Interest on credit cards vs. equity loan
If I borrow from my credit card at 10% versus a home equity loan at
10% versus a home equity line of credit at 10% versus a home mortgage
at 10% versus a bank personal loan at 10% . . . and I pay them all
back over the same time period, won't I be paying exactly the same
interest no matter what the loan is called?
I understand there are interest deductibility issues, and minimum
credit card payments which would increase the interest paid there, but
ignoring those considerations, I'm confused as to whether the interest
calculations all come out the same.
Your home mortgage is amortized making the beginning payments mostly
interest; I'm not sure about how a HEL or HELOC interest is computed.
The amount you pay back in interest will vary depending on the
method used to compute interest. You would think that this would
be simple, and there would only be one way. But it turns out to
not be true.
In a simple case, a bank may assume that every month has 30 days.
They figure out a payment schedule based on a single interest
rate and payment every 30 days. You then pay that amount, and
it doesn't matter exactly when your payment hits the bank. This
is common with fixed mortgages.
A slightly more complex method is common with adjustable rate
mortgages (but assume the rate stays the same here) is that
your payment is credited on the exact day it arrives (or
clears), and the payment schedule is recomputed for each payment.
If you have a payment that hits a few days early, you save a
bit of interest. If you have one that hits a few days late,
you then owe a bit more interest.
H/E lines often compute interest every day, and use the exact
number of days in a month versus assuming 30 day months.
Credit cards have all kinds of methods for computing interest.
One uses the average balance for the month. For example, if
your start and end balance for the month is 10,500 and 10,000,
on a traditional loan, you would pay interest on the 10K. With
a credit card, you might pay on 10,250, so you get zinged for
a bit more interest each month. Other credit cards use a 2-cycle
interest calculation. I don't fully follow how it works, but it
should be detailed on the back of your credit card bill. What
they do is that they average your account over 2 months. This
results in far higher interest payments, and when you payoff
your account, you owe a month of interest even when you have a
zero balance.