A home equity line of credit gives you the ability to borrow against the equity in your property as you need funds to pay expenses such as college tuition or home improvements. Commonly abbreviated HELOC, home equity lines of credit work much like credit cards but typically have much lower interest rates. Like a credit card balance, a HELOC balance can fluctuate daily as you make payments and purchases. For this reason, HELOC lenders use your average daily balance as the basis for calculating interest.
Step 1
Divide the annual percentage rate (APR) of interest by 365, then multiply the result by the number of days in the current monthly billing cycle. This gives you the percentage of interest that will be charged for the current cycle. You can find the APR on your monthly statement. For example, if the current billing cycle has 30 days and your APR is 5.11 percent, or the decimal equivalent of 0.0511, you have (0.0511/365) x 30 = 0.0042.
Step 2
Locate the ending balance for the previous billing cycle on your monthly statement. If you just opened the HELOC and no payments have come due yet, the balance will consist only of start-up charges such as application fees and closing costs.
Step 3
Add any purchases and subtract payments made on the first day of the billing cycle to the balance. Record the result. Do the same for the second day and each day remaining in the billing cycle, using the previous day's ending balance as your basis for calculation.
Step 4
Add up the ending balances for all the days in the billing cycle. Divide the total by the number of days in the billing cycle to determine the average daily balance.
Step 5
Multiply the average daily balance by the interest rate for the billing cycle calculated in Step 1. Add the interest charges to the balance on the last day of the monthly billing cycle to find the ending balance for the billing cycle.
Tips and Warnings
- One difference between a credit card and a home equity line of credit is the "draw period." HELOCs may be used only during the draw period, which is usually several years. After that, you will be required to repay any outstanding balance within a specific period of time. The size of a home equity line of credit is based on the market value of your property. In an adverse real estate market, that value can fall. Under such circumstances, lenders can reduce the line of credit or even freeze your borrowing privileges.
Things You'll Need
- HELOC terms and conditions or
- Monthly statement
- Records of current transactions
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