Pros and Cons of a Fixed Rate HELOC

Taking out a fixed HELOC on your home can provide you with several benefits as a homeowner. This is a popular type of loan product and it carries with it several advantages and disadvantages. Here are some of the pros and cons of a fixed rate HELOC.

Pros

One of the major benefits of a fixed rate home equity line of credit is predictability. Your interest rate is going to be fixed and you know exactly what to expect from your monthly payment. Many people prefer to have some stability when it comes to planning out their monthly expenses. If you have an adjustable-rate HELOC, you will not know from one year to the next how much your monthly payment is going to be. This subjects you to a fair amount of interest rate risk and it could result in a much larger monthly payment for you over time.

Another benefit of this type of product is that you can access your home equity whenever you need it. If you were to take out a home-equity loan instead, you would have to take out all of the money at once. With a home-equity line of credit, you could simply choose to open it in case of emergency. Then, whenever an unexpected expense comes up, you can simply access the money as you need it. This is very convenient for many homeowners and it will allow them to borrow the exact amount that they need.

Another advantage of this type of product is that you can deduct the amount of interest that you pay from your taxable income when you file your taxes. This can amount to a sizable tax deduction at the end of the year.

Cons

Although this type of loan has some benefits, there are a few disadvantages as well. For one thing, you may end up paying more money in interest than if you had chosen an adjustable-rate loan. Fixed rate home equity lines of credit are going to have a higher initial interest rate than those that are adjustable. If the market interest rate did not increase substantially while you had the loan, you might be able to save some money with an adjustable-rate product.

Another disadvantage with this type of home-equity product is that it makes it very easy to access the funds in your home-equity. Once you are approved for the home-equity line of credit, you only have to write a check or swipe a debit card in order to gain access to the money. This leads many people to using the money on frivolous purchases and things that they do not necessarily need. Anytime you are using funds from a home-equity line of credit, you are essentially putting your house at risk. Many people do not stop to think of the consequences of purchasing a big-screen TV with money from a home-equity line of credit. You are essentially risking their house on their ability to pay for the TV.

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