What Are Fixed-Rate Home Equity Loans?

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Edited byAmy Wilder

Updated: January 6, 2023

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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.

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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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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
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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.

Interest is usually based on the prime rate, loan-to-value ratios and your credit score. Your lender might consider other components as well.

It depends on the lender. Be sure to ask your lender about potential penalties to avoid paying extra and unnecessary costs.

Not necessarily. More often than not, a home equity loan has a fixed rate. Reach out to your lender to figure out if this arrangement is possible.

It depends on your situation. If you prefer a credit line with a draw period and variable rate, consider a HELOC. However, if you need a loan type with a fixed rate and lump-sum payout, a home equity loan might be better for you.

It’s generally a good idea to borrow against your home’s value if you’re confident in your financial situation. Borrowers who evaluate their monthly spending and account for sources of income may find a home equity loan favorable.

It’s best to consult your lender and discuss why you want to convert your fixed-rate home equity loan to HELOC. If possible, you can apply for a HELOC.