Is a Fixed-Rate Home Equity Loan or a Variable-Rate HELOC Better for You?
If you decide to tap into the equity you’ve built in your home, you typically have two main options: a home equity loan or a home equity line of credit (HELOC). Both can be helpful, but they work differently, especially when it comes to how interest is charged. One gives you a fixed rate and predictable monthly payments, while the other offers flexibility with a rate that may change over time.
What’s the Difference Between a Home Equity Loan and a HELOC?
A home equity loan provides a lump sum of money upfront with a fixed interest rate and a set repayment term, usually ranging from a few years to 15 years. You make equal monthly payments for the life of the loan, which makes it easy to plan around your budget.
A home equity line of credit (HELOC) works more like a credit card. You’re approved for a maximum borrowing limit and can draw funds as needed during the initial five-year draw period. HELOCs typically come with a variable interest rate, which means your payments can go up or down depending on market conditions and how much you’ve borrowed.
Both options let you borrow against your home’s value, but the better fit depends on your goals and financial situation.
What’s the Difference Between Fixed-Rate vs. Variable-Rate Borrowing?
With a fixed interest rate, your rate stays the same for the entire life of the loan. That means your monthly payments never change, which can be a big plus if you value consistency or expect interest rates to rise.
A variable interest rate, on the other hand, is tied to a benchmark (like the prime rate) and can fluctuate over time. This means your rate, and your monthly payment, can increase or decrease. In the case of a HELOC, the amount you owe will also vary depending on how much you’ve drawn from the line of credit and current interest rates.
You may also want to consider your repayment timeline when deciding. Borrowers often feel confident about rate trends over the next year, but no one can predict what will happen five or ten years from now. If your loan is relatively short-term, you might feel more comfortable with an adjustable rate.
When a Fixed-Rate Home Equity Loan Makes Sense
You know exactly how much money you need and when you'll need it.
You’re using the funds for a one-time expense, like a home renovation, major purchase, or debt consolidation.
You want predictable monthly payments and don’t want to worry about interest rates rising in the future.
You prefer to pay off the loan steadily over time with a consistent schedule.
When a Variable-Rate HELOC Might Be the Better Fit
You want ongoing access to funds and don’t plan to borrow the entire amount at once.
You’re working on a long-term or phased project, like home improvements done in stages.
You plan to pay off what you borrow quickly, minimizing the impact of rate changes.
You’re comfortable with a little uncertainty and prefer the flexibility of borrowing only what you need.
Questions to Ask Before Deciding Between a Fixed-Rate Home Equity Loan or a Variable-Rate HELOC
If you’re trying to decide between a home equity loan and a HELOC, ask yourself these questions:
Do you need a large lump sum now, or just access to funds over time?
Would stable monthly payments help you budget more easily, or do you want the flexibility to borrow and repay as needed?
How long do you plan to carry the balance?
Are you comfortable with the possibility of interest rates increasing in the future?
The right answer depends on your financial habits, current needs, and how you plan to use the funds.
Providing Flexible HELOC and Home Equity Loans to Homeowners in Monroe and Ouachita Parish
Ouachita Valley FCU offers both fixed-rate home equity loans and variable-rate HELOCs. Our mortgage professionals are always available to explain the pros and cons of each to members.
If you’re not sure which option is right for your goals, our lending team can help you compare the benefits and choose the loan that makes the most sense for your situation. Members can start their applications online, or you can call our local loan professionals at 318.387.4592 for more information.
