Choosing a Home Equity Loan in a Rising Rates Environment

Question: I’ve heard that interest rates will climb soon. If that is true, how does it impact home equity lines of credit and a typical home equity loan? And what are the differences anyway?

Answer: It’s true that financial experts predict an interest rate hike (or multiple hikes) in 2017. There are some key differences between a home equity line of credit (HELOC) and fixed home equity loans. Here are some of the things you’ll want to know:


How they work

A HELOC is a revolving credit line that allows you to borrow money as needed, with your home serving as collateral for the loan. You can spend the funds however you’d choose, though some plans have restrictions on the amounts and ways you can borrow.


HELOCs allow for financial flexibility. You can withdraw money as needed over an amount of time known as the “draw period.” This is especially beneficial if you don’t know exactly how much money you’ll need.

Repayment options vary, but are also usually very flexible. When the draw period ends, some lenders allow you to renew the credit line, while others allow you to make payments over another set time period.

Monthly payments also vary. Some only require monthly interest payments and then collect the entire principal at the end of the draw period. This can be beneficial when borrowing for an investment which will hopefully yield a sizable payoff.


HELOCs have variable interest rates – the interest you’re paying on the loan fluctuates over the loan’s term. Taking out a HELOC in an environment of rising interest rates means your rates are likely to increase over the life of the loan.

HELOCs that require repayment of principal only at the end of the term can also prove to be difficult for borrowers. If you can’t pay the large amount, you will be forced to refinance with another lender, possibly at an unfavorable interest rate.

Home Equity Loans

How they work

A fixed home equity loan, also secured by your home’s equity, allows you to borrow a fixed amount in one lump sum. Most home equity loans have a fixed term and a fixed monthly payment.


Home equity loans have fixed interest rates – the borrower knows exactly what their monthly payment will be for the life of the loan. In an environment of rising rates, this is especially beneficial; the loan won’t be subject to increasing rates. Every monthly payment on your loan is made up of both principal and interest. You will pay back the entire loan, in manageable amounts, until the loan term is over.


There are several expensive fees attached to home equity loans. Receiving all the funds at once can also be problematic if you find you will need more than the amount borrowed. Also, the monthly payment will be higher.

St. Paul Federal can help you no matter your needs.