<p>I’d just point out that if your credit is good and you are in a strong financial position (plenty of room on your home equity, good income to debt ratio) – then if you took the HELOC now when interest rates are a 3% and interest rates started to climb in the future – you would probably be able to refinance to lock in a fixed rate. So I wouldn’t be too worried about the adjustable rate – you will have some options there.</p>
<p>On the other hand, I would point out that you need to look at more than the interest rate to figure out how much you will pay on borrowed money. When I had an adjustable HELOC in the past, the monthly payment rate was NOT amortized in a way that would pay off the loan in the period for which the HELOC was extended. That is, I had a 15-year HELOC, but my payments were only slightly more than interest only – I would have been left with a substantial balloon at the end of 15 years. (I ended up refinancing well before then).</p>
<p>I have opted to take PLUS loans for my kids. The interest rate on the loans for my daughters is much higher than a rate I could have gotten on a HELOC – but the loans are amortized over 10 years and I play to pay them off much sooner. My idea was to borrow about half of my costs for college, pay the other half out of current income or savings – and then once my kid graduated I would be able to shift the funds used for the “other half” of college expenses to pay down the loans at an accelerated rate.</p>
<p>If you look at a loan in terms of the <em>overall costs</em> of interest over the life of the loan, you get a different picture than if you simply look at interest <em>rate</em>. Obviously, if you have a HELOC at 3% vs. a PLUS loan at 8%, if you pay each down at the same rate, the HELOC will save you money. But my point is that unless you are very self-disciplined - you probably won’t end up paying them down at the same rate. If you make smaller payments over a more extended time to pay down the 3% loan, you’ll end up paying more than the 8% loan. With either loan, you will cut down on interest costs tremendously if you simply decide to pay extra – for example, if you decide to add $100 to your monthly payment, that’s going to cut things down. </p>
<p>So it makes sense to run some calculations based on various scenarios and then look at what the total costs will be to you over the life of the loan, as you presently intend to pay it off. Also, consider what happens in the even of an unexpected interruption of income (illness, disability, loss of work). There are some deferment options with a PLUS loan and even some situations that wipe out the loan which would not apply for a home loan-- so I decide that the PLUS was “safer” for my needs. In part that is because I am a single parent and my home is my only major asset, plus I am getting older – so it would be disastrous for me if I became even temporarily disabled and faced loss of my home.</p>