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How To Calculate Home Equity Line Of Credit Payback

A home equity line of credit is a secured loan against an underlying asset, normally a primary residence, and the amount available for lending is usually equal to the equity available in the home or a percentage of the available equity. HELOC interest rates are normally based on the prime rate plus some margin rate that the homeowner qualifies for and since the prime rate is variable home equity lines of credit will have a variable interest rate which is computed daily.

One nice aspect about a home equity line of credit as opposed to a home equity loan is that it does not accrue interest and no payment is due until funds are used for purchases. Since a home equity loan consists of a lump sum being paid to the homeowner, interest begins accruing immediately and payments are made on the full amount regardless if the entire amount is spent are not. Home equity lines of credit, while considered technically second mortgages, are much easier to manage because the individual can choose to spend as little or as much as necessary.

Unlike a credit card which can technically last forever as long as minimum payments are made, home equity lines of credit are more specific in the terms of availability and payment. Most HELOCs have what is referred to as a draw period which often does not exceed 10 years. During this period funds can be accessed and interest only payments can normally be made. There is also a repayment period during which time payments usually consist of both principle an interest. Thoroughly read all documentation to understand the requirements of your HELOC.

Since most home equity lines of credit have variable interest rate terms and are computed daily calculating the interest on a monthly basis is fairly easy to do. If $2,000 has been drawn on a home equity line of credit at 6% annual interest rate then the formula to calculate March interest is ((.06 X $2,000)/365) X 31. A March interest only payment would be $10.19 on $2,000 at 6% annual interest.

Keep in mind this interest payment only applies if the loan is still in the draw period. Once the home equity line of credit moves into the repayment period, payments will include both principal and interest. In these circumstances it's easiest just a request a print out of monthly payments from the loan originator which is the bank you requested the HELOC from. If the bank wants to charge a fee then there are numerous online calculators which can generate identical payment schedules for free.

Whether you calculate your monthly payment schedule by hand, request a payment schedule from your bank or credit union or generate one online using one of the many free home equity line of credit calculators there are many resources available to make sure payments are made on time and for the correct amount. Do not put your home at risk by defaulting on a home equity line of credit and make sure you pay the correct amount on time to get the most out of this valuable financial tool.