How to calculate your HELOC payment
A Home equity line of credit (HELOC) is a type of loan that is like a credit card in that you’ll be approved for a line of credit and given a credit limit. Your monthly loan payments will be on the amount of the loan you use (not the whole credit line), and interest you pay will also be on only the amount you’ve used.
At Credit Union of Southern California (CU SoCal), we make getting a Home Equity Line of Credit (HELOC) easier.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
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What are HELOCs and how do they work?
A
HELOC is a type of loan which is secured by the equity in your home.
A HELOC can be used for any type of expense, including home renovations, buying a second home or investment rental property, paying for college tuition, and paying off high interest credit card debt.
When approved for a HELOC you’ll be given a line of credit which you can use like a credit card. Typically, HELOCs have a variable interest rate which is charged only on the amount of money you use, not the entire credit limit. You’ll also be provided with information on how to calculate a HELOC payment.
What factors determine how your HELOC payment is calculated?
There are several factors that are used when calculating a HELOC payment.
- Amount borrowed. This is the amount of money you’ve used that has been deducted from your available line of credit.
- Draw period vs. repayment period. The draw period is the amount of time the lender has given you during which you may draw money from your line of credit. The repayment period is the amount of time during which you must repay the amount you’ve used.
- Interest rate. This may include the lenders promotional or introductory rate which may be a fixed interest rate, and the variable rate the loan will convert to during the repayment period.
How to calculate your HELOC payment
Here is an example of how to calculate a HELOC payment:
If you’d like to run the numbers to see how much you would owe on a HELOC, just follow these step-by-step calculations.
Let’s assume you’d like to get a $200,000 HELOC.
In our example, all loan payments you would make on this HELOC will include the principal loan amount, interest rate, and loan term, which will determine your monthly payment.
Let’s say the $200,000 HELOC has a 9% interest rate and a 10-year term.
Use this formula to determine your total payment, including interest:
Total Payment = Principal (1 + Rate x Term)
Total Payment = $200,000 (1+ (0.09) (10))
Total Payment = $200,000 (1+ 0.90)
Total Payment = $200,000 x 1.90
Total Payment = $380,000
Next, let’s calculate your monthly payment. To find this number we’ll divide the total payment by the number of months in the loan term. For example, there are 120 months in a 10-year loan term.
Monthly Payment = Total Payment ÷ Number of Months
Monthly Payment = $380,000 ÷ 120
Monthly Payment = $3,166.66 per month
Benefits of a HELOC
As you consider applying for a HELOC, here are some
HELOC pros and cons to keep in mind:
Low APR: While most HELOCs come with an adjustable interest rate, the Annual Percentage Rate (APR) on a HELOC is typically lower than the interest rate charged by credit cards on purchases and cash advances.
Interest May Be Tax Deductible: According to the
IRS, interest paid on home equity loans and lines of credit is only deductible when you use the proceeds to buy, build or substantially improve your home that secures the loan.
Borrow Only What You Need: Because this loan is a line of credit, you can take out money as you need it, and you will only pay interest on the amount you borrow.
Flexible Repayment Options: All HELOCS have a “Draw Period” (typically 10 years) and a “repayment period” (typically up to 20 years). During the draw period, you can borrow as much of the funds as you need.
Raise Your Credit Score: Making loan payments on time will boost your credit score. Adding a HELOC to your credit mix can boost your
FICO score in two ways: by adding to your credit history (which accounts for 35% of your credit score), and adding to your credit mix (which accounts for 10% of your credit score).
Few Restrictions: You can use the money any way you’d like!
How to lower your monthly HELOC payment
After the HELOC promotional interest rate ends and the loan adjusts to a new higher interest rate many people find their HELOC monthly payments difficult to manage. Here are two options for lowering your monthly HELOC payment.
Take out a Home Equity Loan. Home equity loans have a fixed interest rate, which makes monthly repayments more predictable. Ask your lender if you qualify to
refinance to a home equity loan.
Apply for a new HELOC. A new HELOC will give you the funds to pay off your existing HELOC. This option can have lower up-front costs than refinancing; however, you may end up paying more in interest over the course of the loan when the promotional interest rate ends, or the variable rate rises.
Alternatives to HELOCs
If you need extra cash, here are additional loan options to consider:
Home Equity Loan: Home equity loans typically feature a fixed interest rate, and the money is provided as a lump sum. Once you receive the funds repayment begins immediately and monthly payments are based on the full loan amount.
Cash-Out Refinance: With mortgage interest rates very low, refinancing your current mortgage to a new mortgage loan could help you lower your monthly payments. Getting cash-out means borrowing more than what you owe on your current mortgage and getting a cash disbursement of the extra funds at closing. You can use the cash any way you choose.
Personal Loans: Credit unions and banks offer a wide variety of
secured and unsecured personal loans, to meet a wide variety of borrowing needs. You’ll find variable and fixed rate
personal loan options.
Is getting a HELOC worth it?
A HELOC may be worth it if you’ve run the numbers and are confident that this type of second mortgage meets your financial needs. Just remember, a HELOC is secured by the equity in your home and failure to repay the loan can result in the bank foreclosing and taking your home.
HELOC FAQs
Are HELOC rates fixed?
HELOC typically come with a variable interest rate, which means the interest charged on the loan is based on a financial index that varies. As the financial index moves up and down based on economic factors, the interest rate charged to the borrower fluctuates. More and more lenders are starting to offer
fixed-rate HELOCs.
Is it possible to increase my HELOC limit?
Typically increasing a HELOC limit can be achieved by refinancing your current HELOC or applying for a new HELOC. Some lenders may offer the ability to increase your current HELOC limit without requiring a refinance of the loan.
Do I need an appraisal for a HELOC?
Yes, in most cases
getting a HELOC requires an appraisal of the subject property that is being used to secure the loan.
How soon can I get a HELOC?
A HELOC can be obtained 30-45 days after the purchase of a home.
To get a HELOC soon after purchasing a home borrowers will need to meet all the necessary lender requirements, including 15-20% equity in home, good repayment history, and more.
What are some HELOC pros and cons?
There are
HELOC pros and cons to be aware of before you apply for a loan. Pros of a HELOC include lower interest rates than a home equity loan and you only pay interest on the amount of the loan you use (not the amount you’re approved for). HELOC cons include a variable interest rate that could rise and give you higher than expected monthly payments.
How much HELOC can I get?
The dollar amount of
HELOC loan you can get depends on your ability to meet the lender’s eligibility requirements, which may include a good credit score, the amount of equity in your home, the lender’s maximum loan limit, and other requirements that may be unique to each lender.
What can I use a HELOC for?
The
funds from a HELOC can be used for anything. Some popular uses are
home improvements, college tuition, emergency expenses, a wedding, business expenses, and purchasing an investment property.
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Loan Today!