Fixed vs. Variable: Rate Risk on Second Liens
Fixed = price certainty: the payment on day one is the payment in year 10. Variable = price risk: prime + margin (e.g., prime + 1%) with periodic and lifetime caps (often 2% per year, 18% lifetime). Caps limit speed, not destination.
Lifetime scenarios on $50,000
- 8.5% fixed, 10yr: $620/mo, ~$24,400 interest. Locked.
- 9% variable flat, 10yr draw + 15yr repay: ~$45,000 interest over 25 years.
- 9% rising to 11% in year 3: ~$58,000 interest — the +2% stress line in our calculator.
- Verdict: variable wins only if you borrow briefly or rates fall. Long horizons favor fixed.
Questions, answered
Can I convert a HELOC to fixed?
Many lenders offer fixed-rate lock options on drawn balances (sometimes for a fee). Terms vary — ask before you draw, not after rates spike.
What index do HELOCs use?
Almost always Wall Street Journal prime. Margin depends on credit and CLTV; floor rates (e.g., 4–5%) stop it falling below a level even if prime drops.