According to the latest quarterly report by TransUnion, total credit card debt in the United States reached a record $930.6 billion at the end of 2022.
If you have credit card debt contributing to that total, there’s one burning question on your mind: What’s the best way to pay it down as quickly as possible?
While there’s no right or wrong answer, it’s nice to know that there are several strategies to consider. Using home equity to pay off credit card debt is one of the first ideas you should consider.
Skip ahead: Get started with AAA BankingHow to access the equity in your home
There are two ways to access the equity in your home: a home equity loan or a home equity line of credit.
Let’s start with a basic overview of a home equity loan.
A home equity loan, also known as a second mortgage, is a type of loan that allows you to borrow money using the equity you have in your home.
Equity is the difference between the value of the home and the amount of money still owed on the mortgage.
For example, if your home is worth $400,000 and you have a balance of $200,000, your equity is $200,000. The amount you can borrow depends on your lender, the amount of equity, your credit score, income, and liabilities.
While it varies by lender, most require you to have at least 15 percent to 20 percent equity in your home to qualify.
One of the primary benefits of a home equity loan is that the interest rates are typically lower than other types of loans and credit cards. This is one of the main reasons to consider using home equity to pay off credit card debt.
A home equity line of credit (HELOC) allows you to borrow money using the equity you have built up in your home as collateral. With a HELOC, you can access funds as you need them, up to a set credit limit, and only pay interest on the amount borrowed.
This type of loan can be useful for projects that require ongoing funding, such as home renovations or paying educational expenses.
Reasons to use home equity to pay off credit card debt
You must exercise caution when it comes to managing and paying off credit card debt. One false move can cost you time and money, while also damaging your credit score.
The following are three of the primary reasons to use home equity to pay off credit card debt.
1. Lower interest rate
As noted above, home equity loans and lines of credit typically have a lower interest rate than credit cards because the loan is secured by your home.
Credit card interest rates can be very high, often over 20%. Home equity loan rates are typically much lower, sometimes as low as 3-5%.
By using home equity to pay off credit card debt, you can consolidate your debt into one payment at a lower interest rate. This could potentially save you thousands of dollars in interest charges over time.
2. Simplify your finances
Using home equity to pay off credit card debt—and other types of debts—can help you simplify your finances. By bringing several debts under one roof, you only have one payment to make each month.
Other types of debt to consolidate alongside credit card balances include personal loans, medical debts, and student loans.
3. Improve your credit score
Reducing your credit utilization ratio can have a positive impact on your credit score. This is a supplemental advantage that can work in your favor over the long run.
Check your HELOC optionsAre you comfortable using your home as collateral?
Credit card debt is unsecured. Even if you don’t repay the money as agreed, the creditor doesn’t have the legal power to repossess anything (such as your home).
However, if you use home equity to pay off credit card debt, you’re taking a risk. If you neglect to repay the balance, your lender could take foreclosure action. The result could be losing your home to the bank.
Home equity loan or home equity line of credit?
Once you decide to use equity to pay off credit card debt, decide which product makes the most sense.
A HELOC allows you to tap into the equity in your home, but it works more like a credit card. It can be used to pay off credit card debt, but a loan is a more efficient approach.
What to do next
Are you ready to use home equity to pay off credit card debt? The next step is learning more about the process and completing an application. The best approach is to consult with an experienced and knowledgeable lending professional.
At AAA Banking, we make it simple to take action.
Complete your online form to get startedOr you can contact a loan specialist via phone at (844) 897-2265.
With our help, you’re well on your way to tapping into your home’s equity with the objective of paying off credit card debt and improving your financial life.
Photo by Elisa Ventur on Unsplash
Annual Percentage Rate (APR). Rates and terms effective as of 08/30/2022. Advertised rates and terms are subject to change without notice. Additional terms and restrictions apply. Subject to borrower qualifications. Offer is based on maximum combined loan to value of 90%. This is a variable interest rate product. Variable rates are calculated by using the most recent Prime rate published in the “Money Rates” section of The Wall Street Journal. The current Prime rate 5.50%. After the initial fixed-rate period, the minimum APR that will be imposed can range from 3.00% to the maximum of 18%. Upon approval, your home equity line of credit amount may vary based on your specific situation. You must also pay certain fees to third parties to open a line of credit. To open a typical line of credit of $75,000, borrower-closing costs are estimated to range from $350 – $2,500 depending on the geographic location of the property. Property insurance is required and flood insurance may be required. During the draw period, your minimum monthly payment will be the interest on your current balance (any funds you have drawn from your HELOC). During your repayment period, your payments will include the principal amount plus interest. Home equity line of credit has a 10-year draw period and a 15-year repayment period. Home equity lines of credit must be secured by owner-occupied primary residences and second homes only. Minimum draw amount after closing is $100.
Your minimum payment can vary during both the draw period and the repayment period. During the draw period, your minimum monthly payment will be the interest on your current balance (any funds you have drawn from your HELOC). For example, if you draw $50,000 and your interest rate is 6.00%, then your minimum payment at this rate during the draw period will be $250.00 a month. When the draw period ends, your repayment period begins. During the repayment period your payment will include the principal amount plus interest in an amortized schedule. For example, if your balance due is $50,000 and your interest rate is 6.00% then your minimum payment at this rate during the repayment period will be $421.93 a month. During the application process we will provide important disclosures about this product that you are encouraged to carefully review.