You no longer can pay off your credit card balance. Inflation and the holidays are the primary culprits. You didn’t think too much about the credit card interest rate because you were in the habit of paying the entire credit card statement balance on time each month. For the first time, you are seeing what 22.5 percent credit card interest rate means as a line item on your credit card statement. And you’re shocked! What do you do now?
Take control. Whether you choose to leverage your home equity, rent, or explore the various financing options, there are ways to regain control. Evaluate your circumstances, explore these strategies, and take the first step toward your future based on your financial goals and objectives.
Home prices have soared nationwide, rising on average by 47 percent since early 2020, thus many homeowners could sell their property for a tidy profit. You have equity in your home, maybe even more than 20 percent of the market value. That means you can monetize some or even most of that equity to consolidate credit card debt, pay down car loans, and pay off your buy-now-pay-later bill.
Second Home Loan
Taking out a second home loan means you now have two monthly mortgage payments. There are two possibilities when it comes to a 2nd mortgage:Home Equity Loan
To qualify for a home equity loan, you may be required to show at least 15–20 percent equity in your home. The interest rate is higher because the lender risk is higher, given that the first mortgage has priority. The interest rates are fixed, and payments are therefore stable. The proceeds of the loan are a lump sum and your monthly payments begin.Home Equity Line of Credit
With a Home equity line of credit (HELOC), for up to 10 years, you can pull out a little or a lot of cash, up to the credit limit. The repayment period may go out to 20 years, and the use of the credit line stops until payment in full is achieved. The interest is generally an adjustable rate, and so monthly payments can change, though some lenders will allow you to convert to a fixed rate during the period of repayment.Pros and Cons
Before you settle on pursuing that second mortgage, be aware of the pros and cons. Keeping your original mortgage with its very low interest rate is advantageous to those who may have locked in 3–4 percent fixed-rate mortgages, as today you would face a 6.5 percent mortgage rate or even higher.Refinancing
There are two ways to go if you opt for refinancing. We will discuss “rate and term” refinancing as well as “cash-out” refinancing, each with unique advantages and disadvantages, as well as for different purposes. First and foremost, selecting this path results in only a single housing payment.Cash-Out Refinancing
Essentially, this refers to taking out a new mortgage that is higher than the old one and the current balance and payoff. The extra cash can then be used to pay down old bills and other debts such as loans and credit cards. The cash can also be used for an emergency, remodeling, or any other purpose. The quotes you get on both interest rates and closing costs will guide you in terms of comparing cash-out refinancing to rate and term refinancing and a second mortgage option.Rate and Term Refinancing
This choice is simply replacing your old mortgage—with its interest rate and terms—with a new one. Perhaps you had an adjustable-rate mortgage, and a new mortgage is needed to avoid the scheduled rate increase. But look carefully at the closing costs involved—generally about 1 percent of the loan amount—to make certain the new mortgage will be worth it. That generally means the new rate should be at least a full percentage point or two lower than the old rate.Summary
There are good reasons for considering tapping your home equity, such as a medical emergency or loss of a job, or consolidating all other debt with a lower interest rate and a lesser amount in a single payment. But be warned that although it is popular today to use the windfall of home equity that arrived over the past two years to take advantage of other investments, this is not recommended and could be a trap that will ultimately bite you.Parlaying that equity into risky stocks, cryptocurrency, and precious metal investments could result in a two-fold financial catastrophe. First, your investment is volatile and may go down, and second, if the appraised value of your home decreases, you could find yourself in the inauspicious place of owing more than the market value.
Be careful. Be smart. Make sure the reasons for the second mortgage, HELOC, cash-out, or refinance are prudent—and in the best financial interest of your family.
