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Interest rates are going up to borrow money for all sorts of things, including homes. Although this makes it more expensive to buy some big-ticket items, it’s not all bad. As interest rates rise, the interest rates on your money that you save also tend to increase, making the money you do have worth more.
If the money you have is worth more, it stands to reason you don’t want to keep spending a bunch of it paying off credit cards and other debts at a high rate of interest. And although interest rates might be going up, so are home values. This presents a unique opportunity.
As interest rates rise, 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.
How Much Interest Are You Paying?
The average rate on a variable-interest credit card as of this writing is above 16.8%.
According to ValuePenguin, the average household debts for people who do carry monthly credit card balances is $16,048.
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 $22,000 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.
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.
Cash Out vs. Personal Loans
Personal loans have their advantages. You can take out smaller loan amounts and not have to tap into your home’s equity. It can also be a nice option if you haven’t built up enough equity yet for taking cash out to make sense.
However, you’ll likely pay a higher interest rate on that debt then if you use your home’s equity. 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 620 median FICO score. FHA and conventional loans from Fannie Mae or Freddie Mac require homeowners to leave 20% equity in their home.
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 not only the interest rate but the closing costs as well. 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.
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This Post Has 12 Comments
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Would like information/rates on home equity loans or heloc for debt consolidation.
Hi Karen:
We don’t do home equity loans or home equity lines of credit as a regular product offering. However, we can help you look into a cash-out refinance. If you would like to go over your options, you can get started online with Rocket Mortgage or give us a call at (888) 980-6716. Have a good weekend!
I have a co-op apt. fully paid off put I need a 50.000 debt consoladation loan. Can you help?
Hi Ken:
We do co-op financing in New York State, and only in areas where co-ops are common, but if this fits you, then yeah. If you would like to look into your options online, you can do so through Rocket Mortgage®. One of our Home Loan Experts could also help if you give us a call at (888) 980-6716.
Ive owned my home no mortgage for the last 20 years…I just finished Bankruptcy due to property taxes unbenonce to me my property taxes were not included and just found out I owe a tad over 10,000. I do not have credit cards never have…just need a loan to pay property tax and need to replace my roof can I use the equity of my house for a loan of 15,000 TY
Hi Keri:
If your bankruptcy has been discharged or dismissed, we may have an option for you, but we would have to look into the tax issue and see if it would still work. You can call one of our Home Loan Experts at (888) 980-6716.
There’s another thing to consider. While we don’t have a minimum loan amount in most states, when the loan amount is as small as you’re asking for, we would have to make sure the closing cost makes sense for you. Another option would be to take a personal loan. Our friends at Rocket Loans® could help with that. I just want to make sure we give you a couple of options to look at.
Hi — I have a mortgage with you and I’d like a $50k LOC to consolidate debt. What do I have to do to get this LOC set up?
Hi John:
At this time, we don’t offer home equity lines of credit. What we do have are cash-out refinances. I think you may find this helps you accomplish the same goal and you often get a better rate. This has to do with the new financing being based on your primary mortgage as opposed to the secondary lien that would come with a home equity line. If you would like to look into your options, you can do so online with Rocket Mortgage or by giving one of our Home Loan Experts a call at (888) 980-6716. Hope this helps!
I am retired and own a home. I’m having trouble paying bills. There jus isn’t enough retirement money to pay for everything. I’ve incurred credit card deb over $25,000 and have no way to pay it off. I’ve been living off credit. Would a home equity work to consolidate debt and help to pay it off?
Hi Diane:
We can certainly help you look into your options. If a home loan isn’t right for you, we can at least try to give him some sound advice. I’m going to suggest you speak with one of our Home Loan Experts at (888) 980-6716. They would be able to go over your situation in detail. With that being said, there are also local credit counseling services you might be able to help with options as well.
I’m having trouble paying bills and need help
Hi John:
If you’re having trouble keeping up with your mortgage payments, you need to speak with your loan servicer as soon as possible to talk through your options. If you’re a Quicken Loans client, we can help you look into your options at (888) 980-6716. I hope this helps!