A really basic HELOC vs Equity Loan Question

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I wanted to play with some numbers tonight as I working towards (I thought) getting a HELOC to fix some things on my house. I found a calculator here, and when I punched in the numbers, I was SHOCKED. 

I used a $64K loan amount at 7% interest for 360 months (30 years) . Unless I'm mistaken, it looks to me like if I paid $426/mo on a loan, it would be paid off in 30 years. If paid $373/mo towards the HELOC, I would have paid almost $100K in interest and would still owe the $64K principal.

If this is true, why would I even want to consider a HELOC? I guess I really don't understand how interest works with a HELOC. I'm looking at a $64K amount, and I don't plan to ever pay interest-only. I thought I could use the $64K number and the 7% interest number to figure out how much I SHOULD pay monthly from day one so that I can have it paid off by the time the 10 year draw and 20 year repayment period are over.

Maybe a home equity loan is a better idea anyway.

[Lel]

There are advantages and disadvantages to a HELOC, and depending on your needs - and discipline - it may not be a bad choice for you.

Advantages:

HELOCs tend to have lower initial interest rates as compared to fixed-rate home equity loans. Depending on FICO score, equity, and HELOC CL, it may be possible to find a HELOC that is at prime (currently 3.25%) or a little above prime (e.g. prime +1.49%).  Home equity loans always run higher, probably in the ~8% range.

A HELOC is a line of credit that you can draw on for a certain amount of time, as you've learned.  So if you have some additional repairs 5 years from now, you can tap the HELOC again to pay for those expenses.

Disadvantages:

The interest rate is variable.  Because the prime rate is as low as it can get, the only way that rates are going to move is up.  Eventually, the Federal Reserve is going to start raising rates, and the interest rate will rise.  But it will take some time before most current HELOCs will reach the interest rate of the fixed rate loans.  But in theory, the interest rate could go even higher.

Without proper payment discipline, there could be a payment shock as you enter the repayment phase.  For example, if you only pay interest during the draw period, then the full loan amount will be amortized over the remaining 20 years.  The monthly payments will go up significantly, since you'll be paying off the principal over 20 years instead of 30 years with a fixed rate loan.

You can avoid this payment shock by paying more than the minimum payment required on your HELOC.  That is, don't opt for the interest-only payment.  You could use a loan amortization calculator to figure out a monthly payment that would allow you to gradually pay down your HELOC over 30 years.  However, as your interest rate changes, you'd have to recalculate the monthly payment to stay on schedule.

Using your example ($64,000 loan amount), a fixed rate loan at 7% comes to $426 a month.  If you choose a HELOC, you might be able to find one with a starting interest rate of 5%.  If you were amortize the $64,000 over 30 years at 5%, your monthly payment would come to $344 per month.  If you pay this amount, you'd be paying down the principal at the same rate as the fixed rate loan at 7%.

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Thanks. I think I found a decent HELOC calculator that will amortize the principal properly here. The other calculator was set up to show interest only, which is NOT the way I want to go. I plan to hack away at it by paying at least $350/mo, and more whenever I can.

I know I will be able to lock in my rate on my HELOC, I just need to read all the fine print related to that.

When it comes to finances, I am very old fashioned: I am used to traditional loans for a set period of time with fixed payments. I hate surprises. And I hate taking chances with my home. But if I don't rehab this place (my investment) it won't have any value anyway, right?

[Lel]

For my HELOC, there is a provision to turn some or all of it into a fixed rate loan.  However, it does not specifiy that you can lock in the same rate as the variable rate.  That is, even if the current HELOC rate is 5%, I can't lock in a fixed 5% interest rate.  The other HELOC products that I looked at were similarly vague about the actual fixed interest rate.  When I inquired a couple times about what a fixed rate would be, I was quoted a much higher rate than the existing variable rate - a rate that was on par with prevailing home equity loan rates.

This makes sense - if borrowers were allowed to lock in their HELOC rates at the lower rates, then EVERYONE would take out a HELOC and immediately lock the lower rate, instead of going for a fixed rate loan from the outset.

So definitely check the fine print, but I would be surprised if it guarantees a lock at the prevailing HELOC rate.  But if it does, then let me know because I'd want to refinance my HELOC with your lender!

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Oops. Didn't mean to imply that I thought the fixed rate lock would be at the same rate. It would be nice, but ain't gonna happen. LOL!

It looks like for about $350/mo I'll be able to sensibly pay down my loan. At least I think I've figured it out correctly. I just want to be smart about this and not get in over my head. We all know where we land if we don't look before we leap, eh?