Is a Fixed Rate or Variable Rate Heloc Better?

Interest Rate Options on a Home Equity Line of Credit

If you have property then it can be put to various uses when a financial need arises. The most common example is taking out a second mortgage loan. A second mortgage loan comes in two forms, home equity loan (HEL) and home equity line of credit (HELOC). If you take out a line of credit it means you are using the equity that you have built on your home to withdraw cash that you need. A line of credit works similar to a credit card. After you have applied for a particular amount that you want to take out as line of credit, you don’t have to use it as lump sum money like a home equity loan. You can withdraw some amount of money out of the total amount at intervals you wish to for a certain period of time, usually 10 years. This is the reason why many people prefer HELOCs.
 

How do you calculate the interest rate on a HELOC?

When you have taken out a loan in the form of a line of credit you have to pay interest on it. Usually lines of credit have fixed interest rate, but there can be variable interest HELOC too.  You can calculate the interest rate payment on your HELOC from an online mortgage calculator found in different mortgage related websites.

However be sure to choose a website which is a reliable one so that the result you get is quite accurate. Thus a HELOC payment calculator, depending upon its type and functionality, will help you calculate the minimum payments that you have to make or the amount of line of credit that you qualify for and how the line of credit will change if the appraised value of your house changes. 

 

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If you take out an interest-only HELOC, then also you can find online mortgage calculator that calculates the monthly interest-only HELOC payment, given your current balance and also calculate the amount you have to pay for the principal and interest payment once the period through which you are allowed to draw cash expires.


What are the pros and cons of fixed rate and variable rate HELOCs?  

1. Fixed rate HELOC:  In this kind of line of credit the interest rate is fixed throughout the period that you are allowed to draw out the money.

  • Advantage -  The main advantage of a fixed line of credit is predictability. If you have a fixed rate of interest then you will have to make the same interest payment over the term of the loan throughout which you can draw out the available balance. The interest payment may differ depending upon the amount of money you have withdrawn, but since the interest rate remains the same, you are able to calculate the amount of money you need to pay.
  • Disadvantage – Like all things even a fixed line of credit has its disadvantages. Since the rate is fixed it is not possible to take advantage of a lower interest rate if it is available. You have to go on paying the fixed interest rate throughout the lifetime of the loan.
2. Variable rate HELOC – This is the traditional kind of HELOC, in which the interest rate changes as the market interest rate fluctuates.

  • Advantage – The major factor that draws most people to a variable line of credit is that it initially provides a very low rate of interest. After this the interest rate is adjusted to market interest rates. Another advantage is that when you have a variable interest rate you can get low interest payment as long as the market rate is low.
  • Disadvantage  - If the rate of interest rises too high then you have to make large amounts of payment which will be very difficult. 
Thus you can take out a fixed or variable rate HELOC depending upon the conditions you prefer.