The Pros and Cons of a Fixed Rate Home Equity Loan
Fixed rate home equity is a home equity loan with an interest rate that remains the same until your loan is fully repaid. While home equity loans tend to have low interest rates, in most cases, their interest rates are variable, going up and down depending on the market conditions. Because of this, fixed rate home equity loans are usually preferred over their variable rate counterparts. However, if you want to get a fixed rate home equity, you should be aware that it has it's downsides as well. In the end, it is up to you to decide whether or not the benefits outweigh the drawbacks.
Advantages of Fixed Rate Home Equity Loans
A key advantage of fixed rate home equity loans is that they will cost less on the long run, saving you quite a bit of money. No matter how high variable interest rates get, the fixed interest rates will remain the same. This gives you a measure of stability. You will always know how much money you will have to set aside for your home equity loan monthly payments, which is always useful when you are trying to plan and organize your finances. It also reduces your risk of going into debt, since you will have easier time keeping up with payments that stay the same than payments that keep going up every month.
One of the biggest risks of taking out a home equity loan is the danger of winding up "upside down" -owing more than your home is worth. If this happens when you have to sell a home, you will have to pay off everything you still owe your home equity loan lender. Since your payments will remain the same with your fixed rate home equity loan, you are less likely to be late on your payments and less likely to fall into debt.
Disadvantages of Fixed Rate Home Equity Loans
However, the biggest advantage of home equity loans can wind up becoming it's biggest disadvantage. While having fixed interest rates on your home equity loan is good when the variable interest rates are higher, they will seem like a burden should variable interest rates go lower. While this is an unlikely possibility given the current market trends, it is not impossible. And, as the history of the world economy demonstrates time and time again, long-term market behavior is hard to predict. You can reduce the odds of this becoming an issue by getting a shorter-term home equity loan, but this will result in higher monthly interest payments.
Like variable rate home equity loans, fixed rate home equity loans' interest rates are tax-deductible. However, because the interest rates are fixed, you will not be able to deduct as much as you would with variable interest rates. Of course, the fact that you will have to pay more in the later case can undercut this disadvantage.
A smaller, but nonetheless noteworthy disadvantage of fixed rate home equity loans is that their interest rates tend to start out higher than the interest rates of variable rate home equity loans. This means that, at first, you will inevitably have to pay more than you would with home equity loans that have variable interest rates