High-interest debt solutions
High-interest debt, such as credit card debt, personal loans, payday loans, and auto loans with interest rates of 8% or more, can be a significant financial burden. Financial advisors often recommend prioritizing the repayment of such debt before other financial goals. If you find yourself in this situation, leveraging your home equity could be a practical solution. With home equity at an all-time high, tapping into it could provide substantial financial relief. Is it time to consider this option?
Cash-out refinance
With a cash-out refinance, you can access your home equity to pay off high-interest debt or achieve other financial goals. It’s a straightforward process: Refinance your current mortgage for a higher loan amount, and you get to pocket the difference. There is no complex financial language, just a simple way to access your home equity. Refinancing your mortgage can be a strategic move to improve your financial health. There are numerous reasons to consider refinancing, such as consolidating debt and freeing up monthly cash flow.
Refinancing allows you to unlock the equity accumulated in your home. By refinancing an amount greater than your current mortgage, you can receive the difference as a cash payment. This cash can be used for home improvements, paying off high-interest debts, or other significant expenses. However, it’s crucial to remember that cashing out equity increases your debt and could lead to a higher interest rate. Working with a loan officer is essential to assess the financial implications of refinancing. Often, borrowers find that while the mortgage rate may increase slightly, the consolidation of household debt significantly frees up monthly household cash flow.
HELOC
Saving up enough money to pay off high-interest debt can take years, but you may not need to struggle for that long as a homeowner. Whether you need funds to pay off debt, renovate your home, or pay for college tuition, a home equity line of credit (HELOC) can help. A HELOC is a revolving line of credit secured by your home. It allows you to borrow against the equity in your home to fund other expenses, and since it’s revolving, you can tap into it whenever you need to if there’s enough equity available. This flexibility puts you in control of your financial situation. HELOCs usually have a draw period where you typically make interest-only monthly payments.
Home Equity Loan
A home equity loan is a second mortgage that allows a homeowner to borrow against the equity in their home. The loan amount is based on the current value of the property and the amount owed on the existing mortgage. Home Equity Loans usually have a fixed interest rate, and the funds from this type of loan are paid out to the borrower in one lump sum. A Home Equity Loan is much like a first mortgage when determining the loan amount and interest rate. The borrower’s credit score, payment history, and other aspects of their financial profile are examined during the application process. Home Equity Loans generally have shorter repayment terms, but the fixed interest rate makes them a valuable tool for some homeowners.
Other ways to reduce high-interest debt involve several strategies:
Prioritize payments
Focus on paying off high-interest debt first. Allocate extra funds toward these balances to reduce the overall interest paid.
Consolidation
Consider consolidating multiple high-interest debts into a single loan or credit card with a lower interest rate. This simplifies payments and may save you money.
Balance transfer
Transfer credit card balances to a card with a 0% introductory APR. Be aware of transfer fees and pay off the balance before the promotional period ends.
Negotiate rates
Contact your creditors and negotiate lower interest rates. Explain your situation and ask for a reduction. Some lenders may be willing to accommodate.
Snowball or avalanche method
Choose a debt repayment strategy. The snowball method involves paying off the smallest debts first, while the avalanche method prioritizes the highest interest-rate debts.
Increase income
Look for ways to boost your income, such as a side gig or freelance work. Use the extra money to accelerate debt repayment.
Dealing with high-interest debt can be stressful and significantly impact your life. Some people feel that the weight of the financial burdens affects their overall mental health, resulting in sleep disorders, anxiety, diminished social lives, and even depression. Some couples report that financial stress has led to relationship problems. Your home’s equity could be a solution to paying off high-interest debt. You have options. Choose the one that aligns best with your financial needs.
Our experienced loan team is available to discuss all the options and help you build a strategy that will work.
Sources:
Ramsey Solutions
