What Are Fixed-Rate Home Equity Loans?

A fixed-rate home equity loan borrows against the value of your home to offer a lump sum equal to your home’s worth. The loan features a fixed rate, repayment schedule and monthly payments.

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A fixed-rate home equity loan comes with a predetermined monthly payment, interest rate and repayment plan. If you’re considering different methods for paying large expenses, locking in a fixed-rate option saves you from costs potentially increasing. This can save you more in the long run.

Several components affect fixed-rate home equity loans, including the loan term, prime rate, your credit score and credit limits. Your loan-to-value ratio (LTV) also affects your home equity fixed-rate loan since a larger down payment means a smaller LTV, and vice versa.

There are many factors to consider when taking out a fixed-rate home equity loan. Comparing the options will help you decide on the best for your needs.

Key Takeaways

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A fixed-rate home equity loan borrows against the value of your home with a set rate, repayment schedule and monthly payment amount.

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Although a fixed-rate home equity loan offers rate stability, you risk foreclosure if you default.

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You can use home equity fixed-rate loans for home renovations, college education expenses, debt consolidation, medical emergencies and more.

Factors to Consider in a Fixed-Rate Home Equity Loan

With a fixed-rate home equity loan, monthly payments and repayment plans are predetermined. You don’t need to worry about rising interest rates and will receive the payment as a single lump sum. Your financial background, such as your credit score, can affect your eligibility to take out a fixed-rate home equity loan.

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CURRENT MARKET RATES

Although a fixed-rate home equity loan’s features are appealing, getting one is only beneficial if the current market rates are favorable. Keep in mind that other options are available for you to finance bigger expenses. Current market rates affect the loan’s overall cost because the market influences interest rates and the value of your property.

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FEES AND HIDDEN COSTS

When considering a fixed-rate home equity loan, it’s best to anticipate possible costs so you can prepare or adjust your monthly budget. Aside from the fixed-rate home equity loan’s interest rate, keep an eye out for appraisal costs, origination fees and document preparation expenses.

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APPLICATION TIME FRAME

Evaluate how much time you need to process an application for a fixed-rate home equity loan since some cases might be time-sensitive. Home construction or emergency expenses are examples of situations when your application time frame is important. In these situations, you’ll want to prioritize a lender that can release funds relatively quickly.

Pros and Cons of Fixed-Rate Home Equity Loans

If you’re on the fence about whether or not a fixed-rate home equity loan is right for you, consider the pros and cons before making this financial commitment.


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Pros
  • It’s an easier type of loan to close than a mortgage.
  • You don’t need to stress over increasing market rates throughout the loan’s lifetime.
  • You should expect lower monthly payments.
  • Funds can be used to pay off virtually any expense.
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Cons
  • Your home is at risk of foreclosure if you default on payments.
  • It’s not a viable option for those with a high debt-to-income ratio or poor credit.
  • It has higher rates compared to mortgages.
  • The process of taking out a fixed-rate home equity loan can eat up a lot of time.

Uses of Fixed-Rate Home Equity Loans

Fixed-rate home equity loans can be used to finance many different expenses. Since it’s a financial responsibility, it’s wise to keep a level head when getting a loan for home improvements and other major costs.

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DEBT CONSOLIDATION

If you have multiple debt streams like car loans, personal loans or credit card debt, taking out a fixed-rate home equity loan for debt consolidation may be a good move. Debt consolidation usually entails a lower interest rate and added convenience since payments are directed to one lender.

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HOME IMPROVEMENTS

Home improvement is one of the most common uses for a fixed-rate home equity loan. Since you receive the money in a lump sum, it’s much easier to avoid delays with your home renovation or construction project, especially if used for minor repairs or remodeling.

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MAJOR LIFE EVENTS

You’ll sometimes want to celebrate life’s biggest milestones and not skimp on expenses. You can fund significant life events such as weddings, engagement parties or education with a fixed-rate home equity loan.

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LARGE PURCHASES

Although not as common, it’s possible to take out a fixed-rate home equity loan to finance travel, medical bills or large expenses. Certain moments in life may make you consider splurging, especially when you want to pamper yourself or your loved ones.

Fixed-Rate Home Equity Loans vs. HELOCs

Although a fixed-rate home equity loan and a home equity line of credit (HELOC) sound similar, these are two different loan types. A HELOC allows you to take out as much as you need and charges interest based on the amount you borrowed. You receive a fixed-rate home equity loan in a lump sum against your home’s value. Understanding the differences between these loan types can better inform your borrowing decision.

HELOCs vs. Fixed-Rate Home Equity Loans
  • Fixed-Rate Home Equity Loans
    HELOC
  • Description

    Offers you a lump sum equal
    to your home’s equity

    A revolving credit line where
    you withdraw as much as you
    need

  • Interest Rate

    Fixed

    Often variable

  • Cost

    More expensive than a typical
    mortgage; costs are also
    affected by a loan’s term and
    other fees

    Only involves interest rate

  • Payment Options

    Stable payment schedule and
    amount beginning when you
    take out the loan

    Pay interest throughout the
    draw period, principal and
    interest afterward

  • Monthly Payments

    Predetermined

    Cover principal and interest

  • Funds Disbursement

    Single lump-sum payout

    You can take out cash as
    needed

  • Common Uses

    Home improvement or other
    significant expenses

    Debt consolidation and home
    renovation

Frequently Asked Questions About Fixed-Rate Home Equity Loans

Assess your financial situation when considering a fixed-rate home equity loan. MoneyGeek answered the most commonly asked questions to help you determine if this is a viable option for your needs.