Let's say someone has an interest only line of credit secured by investment property, and that line has a $100k limit at 5% (using round numbers for easy math). Bank pays closing costs for the LoC, but borrower is required to pay them back if he closes the line of credit before 2 years. LoC has a 10-year draw period, and is then converted to a 10-year loan.
Now, let's say the borrower decides to take $10k out. If the first payment made on the line, during the interest-only period, is $5500 ($500 to interest - $5000 to principle) will the remaining monthly interest payments be recalculated according to the new loan balance of $5000, or would monthly interest still be the same $500 as original?
@Aaron Sauer , one of the cool things about a HELOC is that interest is calculated daily based on the outstanding principle. Basically, Daily Interest = (Outstanding Principle * Rate) / 360.
So, in your example on Day #1 with $10k outstanding you'd accumulate $1.39 in interest. On Day #2 with $5k outstanding, you'd accumulate $0.69 in interest.
Additionally, that $5k is available to be borrowed again!
Your monthly payment will be adjusted depending on the outstanding balance.