Calculating Interest on a Home Equity Line of Credit

The interest on a home equity line of credit is difficult to calculate in advance. Because lines of credit are revolving debt and not installment debt, the interest you will owe depends on how you use the line during the course of the month.

Compounding Interest

If you allow the balance on your home equity line to revolve, meaning it stays on your report until the next billing cycle, the interest will compound. Typically, this occurs monthly. The formula to calculate compound interest is:

Amount = Principal  (1 + Interest/n) ^ nt

In this formula, n is the number of times the interest will compound in a year and t is the number of years.

Variable Interest Rates

The above formula only works if your interest rate is stable over time. Most revolving credit lines, and home equity lines in particular, are distributed as variable rate loans. This means you will have to carry out multiple calculations throughout the life of the loan to determine interest payments.

Calculating Interest

The easiest way to calculate the interest you owe is to do so after the fact. Track your payments toward the line for a year, and then subtract the total sum you actually spent with the home equity line of credit. The difference is the interest you paid that year.

blog comments powered by Disqus