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Mark Cappel
UpdatedJul 22, 2010
Key Takeaways:
  • Homeowners use HELOCs to finance major costly items.
  • Qualifying for a HELOC is similar to a mortgage refinance.
  • Terms for HELOCs vary by lender.

Is my bank violating my HELOC contract by applying payments to late fees first and then the interest second?

I made a few late payments on my equity line of credit which generated a 10% late charge. At this point payments started to be applied first to the late fees and the remaining amount to the interest accrued. Shouldn't it be the opposite way, first interest and then late charge?

A Home Equity Line of Credit (HELOC) is akin to a credit card secured by property. Because a HELOC is secured by the property it is considered a form of mortgage. HELOCs are used most often by homeowners who use HELOCs for major costly items such as education, home improvements, or medical bills. No money changes hands until the borrower draws on the HELOC. A lender will use a similar analysis to a first mortgage when deciding whether to open a HELOC with a homeowner. A lender will review the potential borrower's credit score, debt-to-income ratio, employment history, and the loan-to-value ratio of the property. A lender will not do business with a homeowner if he or she is a negative outlier in one of these key criteria.

A HELOC is a contract between the lender and the borrower. There is no standard HELOC contract with consistent terms and conditions. A HELOC from (for example) Bank of America may have different Ts and Cs from a HELOC offered by Wells Fargo. Therefore, it is impossible for anyone who has not read your contract to determine whether your bank is violating your contract. Consult with an attorney in your state who will be able to read your contract in person, review the payment terms in detail, and advise you accordingly.

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