Use Your HELOC loan as Backup for a Shorter-Term Mortgage

Tip #1 showed how a home equity line of credit resource can provide the margin of comfort needed for people to take on higher insurance deductibles and reap the premium savings. The same principle can be used to shorten the term of your mortgage, say, from 30 years to 15 years.

The benefits of a shorter term mortgage are clear: a $100,000 mortgage financed at 6.5% over 30 years will cost the borrower $127,544 in interest. The same $100,000 financed at 6.5% over 15 years will cost $56,799, a savings of $70,745. Actual savings will be even greater because banks are willing to lend you money at lower rates if you commit to pay it back sooner.

Of course, to realize these savings you’ll be saddled with larger monthly mortgage payments. In the example above, the monthly payment for the 30-year would be $632.07 versus a payment of $871.11 for the 15-year option. This difference ($239.04 in the example) is typically the reason most people opt for the 30-year mortgage, despite the fact that it costs far more in the long run.

Many people who could, with some effort, manage the higher payments opt instead for the “comfort” of a 30-year mortgage. Why not have an untapped home equity line of credit resource be your “comfort margin” instead and save thousands? Under this scenario the HELOC loan would only be tapped in the event an unforseen circumstance made it temporarily difficult to meet the higher monthly payment.

Keep in mind that with a conventional mortgage, your monthly payment is fixed while, hopefully, your income increases over time. Thus, the HELOC loan comfort margin may only be needed for a few years but will allow you to reap thousands in interest savings over the course of your mortgage loan.