How To Determine End Value And Time Frame Of An Interest Only Home Equity Line Of Credit

[Holt]

Hello Folks - Grasping at straws here but thought perhaps someone might be able to figure out. I will try to lay it out as basically as possible.


1/ I currently have $205,000 Home Equity Line Of Credit at 5% per annum with the only requirement being that interest must be paid on a monthy basis on the outstanding balance with no principal necessary to be repaid until all funds have run out ( necessitating sale of house to repay the $205,000 in full). There is currently a zero balance and I will not pull from this source until all my cash on hand from other sources has been depleted.

Once all other cash sources have been zeroed out, my intention is to pull, from the line of credit, $1000 per month to top up my pension / pensions plus whatever interest dollar amount I will need to pay back to the bank to pay the increasing monthly interest payment required based on the increasing line of credit monies outstanding based on the accumulating debt.

My question being, at what point will the whole $205,000 be used up in full and how much will I have fully realized / netted of the $205,000 along the lines of how much principal will I have obtained over the term and how much interest will I have paid? Trying to figure out how many months / years I can pull from the line of credit before I have to sell my house to pay off the line of credit.

Thanks for your help!

 

[stapel]

Hello Folks - Grasping at straws here but thought perhaps someone might be able to figure out. I will try to lay it out as basically as possible.


1/ I currently have $205,000 Home Equity Line Of Credit at 5% per annum with the only requirement being that interest must be paid on a monthy basis on the outstanding balance with no principal necessary to be repaid until all funds have run out ( necessitating sale of house to repay the $205,000 in full). There is currently a zero balance and I will not pull from this source until all my cash on hand from other sources has been depleted.

Once all other cash sources have been zeroed out, my intention is to pull, from the line of credit, $1000 per month to top up my pension / pensions plus whatever interest dollar amount I will need to pay back to the bank to pay the increasing monthly interest payment required based on the increasing line of credit monies outstanding based on the accumulating debt.

My question being, at what point will the whole $205,000 be used up in full and how much will I have fully realized / netted of the $205,000 along the lines of how much principal will I have obtained over the term and how much interest will I have paid? Trying to figure out how many months / years I can pull from the line of credit before I have to sell my house to pay off the line of credit.

Thanks for your help!

What are the exact terms of your contract?

 

[Holt]

What are the exact terms of your contract?

$205,000 Home Equity Line Of Credit at 5% per annum with the only requirement being that interest must be paid on a monthy basis on the outstanding balance with no principal necessary to be repaid until all funds have run out ( necessitating sale of house to repay the $205,000 in full). my intention is to pull, from the line of credit, $1000 per month , plus monthly interest, until all of the $205,000 is exhausted.

 

[blamocur]

I am assuming this is not a homework assignment but a practical question, otherwise I am destined for the corner again

If your monthly rate is 5/12 % then I believe your equity line will last 147 months. In that time you'll get $147000 for your own use, but you'll owe to the bank $203376.16. See the attached file for monthly payments and balances.

Disclaimer: I am not big on finances, so please double check the numbers before making important decisions. Or wait to see if others in this forum notice any problems with these numbers.

 

[blamocur]

In this addendum to my previous post I want to mention some important/defining properties of the table:

1. "Interest" is always equal to "Debt" multiplied by 5/12 %
2. "Debt" is equal to the cumulative sum of all amounts in the "Withdrawl" column up to and including the current month (the spell checker just told me it should be "Withdrawal" )
3. The difference between "Withdrawl" and "Interest" columns is exactly 1000.
4. The sum of "Withdrawl" and "Remains" is always 205000.

 

[Holt]

Thank you so very much for your very thorough and detailed answer. A while back, I had done a basic spreadsheet with formulas, and from what I can remember, came up with similar figures, but my background in math I am assuming is not even close to yours, so I somewhat doubted my figures. I got caught up somewhat on the interest to be paid on the
accumulated interest over time etc. etc.
This is a calculation for retirement down the road with my wanting to use the equity in my fully paid off home to keep me in my home as long as possible , once my cash position has zeroed out ,as opposed to selling my home and moving into an apartment / condo, which in the grand scheme of things would be much more expensive than paying for my minimal expenses / mortgage free home.
Thank you again and much appreciated!

 

[Holt]

I am assuming this is not a homework assignment but a practical question, otherwise I am destined for the corner again

If your monthly rate is 5/12 % then I believe your equity line will last 147 months. In that time you'll get $147000 for your own use, but you'll owe to the bank $203376.16. See the attached file for monthly payments and balances.

Disclaimer: I am not big on finances, so please double check the numbers before making important decisions. Or wait to see if others in this forum notice any problems with these numbers.

On another note, would it be posssible to get the spreadsheet reflected in the .txt file? Or the formulas utilized for the appropriate columns? When the time comes, I would like to be able to input the appropriate interest rate at the time, when it comes down to making my decision as to wether to sell the house or utilize the line of credit funds. I had previously provided 5% as a benchmanrk. Either here or perhaps to an email address provided?

Thanks Again!

 

[blamocur]

I am not good with spreadsheets, but below are the formulae and their explanation. First the notations:

• [imath]B_k[/imath] -- monthly withdrawal / amount borrowed in month [imath]k[/imath], where [imath]k=1,2,3,...[/imath]
• [imath]A[/imath] -- montly withdrawal minus interest (i.e. \$1000)
• [imath]P_k[/imath] -- total amount (principal) owed after month [imath]k[/imath].
• [imath]I_k[/imath] -- interest paid at the end of month [imath]k[/imath]
• [imath]r[/imath] -- monthly interest rate (i.e. 5/1200)

Initially there no debt/principal, i.e. [imath]P_0 = 0[/imath]. When one borrows [imath]B_k[/imath] in the month the total debt becomes
[math]P_k = B_k + P_{k-1}[/math]The interest on this amount:
[math]I_k = rP_k = r(B_k + P_{k-1})[/math]But we want to have amount [imath]A[/imath] left after the interest is paid, thus:
[math]A = B_k - I_k[/math]i.e.
[math]P_k = B_k + P_{k-1} = (A+I_k) + P_{k-1} = A + rP_k+rP_{k-1}[/math]Thus we get a recursive relation for the principal [imath]P_k[/imath]:
[math]P_k = \frac{A+rP_{k-1}}{1-r}[/math]The montly withdrawal is now easy to compute too:
[math]B_k = P_k - P_{k-1}[/math]