Prime Went Up. What Does That Mean For Your HELOC Payments?

The recent quarter-point increase in the prime rate has raised the cost of variable-rate borrowing for many people who borrowed against their home through a home equity line of credit.

Tropical Financial Credit Union’s limited-time Prime minus 1% HELOC offer can help qualified homeowners keep both monthly payments and ongoing interest costs lower than a line priced at Prime plus 1%. At a 7% WSJ prime rate, that is a 6% APR versus 8% APR.

What the quarter-point increase does to your budget

If you opened a HELOC a year ago and borrowed $25,000, a 0.25 percentage-point increase may seem modest. Yet because a home equity line of credit typically has a variable rate tied to prime, the increase applies to your remaining outstanding balance and can affect how much of your monthly payment is applied toward interest.

For homeowners with a qualifying Tropical Financial HELOC priced at Prime minus 1 percentage point, a 7% prime rate produces a 6% variable APR. By comparison, a HELOC priced at WSJ prime plus 1 point carries an 8% APR.

The direct cost of the most recent quarter-point increase on a $25,000 balance is $25,000 times 0.25% divided by 12, or $5.21 per month.

That means the rate increase alone adds approximately $5.21 in interest for the first month, assuming the full $25,000 balance remains outstanding. Over a full year at the same balance, the added interest totals approximately $62.50.

Of course, HELOC balances can change as borrowers repay, make additional draws, or use available credit for planned and unexpected expenses. The exact amount of interest depends on the daily or monthly outstanding balance and the rate in effect.

Monthly payments compared

Tropical Financial requires a minimum monthly payment of 1% of the outstanding balance. On a $25,000 balance, that’s approximately $250 per month.

That payment structure does not mean the $250 is all interest. At a 6% rate, the first month’s interest on a $25,000 balance is roughly $125. The remaining $125 or so is applied to the principal, assuming no additional draws or fees.

Here is how the two rate structures compare on the same $25,000 balance:

For the Tropical Financial borrower, the monthly payment remains approximately $250 if the balance is $25,000 and the 1% payment structure applies. The good news on the lower rate is that more of that payment goes toward reducing the amount owed.

The total-interest difference

The more meaningful comparison is not the latest quarter-point move; it’s the 2-percentage-point gap between a 6% Tropical Financial rate and an 8% Prime-plus-1 percentage point HELOC.

If a borrower carried the entire $25,000 balance for one year without paying down principal, interest would be approximately:

• $1,500 at 6% with Tropical Financial’s Prime-minus-1% offer.
• $2,000 at 8% with a Prime-plus-1% HELOC.
• $500 less in annual interest at the 6% rate.

Because Tropical Financial’s payment schedule is 1% of the outstanding balance, a borrower who makes the approximately $250 monthly payment and takes no additional advances would generally pay down the balance over time. That means actual interest during the year would be lower than the “no-paydown” illustration, but the rate advantage remains material.

For example, in the first month alone, the estimated interest difference is about $41.67. More of the Tropical Financial payment can go toward principal, which may lower future interest charges as the balance declines.

Strategies for potential borrowers

A HELOC can help cover the costs of home improvements, repairs, major outlays, or unexpected expenses. Here’s how to make the most of your credit line:

• Draw only what you need, when you need it. HELOC interest is charged on the amount used, not necessarily the full approved credit limit.
• Pay more than the minimum whenever cash flow allows. Each extra principal payment can reduce the financial impact of an interest rate increase.
• Compare the margin, not just the prime rate. Prime is the benchmark; the lender’s margin, such as Prime minus 1 point or Prime plus 1 point, determines how favorably your line is priced.
• Maintain flexibility. A variable-rate line may rise or fall as the WSJ prime rate changes, so make room in your household budget for potential payment changes.
• Review eligibility details. The lowest advertised rate depends on factors including creditworthiness, collateral, loan-to-value ratio, ability to repay, credit score, and loan terms.

Unlike some financial institutions, Tropical Financial Credit Union does not require a minimum withdrawal amount after you open the account. If you’re not a member, the institution will help by depositing the $1 required to open an account that then makes you eligible to set up a HELOC.

Learn online about Tropical Financial’s Home Equity and HELOC options or speak with a lending officer at (888) 261-8328.