High-interest credit card debt can be financially draining for anyone. Paying off such debt with today’s high-interest rates can require significant sacrifices, but there’s a potential solution, especially if you’re a homeowner.
Your home equity can serve as a lifeline when facing the burden of high-interest credit card debt. Through options like a cash-out refinance, home equity line of credit (HELOC), or home equity loan (HELOAN), you can eliminate your debt or consolidate multiple high-interest credit card accounts into a more manageable single payment, typically lower than your previous combined monthly payments to various creditors.
How It Works:
- Cash-Out Refinance: This involves replacing your existing mortgage with a new, larger one, with the difference between the new and old loan balances paid to you in cash. You can then use this money to pay off your high-interest credit card debt.
- HELOC: A HELOC allows you to establish a line of credit against your home, typically with a 10-year draw period during which you can withdraw funds up to your maximum credit limit. You then have 20 years to repay the principal and interest on the amount withdrawn, and during the draw period, you pay interest only on the money you take out.
- HELOAN (Home Equity Loan): This is a fixed-rate mortgage with a typical term of 15 years. Unlike HELOC, it offers a fixed home loan with a lump sum check at closing, enabling you to consolidate your debt.
However, it’s important to understand that utilizing these options will result in a new mortgage loan or, in the case of a second mortgage, a new interest rate.
Benefits of Using Home Equity to Pay off High-Interest Debt:
- Faster Debt Repayment: Lower interest rates mean reduced borrowing costs, allowing you to pay off your debt more quickly, saving thousands of dollars in interest payments over time.
- Improved Credit Score: Reducing your credit card debt load can lead to an improved credit score, offering better terms and opportunities for future loans and credit lines.
- Building Savings: Freed-up funds from a HELOC, home equity loan, or cash-out refinance can accelerate debt consolidation efforts, allowing you to divert previous monthly payments into savings, retirement, emergencies, or other financial goals.
- Financial Security: Debt consolidation provides a safety net, increases credit limits, and creates financial security, leading to better peace of mind.
- Streamlined Payment Process: Simplify your financial management by consolidating multiple payments into one with a more favorable fixed interest rate, potentially improving your credit score.
- Elimination of High Interest: While your new mortgage may have a different interest rate, it’s generally much lower than the high-interest rates on credit cards, potentially saving you substantial sums.
Considerations for Debt Consolidation Refinance:
- Higher Monthly Payments: Expect increased monthly mortgage payments due to new terms and a higher mortgage balance. However, the savings from consolidating high-interest debt can outweigh this cost.
- More Mortgage Interest: While you save on credit card interest, you may pay more interest on your mortgage over its life.
- Loss of Deductibility: Unlike mortgage interest, interest on other debts, such as credit card debt, is not tax-deductible.
- Long-Term Commitment: A cash-out refinance or HELOC commits you to a new loan and repayment structure for the next 20 to 30 years.
- Closing Costs: Using home equity involves closing costs, typically ranging from 2% to 6% of the loan amount.
Using home equity to pay off high-interest credit card debt can be a wise move for homeowners who can manage the new monthly payments and plan to stay in their homes. While it may involve higher monthly mortgage payments and additional costs, the long-term benefits can outweigh these drawbacks, especially if your credit card debt is overwhelming your financial stability. Consider discussing your situation with a Preferred Rate Mortgage Advisor for personalized guidance.