Help with Heloc
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.