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I'm having some difficulty understanding the payment fees of a possible home equity line of credit (HELOC). The HELOC is for $270k, with a stated repayment period of 15 years at 2.75% APR.

The credit union, however, insists that the minimum payment per month is $14 per $1000 dollars borrowed.

Assuming the 2.75 interest rate is flat (I know it isn't), I calculate a monthly repayment of ~1815k. But the $14/$1000 borrowed yields a monthly payment of $3836?

Am I correct in understanding that the repayment will decrease as I repay the loan in this scheme, as opposed to a fixed monthly rate as is usually done?

  • You describe it as a line of credit. How much is the initial draw? and how long is the draw period? – mhoran_psprep Jul 22 '15 at 14:00
  • Initial draw would be for the entire amount, with a 10 year draw period. – user1837608 Jul 23 '15 at 0:45
  • Some of the issue may be because you will have two payment amounts: the amount during the draw period, and the amount during the repayment period. – mhoran_psprep Jul 23 '15 at 10:14
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I get a payment of $1832. $14/$1000 either gives you a payoff of just 6.5 years, or assumes that rates will rise to 15%.

Either way, the best anyone here will be able to offer is the advice that you ask the bank to explain exactly why the numbers are so off.

Curious, was this a refinance? If you paid the mortgage down and are treating this as a true HELOC, you are limited in your interest deduction to just the interest on $100K of HELOC of debt. (This assumes you are in the US. I will edit if you are not.)

  • Not a refi, but a proper HELOC, using our home as collateral. The home is paid off so no other mortgage payments. This is a US transaction. Seems strange to advertise a 2.75 rate but insist on a payment scheme at a 15+ rate? I'm definitely investigating further with the loan dept – user1837608 Jul 22 '15 at 1:21
  • Agreed, please let us know what the bank tells you. The numbers make little sense to me. – JoeTaxpayer Jul 22 '15 at 13:57
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This is the answer I received from this bank (actually a credit union).

The flat repayment rate of $14/$1000 borrowed is a random number the credit union issues that is unrelated to the stated interest rate.

In my example, they say that the interest rate is calculated daily and the ~$3800 per month owed will go towards 97.25% of that day's principal and 2.75% is interest.

Whatever - ultimately, I see this as a bait-n-switch. When someone compares loan rates between lenders, they generally compare the interest rates to roughly gauge which has lower monthly fees for the same term. This CU's method removes that essential comparison and yields much higher monthly repayment rates due to the constant 14/1000 ratio.

Buyer beware I guess.

  • I would call bullcrap on them. Tell them this is not a 30 year loan, it's not even 7 years. – JoeTaxpayer Jul 25 '15 at 0:33
  • Agreed! I did not appreciate the bait-n-switch from the advertised rates and their payback scheme. – user1837608 Jul 27 '15 at 16:22

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