Leverage Home Equity to Cut Down Credit Card Debt
Do you feel your credit card debt is mounting to unmanageable levels? Are you struggling to keep up with making the minimum payments? Did you try transferring your balances around, but only to end up from where you started?
If this situation sounds familiar, you are not alone. Many Americans across the country find it difficult to retrieve themselves from the burden of mounting credit card debt.
As the interest on credit card debt compounds daily, making minimum payments alone may not be enough to get you out of the trap or this unappealing situation. The interest will continue to pile up, making it harder each day to catch up with the increasing balance.
Formulating a Plan
If you have piled up a significantly large credit card balance, paying it off sooner than later would probably require a strategic move on your part. This means you need to find a way to begin paying considerably more than your minimum payments each month, or somehow pay off the entire amount all at once.
If you are a homeowner, you could have a potential solution available right before you: your own home!
A large number of homeowners are leveraging their home equity to bring their spiraling credit card debt under control. The way to do it is “Cash-Out Refinance,” which you may explore carefully if it works as a viable option for you.
Cash-Out Refinance: How does it Work?
A cash-out refinance occurs when you take out a new mortgage to replace your old home loan and receive a part of your home equity as cash once the new home loan is closed. If your objective is to pay off expensive credit card debt, you could straightaway put that cash towards cutting down your card balances.
When you do it, it will not cut down your overall debt: You will have less balance on your credit cards, but more on your new home loan. The equity that you took out as cash would be added back to the home loan balance.
Credit cards today typically carry interest rates in the range of 10% to 20%, and “penalty rates” could be even higher for those who pay late or have a poor credit. On the other hand, a home loan today would typically have an interest rate in the range of 3% to 6%.
While your eligibility for a home loan rate depends on your situation, any type of home loan you may qualify for will most likely have a significantly lower rate than your credit card rates.
Let us assume you had a total credit card balance of $12,000 at a 15% interest rate. You chose to apply for a cash-out refinance, which enabled you to have a new home loan at 4.9% interest rate – and $12,000 cash that you used directly pay off your credit card debt in full.
This $12,000 of debt would not disappear, but it would not be incurring far lesser interest on your overall balance every month.