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How are heloc payments calculated

how are heloc payments calculated

NEW YORK (CNNmoney) - Times may be getting tighter, but your bills and family plans can't be put on hold. That's why it may be all the more tempting to tap into what likely is your biggest asset: the house.

After all, you can get your hands on a big chunk of money to fund just about anything you need - home repair, tuition payments, a get-out-of-credit-card-debt-free card.

In the midst of 10 interest rate cuts by the Federal Reserve this year, the cost of borrowing money against the equity in your home has gotten considerably cheaper. And, unlike other forms of consumer debt, the interest you pay may be tax-deductible.

But even with low rates and potential tax deductions, you should know what you're getting into. Determining whether a home equity loan (HEL) or home equity line of credit (HELOC) makes sense for you depends on several variables. And before deciding, be clear on how the two instruments differ from each other.

Mortgage vs. credit card

A home-equity loan is essentially a second mortgage. You get a lump-sum of money and pay it back in fixed monthly installments over a fixed period of time, typically 10 years-to-15 years. The most common HEL has a fixed interest rate that, like a mortgage, you lock in when you secure the loan.

A home equity line of credit, by contrast, functions more like a credit card. You're assigned a credit limit and you pay back

only what you use plus interest. When you secure a HELOC, you typically receive a checkbook or credit card which you may use up to your credit limit - the average is $58,800, according to the Consumer Bankers Association (CBA). Whenever you use some of the credit, you'll owe a monthly minimum payment on your outstanding balance, but beyond that you determine how much you pay back and when.

The interest rate on a HELOC is pegged to the prime rate - the rate at which banks lend to their most creditworthy customers. The average HELOC rate is 1 percent over prime, although some HELOCs are set at prime, said CBA spokesman Fritz Elmendorf.

So which is better?

When deciding whether to take out a home equity loan or line of credit, consider your goals, your payment schedule, your spending habits and your risk tolerance.

A home-equity loan is best used for a one-time goal for which payment will be due in full and which has long-lasting benefits. For instance, said certified financial planner Jon Duncan of Tacoma, Wash. a loan makes sense if you want to fund a specific home improvement project that boosts the equity in your house or if you want to pay off high-interest credit card debt in one fell swoop.

What's more, a HEL makes sense if you like the security of a locked-in rate and knowing exactly how much you'll owe every month, Elmendorf said.


Category: Bank

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