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Dr. Don Taylor, CFA, advice columnistFiguring out the payment on your loan

Dear Dr. Don,
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

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Dear Judy,
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 term.

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 self-amortizing.

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.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."'s corrections policy -- Posted: July 13, 2006
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Home Equity
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$30K HELOC 4.56%
$50K HELOC 4.07%
$30K Home equity loan 4.96%
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