Help with Heloc

twotzusJune 4, 2010

Hopefully someone here who is versed on Home Equity Lines of Credit can help me understand whether my payments are being applied properly.

Three years ago, we took a HELOC for some emergency home repairs and maintenance projects. This is an Interest Only loan tied to Prime. All of our draws were within the first 4 months of the loan, and during this time the rate dropped from 8% to 4% incrementally over these 4 months. I have always paid a little more than interest accrued. In November, I realized that in some instances all or most of my payment were going to interest, rather than reduce the principle. I have been trying to get some answers from the bank since last December. I manually recast the loan from inception figuring daily interest at the correct rate, including the draws and I come up with a $150+ difference in the principle balance to the bank. My question is, how are HELOC payments generally applied to the principle balance?

My note reads that interest is calculated on the balance of the loan outstanding and unpaid after each transaction. So I would think that when a payment was made, that FIRST all accrued interest would be paid, with any leftover to reduce the principle. Right? Interest is calculated by balance amount X rate X 365 days divided by the number of days since the last payment.

Here is my example of my first transaction:

11/27/07 - Draw of $11,173 at 8%

12/1/07 Rate change to 7.75%

12/20/07 Payment of $100.00

4 days interest at 8% = 9.80

19 days interest at 7.75% = 45.07

Total Interest accrued = $54.87

$100.00 minus 54.87 = $45.13 to reduce principle

On 12/20/07 my principle balance becomes $11,127.87

This is how my bank figured it:

11/27/07 - Draw of 11,173 at 8%

12/1/07 Rate change to 7.750%

4 days interest st 8% = $9.80

12/5/07 "Cycle" ends

5 days interest @7.75% = $11.86

12/20/07 Payment of $100.00

Total of $21.66 applied to interest (interest to end of "cycle")

$78.34 applied to principle which reduces balance to $11,094.66.

This is on 12/20/07 when the payment was made, but they are only applying 11 days interest and then reducing the balance based upon those 11 days. The bank says they continue accruing interest from 12/6/07 until the payment is made on 12/20/07, but if that is so, why is the balance reduced and interest paid based upon 11 days accrual to the "cycle" end? To my mind, they didn't collect their interest owed and reduced my balance prematurely. I know this sounds convoluted, but it just isn't making sense!

Going forward 3 years, this loan is wacky! My interest payment is due on the 28th. Say my interest only payment is 118.50. I make a payment of $175. If I make this exactly on the due date, 118.50 goes to interest and the balance of $175 reduces the principle. But if I make the payment 3 days after the due date, the WHOLE $175 is taken to interest,none to principle regardless that there is only 3 more days accrued at 4%.

I just do not understand this.

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cindyb_va

If I look at your schedule versus the bank, what I see is that you are including interest accrued up to the date you made the payment (12.20 vs 11.27), while the bank's statement is including interest up until the statement cut off period, or cycle, (12.05 vs 11.27). The payment was applied based on the cut off (cycle) date, which is 14 days less than you are including in your calculations.

If you had paid off the entire balance on 12.20, the bank would have sent you a final statement for the interest due from 12.05 to 12.20.

    Bookmark   June 8, 2010 at 10:04AM
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maifleur01

Never ever make a payment on the date the payment is due. Always alow additional time for processing and mail time unless paid on line. Even on line if you do a payment there can be several days before the transfer then several additional days before the payment is processed and applied.

This is where you are getting in trouble. If posible set up your payments a week in advance of when they are due.

    Bookmark   June 9, 2010 at 9:45PM
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Billl

Why are you posting this 2 and a half years later?

Basically, your payments for mortgages etc are supposed to post the day they are received and be credited based on the standing of your account at that instant. If you don't send your payment in time to make the agreed upon billing cycle, then your payment will go to the interest from the prior cycle plus whatever has accumulated in the current cycle.

In the bigger picture - you need to get this paid down asap. Stretching out payments for "maintenance projects" over years is a quick way to get to the poor house.

    Bookmark   June 10, 2010 at 9:41AM
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twotzus

cindyb -yes, that makes sense. But I guess I'm having trouble figuring that on 12/20 when I make my payment, the principal balance is reduced effective 12/05. But am I accruing on the reduced balance from 12/05 to 12/20 when I made my payment? That's what doesn't make sense.

Billl~ I agree with you. That is the way I thought the payments were being applied. My note reads that way too, but that is not the way it is being applied. I have actually been trying to get an answer from the bank (credit union) since December without luck. Nobody understands it and nobody can explain why all of a sudden my total payment goes to interest instead of interest, and then principle. It was 6 months ago that I began to see this.

Yes, we are going to refinance our 1st and include this equity line to pay it off. Or we may end up selling to buy a smaller house. We have used the line to upgrade and repair which is mostly complete now. Our house was built in 1927, and while it has charming features, it sure needed alot of work! We have plenty of equity in the house and wanted to use it for repair and upgrades. We still have plenty of equity even after consolidating the two notes into a refinance. Thanks all!

    Bookmark   June 10, 2010 at 9:04PM
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christine

If I remember right this happened to me once on a car loan - I am referring specifically to applying the overage paid to the interest vs the principal. Thy told me it was in my loan documents that overages (no matter when paid) default to future interest. If I didn't specify at the time I sent the payment how to otherwise apply the overages, that was the default. I think there may have been an option to permanently change this, but I don't recall the specifics as it was probably 15 years ago...

Good luck in figuring it out!

    Bookmark   June 11, 2010 at 6:41PM
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booger3914

Some banks calculate interest on a 365/360 basis versus 365/365. This could easily explain the difference. Real your credit agreement.

    Bookmark   June 13, 2010 at 8:24AM
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