it builds in based on your credit profile and risk factors—plus the index rate your HELOC is tied to. For example, if the index rate is 5% and your margin is 2 percentage points, your interest rate is 7%. This rate (and your payment) could change as often as every month.
Note: Some lenders may offer a special, fixed introductory rate for a short period, with a variable rate following once the introductory period comes to an end. Some lenders offer fixed-rate HELOCs for the entire term.
Will I be notified if my interest rate changes?
Before you accept the terms on your line of credit, the lender will provide a disclosure detailing how often your rate can change and how high that rate can go.
Your lender is required to include any upcoming rate increase in your monthly statements. So if your rate is expected to rise in November, you’ll see the new rate reflected in your October statement, before November’s payment comes due.
How do interest rate changes affect my monthly payment?
Interest rate changes affect your monthly payments during both the draw and repayment periods. In the draw period, typical payments are interest-only, so the impact of a rate increase depends on how much you’ve spent. The higher your balance, the more interest you’ll pay.
In the repayment period, rate increases will be more pronounced since you’re paying both principal and interest.
Here’s a look at how HELOC payments can change on a $50,000 balance during a 10-year repayment period:
|Starting interest rate||Starting monthly payment||Rate after an index rate change||Monthly payment after an index rate change|
|Variable-rate HELOC (rate increases)||4.5%||$518.19||6%||$555.10|
|Variable-rate HELOC (rate decreases)||4.5%||$518.19||3.5%||$494.43|
Variable rates can be helpful at the beginning, as they’re typically lower than fixed rates. This is the case in the examples above. However, when your rate begins to fluctuate, your payment can be unpredictable.
Interest-rate fluctuations can influence your long-term costs as a borrower, but there’s no way to calculate these costs because they vary based on factors including:
- How often the interest rate adjusts
- Your balance
- Your rate cap
- The term of your HELOC
Is there a maximum rate that HELOCs can’t exceed?
Most lenders cap on your interest rate at 18%—meaning it won’t rise above that amount during your loan term—although only credit unions are required to abide by that cap.
Some lenders limit how much your rate can increase at each adjustment, and others may have a floor rate—the lowest rate possible if the index rate falls.
Your rate cap will be laid out in your loan paperwork, so be sure to read the fine print before closing on your HELOC. You can also have an attorney or financial advisor review the terms before signing your final documents.
Can I choose between a fixed and variable rate?
Your rate options depend on the lender you choose. Some lenders offer both fixed- and variable-rate options from the start, while others may offer the option to convert your HELOC to a fixed-rate at a later date.
Here are a few examples of lenders and what types of HELOCs they offer:
|Lender||Variable rate||Fixed rate|
|Figure||Not available||Lifetime rate|
|Hitch||Initial rate||Can convert to a fixed-rate loan|
|Spring EQ||Initial rate||Not available|
|Bethpage FCU||Lifetime rate||On introductory rate and if you convert to a fixed-rate loan|
Keep in mind that typical fixed rates are higher than variable rates at the start of the HELOC’s term. Long-term, though, it’s impossible to predict which option will be the most affordable as variable rates fluctuate throughout the term.
What if my interest rate becomes higher than I can afford?
If your HELOC has a variable interest rate, and that rate increases while you’re still paying back what you borrowed, your monthly payment could be higher than what you can afford.
If this happens, you should contact your lender. It can lay out your full range of options, which could include a hardship program or restructuring your terms.
You can also:
- Convert it to a fixed-rate HELOC: Some lenders will let you convert your adjustable-rate HELOC to a fixed rate. This gives you a consistent rate and payments.
- Convert it to a fixed-rate installment loan: You might be able to turn your HELOC balance into an installment loan. You’d then pay this back with fixed monthly payments over time.
- Refinance the HELOC: You may be able to refinance into a new HELOC with a fixed rate or into a home equity loan with a fixed rate. You might also do a cash-out refinance of your first mortgage. The cash could be used to pay off your HELOC balance, rolling it into another loan.
While these methods can offer relief if your variable-rate payments get out of hand, they’re not guaranteed, as all loan options depend on your credit and finances. If you’re concerned about managing fluctuating rates and payments, you may want to explore a fixed-rate financing product below.
Find out more about converting a HELOC to a fixed-rate loan.
When you may want to consider HELOC alternatives
If you’re worried about the unpredictability of HELOCs or your ability to make consistent HELOC payments, you should explore other options. Failing to make your HELOC payments could cause you to lose your house, so another product with a fixed interest rate may be best for you.
You should also take into account the current interest rate environment. If rates are projected to rise in the near term, it could have a significant impact on your costs as a borrower.
Other options you might explore include:
|Home equity loan||Fixed||Consistent rate and payments.|
Long terms (up to 30 years).
Allows you to access your home equity.
|Adds a second monthly payment.|
Interest is only deductible if you use the funds to improve your home.
|Personal loan||Fixed||Consistent rate and payments.|
Unsecured, so it doesn’t put your assets at risk.
|Usually have higher rates than home equity products.|
Interest is not tax-deductible.
Tend to have a higher interest rate.
|Cash-out refinance||Can be fixed or variable.||Can have a consistent rate and payment.|
Low rates compared to other products.
Interest is tax-deductible.
|Replaces your existing mortgage terms.|