Have a HELOC? You’re in for a roller coaster ride

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(This article was originally published in NextMove, our weekly newsletter on the housing market. Sign up for it using the box below.)

Experts keep using the same metaphor when talking about interest rates this year: It’s a roller coaster. 

This is Jon Reed with NextAdvisor. I’m from Ohio, and I can attest that financial news this year can make you feel like you’re on the old wooden roller coaster The Beast at the nearby Kings Island amusement park. Mortgage rates have gone up dramatically, with big peaks and dips for the past few months. 

Lucky for me, I haven’t felt that turbulence in my mortgage payment. Because it’s fixed, it’s remained steady and consistent for years, kind of like the drive from my house to Kings Island, through farmland so flat you can see soybeans for miles. 

The benefit of a fixed-rate loan is that you can borrow money at any point in time, and you’ll pay the same amount, at the same interest rate, until it’s paid off. You’re protected against big rate hikes that could make that debt more expensive. Of course if rates drop, you won’t be able to take advantage of paying less in interest. But it allows you to do the math ahead of time to make sure you can afford to pay back what you borrowed.

In the world of mortgages, most loans are fixed-rate, although adjustable-rate mortgages are growing in popularity as rates rise. ARMs are becoming more common because they offer lower interest rates to start out with – but that’s because you’re the one taking on the risk that rates will rise in the future, not the bank. 

When you’re a homeowner borrowing against your home equity, you’ll likely face the choice between a fixed or variable interest rate. Generally, if you want a fixed interest rate, you’re looking at a home equity loan – that is, taking out a set amount of money, say $30,000, all at once and then paying it back in equal installments over however many years. A common alternative that usually comes with variable rates is a home equity line of credit, or a HELOC, where you’re given the option to borrow up to a certain amount at once for a set period of time.

In calmer financial times, when rates move around just a little bit, the difference isn’t all that significant. Today, experts say you may be choosing between a flat, smooth car trip and a ride on a roller coaster.

It’s something to keep in mind if you’re borrowing money with a variable-rate HELOC. You might be perfectly comfortable with your interest rate right now, but the Federal Reserve is expected to keep raising rates, which means in a few short months you could be paying significantly more.

My take is that it’s easier to know if you can afford a home when you’re looking at a fixed payment and a fixed interest rate. There’s less risk, and you don’t need to account for volatility. 

Don’t let the roller coaster surprise you.