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I'm shopping for a new home, and I'm planning to stay in this new home for 20 or more years--through retirement. I have 5-10% for a down-payment by dipping into my rainy day fund.
Initially I was planning to do a 95/5 loan, but with the PMI and interest on the extra 15%, I was stretching me further than I wanted in monthly payment. Even if I could get the principle down and remove the PMI, I'd only reduce my payment by $100/month. What I want is to free up more money sooner so that I can invest more. I don't see re-financing as an option because I don't believe interest rates will be this low again in my lifetime.
I'm looking now at an 80/10/10 program. 80% fixed @ 4.5%, 10% HELOC at Prime+1.5%. My plan is to reduce my 401K contributions from the maximum to the level of my company match. During the next 23 months, I would pay the extra from 401K, my entire annual bonus and tax returns, plus all my flexible spending budgeted items onto the HELOC loan. I "should" be able to do this in 23 months.
After that, I will start putting the full $17,500 into my 401K and rebuild my rainy day fund over the next 2-3 years. This will set me up to start contributing 50% of the 401K catch-up when I'm eligible.
I'm nervous about the HELOC. The "should" is a concern because ..."what if" this or that derails my plan? Are all HELOC's made equal? What sorts of gotcha's exist?
The HELOC can hurt in two ways:
1. How long will the HELOC rate Prime+1.5%? When does it become a Variable Rate loan? If something unforeseen happens to consume the funds you have pegged for the accelerated payback, you may face the Variable Rate Period of the HELOC.
2. Less likely, but if Prime goes crazy so will your rate on the HELOC.
Even if rates on the HELOC go up to 10%, you are only talking a couple of hundred dollars on a 40k line.
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