05 Jul With higher interest rates, should I lock in a fixed rate for my HELOC?

Q. I took out a home equity line of credit to redo my kitchen and the balance is about $30,000. I know interest rates are going up and the credit line has a variable rate. Is now a good time to try to lock in a fixed rate with the bank?
— Borrower

A. The simple answer is yes.

Interest rates have a lot of moving parts, but right now, they’re moving higher.

The Federal Reserve increased the federal funds rate three times in 2022 with the most recent increase coming in mid-June, said Jeanne Kane, a certified financial planner with JFL Total Wealth Management in Boonton.

They are planning to raise rates again later this year, she said.

It all increases your borrowing costs.

A home equity line of credit, or HELOC, is a line of credit that you can access, essentially borrowing against the equity in your home, she said. These have variable interest rates and will increase as the Federal Reserve increases rates, she said.

“When rates are decreasing, variable rates work well but in rising interest rate environments they don’t,” she said. “That’s because these rates change periodically and an increase by the Fed will increase your rates too.”

You have several options.

You may be able to convert your existing variable rate HELOC or a portion of it into a fixed rate HELOC, Kane said, but not all banks offer this option.

When the rates are fixed, you will probably pay more in interest that you are currently paying for the variable portion, she said. However, in a rising interest rate market you’ll be able to lock that rate, in which is good.

Another option is a fixed rate home equity loan, she said. This is essentially a second mortgage on your home.

“You’ll have fixed payment and a payment schedule for repaying the loan so no surprises or increases in your payment,” she said. “You will likely also have loan origination and other fees which increases the overall cost.”

She said you should do your research to understand the tradeoffs and rates today for what would probably be a higher fixed rate loan or roll the dice with your HELOC in a rising interest rate environment.

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This story was originally published on July 5, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.