Using Home Equity to Consolidate High-Interest Debt

Using your home’s equity to consolidate high-interest debt can be beneficial, but it isn’t right for everyone. For those considering this strategy to consolidate high-interest debt, speaking with a financial professional who can present the pros and cons and allow you to make an informed decision is advantageous.

Household debt is on the rise

Household debt rose by 1.3 percent to reach $17.29 trillion in the third quarter of 2023, according to the latest Federal Reserve Quarterly Report on Household Debt and Credit. Mortgage balances increased to $12.14 trillion, credit card balances to $1.08 trillion, and student loan balances to $1.6 trillion. Of greater concern is the Fed’s report of credit card delinquencies on the rise.

According to Nerd Wallet, “Making only the minimum payment on your credit card keeps your account in good standing and avoids late fees, but that’s all it does. It won’t get you very far toward reducing your credit card debt.” This strategy could be problematic even if a consumer makes regular minimum payments.

What can you do to pay down high-interest debt?

Traditions Bank offers free financial wellness checkups and online resources on financial preparedness, which can help consumers avoid overextending themselves with high-interest debt. However, if you find yourself overextended, consider this:

1. Make the minimum payment on time. While overextending can negatively impact your credit score, making on-time payments is critical and can prevent worse outcomes, such as a delinquent report and/or being sent to a collections firm.
2. Contact your lender or credit card provider. The more information you can provide about your situation, the more assistance and cooperation you will likely receive. This may provide short-term relief, but consider another option below if your financial situation doesn’t improve.
3. Consider a balance transfer to a loan product with a lower interest rate. However, beware of promotional rates that provide short-term relief, then increase to high-interest rates when the promotion ends.
4. For a long-term fixed-rate solution, leveraging your home equity with a debt consolidation loan may be right for you.

What is a debt consolidation loan?

A debt consolidation loan is a financial product that allows individuals to combine multiple debts into a single, larger loan. The primary purpose of a debt consolidation loan is to simplify debt repayment by merging various outstanding debts, such as credit card balances, personal loans, or medical bills, into one loan with a fixed interest rate and monthly payment. A debt consolidation loan collateralized by home equity can often give the borrower a lower interest rate, which means that more of their monthly payment goes towards paying off the loan balance and less goes towards paying interest. “We look to see what’s best for the customer. Suppose they have a mortgage payment and a large monthly credit card payment, where most of their payment is going to interest; we look to see if consolidating it into one amortized payment can free up some cash that could be applied to the principal balance of the loan,” says Dave Fuchs, Regional Mortgage Sales Manager at Traditions Bank.

What factors should be considered when weighing the benefits of debt consolidation?

• Do you have balances with high-interest rates, such as credit cards or car loans?
• Are you able to make more than the minimum monthly payments?
• How many high-interest loans do you have?
• How long will it take to pay off your debt on your current payment schedule?
• How much of your monthly payment is being applied to interest vs principal?
• After making your monthly payments, do you have excess cash for emergencies or to invest?

How to determine if leveraging home equity is right for you

Always consult a financial expert when evaluating options. Traditions Bank has many products that are designed to help individuals manage debt, such as home equity lines of credit, cash-out refinances, home equity term loans, and personal loans.

One of these options, a home equity line of credit (HELOC), can be advantageous because it allows you to pay only for what you borrow against the line of credit. The interest rate will likely be significantly lower than typical credit card rates and may lower your monthly payments. Your Traditions Bank financial partner can help calculate whether this option is viable, guide you through every scenario, and inform you of the estimated timeline for the process.

What are the important factors to consider when evaluating a HELOC?

First, you need to know how much equity you have in your home since you can generally borrow up to 80% of your home’s value, less any existing mortgage debt you currently owe. Your creditworthiness will also play a crucial role in deciding your eligibility. Furthermore, it’s essential to understand the various fees associated with the credit line and weigh them against the long-term benefits. Finally, it’s crucial to consider the impact on your overall debt ratio when evaluating alternatives.

Where should you start with consolidating high-interest debt?

It is important to consider the advantages and disadvantages of all available options carefully when looking to consolidate high-interest debt. At Traditions Bank, we strive to ensure that every person, every business, and every community we interact with finds success, in part because of the mark we made on their finances and their lives. Contact us today to see if utilizing your home equity for debt consolidation is the right option for you.