Features

• A fixed-rate home equity loan is issued with a given set of terms. Two of the most important terms are the limit and the interest rate. The limit is based on the equity you have in your home as well as your income. When you use your home equity loan, you subtract funds from this limit. If the loan is an installation loan, you will never have the ability to use this amount again. If you have a revolving loan, you can repay the amount and borrow again in the future. With a fixed-rate loan, you will pay a flat fee on any amount you borrow.
  
  

Considerations

• On an installment loan, you can predict your financing fees up front if you have a fixed rate. Only some home equity loans are issued through a lump sum and repaid through installment. More commonly, a home equity loan is issued in revolving terms through a line of credit. Each month, you can spend up to your limit on the loan, repay the debt and start anew. In this case, your loan payment will vary. You will have a set amount you must repay each month to keep the loan active. You also have the option of paying down your debt in full. If you do not pay down your debt, the interest will compound next month. Even though the rate is fixed, since interest is charged twice, your financing fees will go up.
  
  

Significance

• As a borrower, considering the way fixed-rate loans can still vary in cost is important. You must make smart decisions about how and when to use your loan and when to pay down the loan amount. If your home equity loan offers revolving interest, you will incur the lowest monthly payments and financing fees by paying down your debts each month. If you have a fixed-rate installment loan, there is no benefit to paying more than the minimum amount each month.
  
  

Misconceptions

• Many borrowers mistake a fixed rate for simple interest. Simple interest is a flat fee that does not revolve or compound. Most fixed-rate loans are not simple-interest loans. Instead, they allow your home equity debt to vary monthly, based on your borrowing and payment record.
  
  

Warning

• If you have a fixed-rate home equity loan, look closely at your contract to determine if the rate can compound monthly. If so, it is in your best interest to pay down your debt to reduce monthly payments and fees.