I'm looking at two options for a home improvement loan (around $20,000): the first is a federal title 1 loan, which would be a fixed interest rate of around 4.5% (at the time of initial quote), BUT requires PMI at around $20/month. The other option is a HELOC, which doesn't require PMI, but has a variable rate (which will almost certainly only go up over the life of the loan) of 6%.
According to my math, if the rate on the HELOC goes up more than 0.4%, then it becomes more expensive than the Title 1, meaning that if I pay off the loan over 15 years, the Title 1 loan, even with the PMI attached, would almost certainly be the cheaper option.
Where I'm still a little fuzzy is what happens if I pay the loan down more quickly - say over 7 years rather than 15? Is there a point where the HELOC would become the cheaper option, even with the rate going up? That is, is there a point in paying down the loan where that $20/month outweighs the higher interest rate on the HELOC? Or does the likelihood of the rate going up significantly almost always make the HELOC the more expensive option?