How your HELOC payment can be affected by interest rate changes

Homeowners looking to tap into some extra cash today may find a well of potential value in their home's equity — especially those who live in an area where home prices are still elevated.

Borrowing from home equity using a home equity loan or home equity line of credit (HELOC) can help you avoid the double digit interest rates some personal loans and credit cards carry. In fact, some of today's best home equity rates are around 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 through the lifetime of the loan, for example, HELOCs generally carry variable interest rates. As a result, while HELOC borrowers may have experienced increasing monthly payments over the past few months of rate hikes, a potential rate pause — or rate drop in the future — could soon make HELOC payments more manageable.

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

How interest rate changes can affect your HELOC payment

If the interest rate on your variable-rate HELOC goes up when federal interest rates rise, it can increase your monthly payment amount. Today's borrowers have already experienced this firsthand, thanks to interest rate hikes over the past several months. But on the flip side, when rates go down, so too will your monthly payments. 

"A home equity loan or line of credit can still potentially make sense to fund renovations, but at today's rates, payments are substantially higher than they were just a couple of years ago," says Natalie Taylor, CFP, founder of Natalie Taylor Consulting Services. "Be sure that you can afford the payment on any home equity debt you take on, and be mindful of taking on variable interest rate debt as rates, and monthly payments, could increase over time." 

Note that this can have different effects depending on whether you're in the draw period or repayment period of your HELOC. During the draw period, you may only owe interest payments each month. While a higher interest rate will definitely still increase your monthly payment amount, it won't have as much of an impact as during the repayment period — when you'll pay back both the amount you borrowed and the interest owed. 

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

Why a HELOC can be a good option today

Though rates are high, you can still benefit from taking on a line of credit with a variable interest rate. If you believe rates could go down in the near future, you may save more over the long run with a variable rate HELOC than you would by locking in a fixed rate now. Plus, 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 benefit of a HELOC is the option to draw only the amount you need from the credit line. If your home value has gone up over the past few years, you may be 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're approved for. 

Finally, like a home equity loan, a HELOC could be a good option for you if you're planning to use the money toward a home renovation. When you use your HELOC for a qualifying home renovation, you can deduct the interest you pay from your tax return — which can be especially useful if you're repaying the money while rates are high. 

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

The bottom line

Rising interest rates over the past several months may have led to increased monthly payments on variable-rate HELOCs. But just as those rates can go up, they can also go down, depending on the overall rate environment. If interest rates do pause in the near future — and eventually start moving down — HELOC borrowers may benefit with lower monthly payments.

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