A HELOC or home equity line of credit works almost the same as a credit card. It is like a revolving credit line for which the limit was set by you. But unlike a credit card, credit using this is closely associated with your home and its market value.
Some borrowers refer to the HELOC as second mortgage. It has a fixed draw period that signals when you can borrow money. At the end of your specified draw period, you may pay your principal balance alongside with the accompanying interest, renew your credit line, or commence repayment to pay a principal loan and its interest after a set term.
Generally, HELOCs have adjustable rates which could change from month to month. It is actually a reusable credit line.
Computing for your Interest Rate
A few terms that can help you understand the process more before learning how to calculate your home lines of credit:
*Mortgage note: This is where you can find your index and margin.
*Index: This is the basis of the interest rate of your loan.
*Prime rate: Index popularly utilized by HELOC lenders and published daily on The Wall Street Journal.
*Margin: The amount over or below your loan index.
Therefore, if you have a prime rate loan index and a margin of 0.5%, the computation would be:
Prime rate + 0.5% = total HELOC rate
Some lenders compute interest rates using this formula:
Today’s base rate + margin = Present interest rate
Prime rate + 2% + (example) 3% = 5% (present interest rate)
Understanding your monthly payment
You may also calculate your loan’s interest rate by adding the index and margin together, multiplying the balance against the set interest rate, and dividing the sum by 12 to come up with the required monthly payment.
If you have a loan balance of $80,000 and the adjusted interest was at 3.75%, it is explained as the following:
$80,000 x 3.75% (0.03) = $2400
$2400 / 12 months = $200
Understanding your monthly payment is as important as saving for your monthly amortization towards your lender. You may find your loan balance in every loan statement that arrives on your door. In cases your statement doesn’t show up, it’s time for you to call your lender’s representative for you to get the digits.
Majority of the lenders have online websites so that would be easier for you to avail and track your loan balances. This is as essential as learning how to calculate your home equity lines of credit but usually taken for granted by other borrowers.
Paying for Private Mortgage Insurance Layer
Among the deciding factors for loan application approval is your home’s equity. This helps determine if you still have to pay for PMI (private mortgage Insurance layer). That is the reason why other borrowers who are knowledgeable in HELOCs keep their Loan to Value rate less than 80%. At any rate, PMI payment is only applicable for first lien payers. Having a second lien HELOC doesn’t require you paying for PMI anymore.
Another welcome idea is the more equity is left on your property, the more chances you can avail of other loan options.
At www.homeequitylineof.credit, we will teach you how to calculate equity in a home and, of course, how to tap into the value of your home.