Everything is more expensive these days!
Inflation is the number one concern on many Americans’ minds, and it seems we can’t go 1 day without hearing about it on TV or reading about it on the internet. While costs seem to be rising uncontrollably, wages and salaries of Americans aren’t keeping pace. This discrepancy means that many Americans have resorted to taking out more loans and piling on more credit card and personal loan debt to live the same lifestyle that they’ve become accustomed to.
The potential silver lining is that inflation has also caused home prices to increase dramatically, even for those who purchased as recently as last year. For millions of homeowners, leveraging the additional home equity by consolidating all of your additional loans with a cash out refinance or home equity line of credit, with the proceeds going to pay off more expensive debt, such as credit card debt, could save you hundreds or even THOUSANDS of dollars a month!
What is Debt Consolidation?
Debt consolidation is the process of rolling your high-interest rate debts into a lower interest rate loan. The average credit card interest rate is 16.27% and some cards can be as high as 24%. The average auto loan interest rate on used cars can be upwards of 10-12% and the average private student loan debt can be as high as 14%!
While interest rates for home loans have increased rapidly in 2022, average home loan interest rates as of the date of this article are around 7%, about half the cost of other debts individuals typically accrue. By taking out a loan on your home to pay off more expensive debt, individuals can save anywhere from 3-9% annually, which can add up to thousands of dollars a year in savings depending on your current amount of debt.
Is Debt Consolidation right for you?
If you can answer “yes” to these 2 questions, debt consolidation may be right for you:
- Do you own a home that you believe has appreciated in value since the date of your last financing?
- Do you have any high interest rate debt that you would like to pay off?
What steps do you need to take to do a debt consolidation?
When you make the decision that you want to consolidate your debt using a home loan, you have 2 great options. You can either refinance the entire loan your home, which is called a “cash-out refinancing” to pay off your other debts, or you can obtain a Home Equity Line of Credit (HELOC).
Traditionally speaking, many homeowners find the cash-out refinance to be the better solution because you will only have one mortgage against your house, meaning you’ll only have 1 lender to deal with and you’ll get a better rate than you would a second mortgage or HELOC. The process to complete a cash-out refinance is nearly identical to the process to complete any other refinance. You’ll just be using some or all of the proceeds to pay off your existing debt.
If you have an extremely low interest rate on your home thanks to the historically low interest rate period of 2020-2021, you may want to consider obtaining a HELOC to consolidate your debt instead of a cash-out refinance. A HELOC allows you to take cash out over time or as a lump sum, depending on your preference. A HELOC is similar to a credit card because you can carry a balance from month to month and make minimum payments. The interest rate on a HELOC may be higher than the interest rate on a cash-out refinance because you are obtaining this on top of your existing home loan, but if you factor in the rate on your existing home loan and average both payments, it may be cheaper than obtaining a full cash-out refinance.
The bottom line is that while interest rates have gone up, so has the cost of living and home mortgages may be your best option if you are looking to lower your overall monthly debt obligations. Understanding your options is critical in today’s unpredictable world.
If you have any questions on debt consolidation or just want to learn more about the cash-out refinance or HELOC process, please give us a call at 512.881.5099 or apply now and one of our loan officers will be in touch as soon as we receive the application.
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