As explained earlier, HELOC option is better compared to Traditional Mortgage if you play the game right. This is a critical assumption when comparing HELOC and Traditional Mortgage. You may experience exactly the opposite if you do not have sound financial habits. In which case, I would suggest you stick to traditional mortgage.
Spending Habits & Compulsive Spending
The amount you can draw from HELOC gives you a good comfort factor. If you get complacent and start purchasing furniture and make other non-investment funding from your HELOC money, you will experience exactly the opposite effect on your savings and all benefits of using HELOC to be better than a mortgage will diminish.
Issues with Financial Management
If you are passive in managing HELOC and let the money stay in your savings account rather than transferring them to HELOC account, then the interest creep will result in your benefits slowly but steadily diminishing.
Higher Interest Rates after Introductory Period
Assuming you did everything right but the base bank rate/ prime rate (on which the HELOC variable rates are pegged) increases such that your HELOC interest rate is about 1.5% higher compared to the traditional mortgage, then you are in the red zone. The only option to mitigate this is to pay off your HELOC principal to reduce the impact interest.
Using HELOC to Invest in Stocks
Few of you may consider this as a lucrative option if you could draw money from your line of credit and invest in individual stocks. I strongly advise against using leveraged money to invest in risky assets. If the invested amount yields a return lesser than the interest for HELOC, you will end up losing money. Still worse, if you lose a large chunk from your investment, you will find it difficult to service the HELOC debt and there would be a likelihood of default. In conclusion, I would ask you to walk this path carefully if you want to override my advice.
