Has your credit card debt become unmanageable? Are you barely getting by making minimum payments? Have you tried transferring balances around, only to end up back where you started? If any of this sounds familiar, you’re not alone. And if you’re feeling the pressure of credit card debt, now could be a great time to think about strategies you can use to get debt under control.
Across America, people are finding it harder to dig themselves out of credit card debt. Because credit card interest compounds daily, the interest piles up every single day. Making minimum payments doesn’t make much headway toward paying off the balance, which ultimately makes it hard to catch up. If you have substantial credit card balances, paying them off sooner likely requires a big move on your part — which means finding some way to start paying much more than your minimum monthly balance, or somehow paying it off all at once.
If you’re a homeowner, a potential option for accomplishing this might be right under your nose — or rather, your doormat: Consider using home equity to consolidate debt. Many homeowners have leveraged their home equity to pay down credit card debt, and here’s how it works.
A cash-out refinance** is when you take out a new home loan to replace your old one, and you receive a portion* of your home equity as cash after the new loan closes. If your goal is paying off credit card debt, you can put that cash directly towards your card balances.
Using home equity to consolidate debt won’t reduce your total debt: You’ll have less of a balance on your cards, but more on your home loan. The equity you took out as cash will be added back to your home loan balance.
Typical credit cards today carry interest rates from 10% to 20%, with “penalty rates” being even higher for late-payers or those with poor credit. Typical home loan rates, on the other hand, are closer to the 4% to 6% range. Your home loan rate eligibility depends on your individual financial situation, but any home loan you qualify for will likely have a lower rate than today’s typical credit cards.
There are many other factors involved in choosing your strategy for getting credit card debt under control. If you want to explore leveraging your home equity, you can learn more about refinancing and crunch your numbers by using Mr. Cooper’s free calculator.
*Most Cash-out refinances allow homeowners to draw up to 80% of their home equity to pay off credit card debt. Others, such as FHA loans allow 85% and VA loans allow a full 100%, depending on the state.
**A debt consolidation refinance increases your mortgage debt, reduces equity, and extends the term on shorter‐term debt and secures such debts with your home. The relative benefits you receive from debt consolidation will vary depending on your individual circumstances. You should consider that a debt consolidation loan may increase the total number of monthly payments and the total amount paid over the term of the loan. To enjoy the benefits of a debt consolidation loan, you should not carry new credit card or high interest rate debt.