Is paying back a HELOC similar to paying a credit card?

Question

Background: Due to some not-so-good financial/home decisions by my spouse, I now must pay off our HELOC to the bank. We own the house but the bank owns us b/c the HELOC was only paid and never paid off sooner due to the other person thinking it would be possible to convert it to a 30-year mortgage when it expired, which never happened, the bank automatically told us we must now pay it back over 10 years with $X per month payments. Unfortunately for various reasons it would be very difficult to change things, also not rocking the boat is at this point a good idea.

We now have large monthly payments to pay off the HELOC.

Is paying back a HELOC similar to paying a credit card?? Where one should pay more than the minimum each month and paying something weekly is better than paying monthly?? The interest rate is 7.75% (thank you, inflation and The Fed!!) and there is a .02xxxx% daily periodic rate.

I am thinking it would be better to try to perhaps pay when possible a month ahead and also definitely as soon as possible start paying slightly more than 1/4 the total monthly payment every week rather than only one payment/month.

Am I on the right track with how I am thinking about this and planning to pay all this??

Thank you, :) p

Answer 1

Is paying back a HELOC similar to paying a credit card?

HELOCs have two periods: draw period and repayment period.

The draw period is exactly like a credit card: you get a credit line and you can draw as much of it as you want, as long as you pay a minimum payment each month. If you pay more than the interest charge - you get some of the credit limit available again, against which you can draw again. This is called "revolving" credit.

The repayment period is when your draw period ends. At that time the remaining balance is converted into a regular loan which is amortized into monthly payments. You can no longer take any more money out, even if you pay more than the monthly payment.

Where one should pay more than the minimum each month and paying something weekly is better than paying monthly?? The interest rate is 7.75% (thank you, inflation and The Fed!!) and there is a .02xxxx% daily periodic rate.

The interest is usually calculated daily, so it may reduce a bit of the interest charge if you pay more than the monthly payment. You need to check your specific loan documents to verify how the interest is calculated, and whether prepayments are allowed and on what terms.

7.75% is not the highest it could be, it's much less than credit card interest. So if you carry credit card balances as well, I'd suggest first getting rid of those.

I am thinking it would be better to try to perhaps pay when possible a month ahead and also definitely as soon as possible start paying slightly more than 1/4 the total monthly payment every week rather than only one payment/month.

You should check if partial payments are allowed. It may be that you're expected to make your monthly payment in full in one go, and then any additional payment would be applied to the principal. Alternatively you should check how the bank would categorize these 1/4ths of a payment - you may need to explicitly designate it to be applied to the monthly due or to principal.

Answer 2

Weekly vs. monthly doesn't make a lot of difference, usually, if it comes out to the same amount per day on average. The savings occur when you put in enough money per payment to actually reduce how much you owe faster than required.

Check with the bank holding your loan. If they allow additional payment that is counted toward the principal (rather than just prepaying the next bill), and IF you are careful to explicitly say that this is what you are doing on each payment (and keep an eye on them to make sure that is indeed how they are applying it), then yes, you can reduce the total cost by paying more and thus shortening the term of the loan.

But note that I said "if". Not all loans permit this. You need to talk to the bank.

At least it isn't credit-card interest rates of 17% and higher...