The holiday season is a time to gather with family and friends and celebrate the year. However, it’s also a good time to plan for the future. This could encompass a great many things, but one aspect you might be thinking about is your finances.
Do you want to get out from under high-interest debt? There may be no time like the present with interest rates on the rise.
As interest rates climb, your mortgage is probably going to be one of the lower interest rates you’re going to have, if not the lowest. Home values going up means you have more equity you can turn into cash. If you have several thousand dollars’ worth of credit card debt, a debt consolidation cash-out refinance may be the best way to pay off credit card interest at a much lower rate than what you would be paying over time on the credit card.
If using home equity isn’t an option or you don’t want to touch it, a personal loan could also be a good option to pay off credit cards and other debt with high borrowing costs. Our friends at RocketLoans® can help you look into your options.
How Much Interest Are You Paying?
The average rate on a variable-interest credit card as of this writing is above 17.5%.
According to ValuePenguin, the average household debts for people who do carry monthly credit card balances is $9,333.
Using a credit card interest calculator, if you make the minimum payment on those balances at a 17% APR interest rate, it could cost you more than $13,400 in interest.
If you contrast that with a mortgage, even if rates go up a little bit to 5% or even 6%, you’re saving yourself a lot of interest over time vs. paying it on the credit card balance.
In addition to reducing the interest rate you pay, paying off your credit card debt with a debt consolidation cash-out refinance is beneficial for your credit score because you’re not carrying high balances and utilizing too much of your available credit.
The Advantages of Personal Loans
Personal loans have their advantages. You can take out smaller loan amounts and not have to tap into your home’s equity. Maybe you plan on paying off your home in the next couple of years so that you can use the money for that payment toward other purposes.
With personal loans, you can have a smaller loan amount that you pay off over a shorter term without ever touching your home equity. RocketLoans offers personal loan terms of three or five years. You can choose to borrow from $2,000 to $35,000.
It can also be a nice option if you haven’t built up enough equity yet for taking cash out. We’ll get into this a bit more below, but you often need to have a certain amount of equity before you can take cash out of your home.
Advantages to Using Home Equity
Personal loans allow you to deal with smaller loan amounts over shorter terms without touching your mortgage, so they can be very beneficial.
However, you’ll likely pay a higher interest rate on that debt then if you use your home’s equity. Personal loan rates vary widely based on the situation. However, they tend to be higher than mortgage rates and can be quite a bit higher depending on the terms of the loan.
In addition to the lower interest rates, another huge advantage mortgages have over paying the interest through the credit card itself or even a personal loan is the fact that mortgage interest is generally tax-deductible. Depending on your tax situation, this could mean savings for you.
Does Taking Cash Out Make Sense?
The big thing to figure out next is whether taking cash out makes sense. There are a couple of factors here.
For starters, mortgage investors like Fannie Mae, Freddie Mac, FHA, etc., all require you to keep a minimum amount of equity in the home when you take cash out. VA loans offer the ability for you to make the most of your home equity by allowing you to convert all of your existing equity into cash, but not everyone qualifies. You need to be an eligible active-duty servicemember, veteran or surviving spouse, you need a 680 median FICO score. FHA and conventional loans from Fannie Mae or Freddie Mac require homeowners to leave 15% and 20% equity in their home, respectively.
Knowing that, a key question you need to ask yourself is whether you have enough equity in your home before the refinance that you’ll be able to accomplish your goals, whether you want to pay off debt or use the money for other purposes.
Finally, you need to determine whether the cost of the mortgage makes sense compared with taking a personal loan in order to consolidate debt. If you’re looking at this, take into account the interest rate and the closing costs. If it’s an FHA loan, you’ll also have your monthly mortgage insurance fees for 11 years with a cash-out refinance.
Are you interested in a cash-out debt consolidation? You can get a full refinance approval online with Rocket Mortgage® by Quicken Loans®. If you’d rather chat with one of our Home Loan Experts about your goals and aspirations, you can give us a call at (800) 785-4788. If a personal loan sounds like a better option, head over to our friends at RocketLoans.