Calculate Your New HELOC Savings

In response to our recent post about a simple equation to keep track of the interest you'll save on your HELOC as rates drop, a friend in the mortgage business offers this suggestion for those who want to give the old desktop calculator more of a workout:

"You overlooked the fact that HELOC interest is calculated on a daily basis, not monthly. To get really nerdy and precise, use this equation: Multiply the amount you owe by the amount the prime rate decreased, and then divide the total by 365 to see how much interest you'll save each day of the year. For your monthly payment, multiply that daily interest rate by the number of days in your payment cycle."

In other words, if you owe $200,000 in principal on your HELOC and the prime rate drops by three-quarters of a point, the two-step equation will look like this:

(200,000 x .0075)/365=$4.11 in interest saved every day

4.11 x 31=$127.41 in interest saved in a 31-day billing cycle

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What Today's Fed Rate Cut Means

For fixed-rate mortgages: Nothing.
For your HELOC: A nice drop in your minimum payment. See here.

Seventy-five basis points isn't what Wall Street wanted so don't expect your 401K accounts to stop bleeding anytime soon either.

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Silver Lining: How Much Your HELOC Payment Is About To Drop

Finally, good news. You'll probably see the minimum monthly payment on your home equity line of credit drop after the Fed cuts rates again tomorrow. That's because most HELOC rates are tied to prime. Here's how to calculate your savings:

Multiply the amount you owe by the rate decrease, and then divide the total by twelve. So, if you owe $200,000 and the rate drops by three-quarters of a point, the equation will look like this:

(200,000 x .0075)/12=125

The best use for the $125 you won't owe next month? Send it anyway to painlessly pay down the principal that you should have been paying down anyway to avoid getting into this mess in the first place.

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