Converting Variable Rates in a Rising Rate Economy

iQuanti: The Federal Reserve's decision to hike interest rates in 2022 along with the prospect of half a dozen additional rate hikes throughout the remainder of the year is cause for concern, especially for those who have a variable-rate HELOC. 

HELOCs are home equity lines of credit, where a lender provides a capped limit of money to borrow over a specific period of time. The limits of HELOC borrowing are based on the collateral of the homeowner's home value. 

While HELOC interest rates are most often variable rates, if you have an option to convert your variable-rate HELOC, now might be the best time to convert to a fixed-rate HELOC.  

The Benefits of Converting to a Fixed-Rate HELOC

The prospect of several additional interest rate hikes through 2022 and possibly beyond is enough to cause holders of variable-rate HELOCs to lose sleep at night. However, the saving grace for HELOC borrowers is the option to convert to a fixed-rate HELOC. 

The increasing availability of opportunities to convert to fixed-rate HELOCs is an especially attractive option in the current climate characterized by inflation, rising interest rates and a looming recession.

Though there is the potential for interest rates to stagnate and/or possibly decrease, most economists agree several rate hikes are coming. Convert the balance on your adjustable-rate HELOC before those rate hikes are implemented and you can capitalize on the opportunity to lock in a better rate. 

Perhaps the most alluring aspect of converting a variable-rate HELOC to a fixed-rate HELOC is that the new interest rate does not have the potential to increase, regardless of whether interest rates are elevated significantly higher in the months and years to come. The new interest rate is locked in for the term of the loan, ultimately providing you, the HELOC borrower, with financial protection against the prospect of ever-increasing interest rates.

Recognize the Risk of Adjustable-Rate HELOCs

Though adjustable-rate HELOCs are certainly intriguing as they empower loan holders to snag potentially advantageous interest rates and make interest-only payments after borrowing against the loan, there is also a significant downside. 

The repayment phase might not be applicable for a full decade or longer, meaning the adjustable-rate HELOC will not convert to that of the fixed-rate variety for quite some time. There is the potential for interest rates to significantly increase during this waiting period. Higher interest rates trigger higher monthly payments. 

If interest rates continue to increase through 2022, those holding adjustable-rate HELOCs will be on the hook for higher payments down the line once the repayment phase begins. Convert the HELOC to one that has a fixed rate and you won't spend a single second worrying about the potential for the interest rate to incrementally increase to a level that makes repayment that much more financially arduous. 

Every adjustable-rate HELOC holder should be aware that the upper limits of interest rate fluctuations have the potential to be as high as 18%. Rewind back to the 1980s when mortgage interest rates were in the teens. If history repeats, we might see interest rates elevate back to or near this egregiously high level. It is not in your interest to continue rolling the metaphorical dice with an adjustable-rate HELOC.

Convert Your HELOC Before Interest Rates Rise Again

The clock is ticking. Be proactive by reviewing the advantages of converting your adjustable-rate HELOC to a fixed-rate HELOC, seize the opportunity to lock in a fair interest rate and you will have paved a path toward financial success.

Source: iQuanti, Inc.

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Categories: Mortgages and Loans

Tags: HELOC, HELOC interest rate, home equity loan