Home equity lines of credit, or HELOCs, allow homeowners to get their home’s equity as a credit line. A number of these programs allow the homeowner to write checks or use credit cards to get the equity. One benefit is that the complete amount of the loan does not always need to be withdrawn right away. Since interest is due on the outstanding balance and not on the entire credit line, it can save homeowners thousands of dollars, compared to conventional loans that need the full amount of the loan to be pulled at closing.
Ascertain what the margin and index are on your HELOC. You can find them in the HELOC notice you signed when you shut on the line of credit. Many HELOCs use the prime rate as published in the”Wall Street Journal” due to their index. As of July 2010, the prime rate is 3.5 percent. The margin is how much above or below the indicator your loan’s interest rate actually is. Some HELOCs actually have negative margins that bring the interest rate under the prime rate.
Look up the index rate online. Many financial sites provide the current rates for the hottest mortgage indicators. In case the indicator in your HELOC is your prime rate, assess the Wall Street Journal daily. Add or subtract, as appropriate, the margin in your HELOC from the indicator. This will decide the interest rate you pay. If the margin is +0.5 percent and the indicator is your prime rate, then your interest rate as of July 2010 will be 4%. When it is -0.5 percentage, your rate would be 3%.
Calculate your payment using the simple interest method, since most HELOCs are interest-only loans. The minimum monthly repayment on interest-only loans is the total amount of interest due on your loan’s current balance. If your current loan balance is $50,000 and your interest rate is 4%, you would multiply $50,000 by 4% to discover that $2,000 in interest is owed for the year. Divide the annual interest owed by 12 to ascertain the monthly payment: $2,000 divided by 12 equals a charge of $166.67. Most lenders want you to round to the nearest cent.