out the payment on your loan
If I am offered a $35,000 home equity loan with a rate of prime
plus 0.625 percent, what would the monthly payment start out at?
-- Judy Judicious
A home equity loan is a fixed-rate mortgage, and while it can be
priced at a spread to the prime rate, it normally is not, since
it doesn't vary with prime. Besides being a fixed-rate mortgage,
the loan is also a self-amortized loan, meaning the monthly payment
covers both the interest expense for the month and some principal
repayment. At the end of the loan term you've paid off the note.
That's in contrast to a home equity line of credit,
or HELOC, which is a variable-rate loan that's normally priced at
a spread to the prime rate. Since you quoted the interest rate on
your loan as a spread to prime, it's possible that you're being
offered a HELOC rather than a home equity loan.
In the early years of a HELOC, the minimum monthly
payment on the loan is the monthly interest expense. At some point
down the road, maybe 10 years out, the minimum payment on the loan
will be calculated on an amortized basis over the remaining loan
It's simple to calculate either payment. To calculate
the payment on an amortized loan, use Bankrate's mortgage
payment calculator. It will even calculate an amortization schedule
showing you how the principal balance pays down over time and the
cumulative interest expense. Bankrate also has a minimum
payment calculator for an interest-only loan before it becomes
With the latest increase in the Federal Reserve Board's
targeted federal funds rate, the prime rate is 8.25 percent. That
puts your loan at 8.875 percent. Use the appropriate calculator
to arrive at your monthly payment, depending on whether it's a HELOC
or a home equity loan.
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