How your HELOC payments can be affected by interest rate changes

Homeowners looking to tap into some extra cash can find one today Potential value is good in their home equity — especially those who live in areas where Home prices are still elevated.

Borrowing from home equity using a Home equity loan or Home Equity Line of Credit (HELOC) Some personal loans and credit cards can help you avoid the double-digit interest rates that carry. Actually, some Today’s best home equity rates About 8% APR.

It’s good to know how home equity loans and HELOCs differ so you can make the best financial plan. While home equity loan rates are fixed and locked in for the life of the loan, for example, HELOCs typically carry variable interest rates. As a result, while HELOC borrowers may experience Increase in monthly payments Rate hikes in the past few months, a possible rate break — or future rate cuts — could soon make HELOC payments more manageable.

Read on to get a better idea of ​​how changes in federal interest rates can affect your HELOC monthly payment. And if you’re considering tapping into home equity today, start comparing the best home equity rates you can qualify for right here.

How Interest Rate Changes Can Affect Your HELOC Payment

If the interest rate on your variable-rate HELOC goes up when the federal interest rate rises, it can increase your monthly payment. Today’s borrowers have already experienced this, thanks to rising interest rates over the past few months But on the flip side, when rates go down, so do your monthly payments.

“A home equity loan or line of credit can still potentially finance renovations, but at today’s rates, the payments are substantially higher than they were just a few years ago,” says Natalie Taylor, CFP, founder of Natalie Taylor Consulting Services. “Make sure you can make the payments on any home equity loan, and be aware of variable interest rate loans as the rate and monthly payment can increase over time.”

Note that this may have different effects depending on whether you are in it Draw period or repayment period of your HELOC. During the draw period, you can pay only interest every month. While a higher interest rate will certainly increase your monthly payment, it won’t have as much of an impact as the repayment period — when you pay back both the amount you borrowed and the interest owed.

If you’re thinking about opening a HELOC today, make sure you read the fine print and understand how often and how high your lender can raise your interest rate. Learn more about your home equity options here.

Why a HELOC may be a good option today

Although the rate is high, you can still benefit from taking out a line of credit Variable interest rates. if you believe Rates may go down In the near future, you can save more over the long term with a variable rate HELOC while locking in a fixed rate now. Also, because HELOCs (along with home equity loans) are secured by the value of your home, they may already offer lower rates than credit cards or some personal loans.

Another advantage of a HELOC is the option to draw only the amount you need from the line of credit. if your Home prices have increased Over the past few years, you may have been sitting on a large amount of equity. But you only have to pay interest on the amount you borrow during the draw period, not necessarily the entire amount you’ve been sanctioned for.

Finally, like a home equity loan, a HELOC may be a good option for you if you’re planning to use a down payment. Home renovation. When you use your HELOC for a qualified home renovation, you can Deduct interest You pay from your tax return – which can be particularly useful if you’re paying when rates are high.

Think a home equity loan or HELOC might make sense for you? Compare today’s top home equity rates here now.

Bottom line

Rising interest rates over the past few months may lead to increased monthly payments on variable-rate HELOCs. But depending on the overall rate environment, those rates can rise as well as fall. If interest rates stall in the near future – and eventually start going down – HELOC borrowers Can benefit from lower monthly payments.

Before you sign, make sure you read your account terms and understand exactly how your HELOC interest and monthly payments may change over time.