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 these sound familiar, you’re not alone. And if you’re feeling the pressure of credit card debt as you head into 2019, now could be a great time to think about strategies you can use if one of your New Year’s resolutions is 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 day. Making minimum payments doesn’t make much headway toward paying off your 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. That 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 is right under your nose—or rather, your doormat: Consider using home equity to consolidate debt!
Many homeowners have leveraged their home equity to get credit card debt under control. Read on to learn about how this works, and whether you should consider exploring it as a possibility.
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%-20%, with “penalty rates” being even higher for late-payers or those with poor credit whereas typical home loan rates are closer to the 3%-6% range. Your home loan rate eligibility depends on your situation, but any home loan you qualify for is likely going to have a lower rate than today’s typical credit cards.
Here’s a simple hypothetical example to illustrate:
Let’s say you had a credit card balance of $10,000 at a 16% interest rate.
Then you called Mr. Cooper to apply for a cash-out refi, and ended up with a new home loan at a 5% rate… and $10,000 cash which immediately went to pay off your card in full.
The $10,000 of debt wouldn’t disappear, but it would be piling more than two-thirds less interest on your total balance each month.
*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.
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 using Mr. Cooper’s free educational resources and calculators.
When you’re ready for personalized advice, talk to one of our experienced mortgage professionals to discuss your situation and options.
**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.