HELOC vs Traditional Mortgage - Full Analysis

Wondering whether a HELOC or Traditional Mortgage is better? I'll show you how to do a full analysis yourself to determine which loan option will best fit your needs and financial goals.

There are many different loan options when it comes to financing your house. Two of the main options used are a Traditional 30 year fixed rate mortgage and a home equity line of credit (HELOC). Figuring out which one will best help you pay down debt is quite simple using excel.

Here is a quick break down of a traditional mortgage and a home equity line of credit:

Traditional Mortgage:
1. Fixed Interest Rate
2. Payments will be principal and interest
3. Any money paid in to the mortgage is not liquid
4. Typically you get lower interest rates when compared to a HELOC

HELOC:
1. Interest only payments
2. Money you use to pay down the principal balance is liquid and can be pulled out of the HELOC easily
3. Higher interest rates when compared to traditional mortgage
4. Interest rates are often variable, meaning they can change based upon what the federal reserve does

My analysis looks at the two loan options with the goal of paying down your debt as quickly as possible.

I made the following assumptions when doing my analysis but you can change the numbers to meet your specific situation:

Mortgage: $175,000
Savings Account Balance: $20,000
Money available for payment: $1,000

When doing this analysis you simply need to input the assumptions in to an excel amortization spreadsheet and then compare the total number of payments and total interest paid between the Traditional and HELOC options.

With the HELOC option you will put the entire savings account balance on the HELOC. You do this to decrease the total principal balance on the loan and save yourself money on interest. Savings accounts are paying extremely low interest rates currently and it is far better to have that money saving you 3.5% on interest then sitting in a savings account making you .01% interest. The great thing about a HELOC is the money you pay down principal with is still liquid, so your $20,000 emergency savings can be taking out any time you need it.

Based upon your assumptions a traditional mortgage or HELOC can be the better option. A few things to remember with a HELOC are rates are variable. This means that your interest rate may increase if the federal reserve decides to increase interest rates (which it has signaled that it plans on doing that in 2022). Increasing interest rates can have an impact on your analysis. Also if you put your emergency savings on your HELOC and pay the HELOC down and then decide to close the loan you will need to either save up more money for an emergency savings or you will need to pull some of that money out of the HELOC so you have your emergency savings.

Another way to make a HELOC work for you is by temporarily paying down the principal balance on the HELOC with any money that you have saved for a future expense. For example, if you have a $2,000 credit card bill each month you can temporarily use that $2,000 to pay down the principal balance on your HELOC, then when your credit card payment is due you pull that money out of your HELOC and pay down your credit card bill. This will decrease the average principal balance on your loan and result in less interest being paid over the life of a loan.