I once cried over buying milk, because it was more than I could afford. It took time, and discipline, to pay off what seemed like insurmountable debt. I talked with a financial advisor and used a budget to pay off debt. If you have debt and want to pay it off, I recommend exploring all of your options. Using your home equity to pay off debt could be a bad idea. Everyone’s situation is different, and the road to living debt free may be one you didn’t expect.
Using Your Home Equity to Pay Off Debt
Accumulating debt is a little like the tiny snowball that starts rolling down the hill. Debt can expand into something that’s feels like the size and weight of a boulder. The stress of debt can feel crushing.
There are a few simple steps to pay off debt. The first step in putting an end to debt is to stop using your credit cards. The second step is figuring out a way to pay the debt off. Paying off debt is like a total money makeover and will enable you to pursue other financial goals. Things like investing in a retirement account, paying for college for your kids, or even just a vacation.
For younger homeowners, using your home equity to pay off your debt may not the best of ideas. However, for homeowners over the age of 62, it may make the most sense. In fact, for retirees, a reverse mortgage loan to pay off debts, and eliminate monthly mortgage payments, may be ideal. A reverse mortgage loan is a loan that taps into your home’s equity. It also allows you to stay in your primary residence for as long as you wish. To learn more, a simple search for best rates for reverse mortgage can go a long way.
Haven’t hit retirement age and are more concerned with building wealth? Accumulating as much home equity as possible would be the priority. In this case, using home equity to pay off debt is not the best of choices. In fact, tapping into your home equity too early can do more damage than good.
Before you use your home equity to stop that snowballing debt, consider the options.
Paying off Debt with Home Equity
Home equity refers to the “ownership stake” you have in your primary residence. Mathematically speaking, it’s the difference between the market value of your home and what you still owe on the mortgage. Home equity may be used as a lump sum to pay off debt. You may be able to use it as a revolving line of credit. The latter option means you will be borrowing against your equity to pay off your debt. Paying off your credit cards with either method seems like a good idea since you can get rid of the high interest rates and instead, make one single low interest monthly payment. Easy peasy, as they say.
Younger homeowners should not use their equity to pay off debt. Credit card debt is unsecured, which means there is no collateral behind the card. If you don’t pay on the card’s debt, it will most likely negatively affect your credit score. You may even receive some threatening letters, or calls, about collections services. But the credit card holder typically stops there.
Mortgage loans are secured debt. It means the debt is backed up by the asset. In this case, your home. If you don’t pay on the loan, the bank can take the asset back in the form of foreclosure proceedings. If you’ve used your home equity to pay off credit card debt, you risk losing your home. The same goes for your retirement savings. You could find yourself in a world of financial pain.
Better Options for Paying off Debt
Make a Budget. This might be the single best way to begin your journey on paying down debt. Eliminate unnecessary spending. It may surprise you how much you find in the budget to apply to debts.
Don’t Just Pay the Minimum. The minimum payment required by the credit cards typically covers only the finance charges. This means you will be paying on accumulating debt for years and years. Make sure you are paying enough to impact the actual debt, not just cover the fees.
Look for interest rate reductions. You can search online for ways to reduce the high interest rate on your credit card debt. One good option is to consolidate multiple credit cards by transferring the balances to a zero percent APR card. You can do the same for a federal or private student loan also.
If you’re 62 or older, using your home equity in the form of a reverse mortgage may be one of the best methods for paying off debt. But if you’re younger and living under the weight of debt, explore your options. Using your home equity to pay off debt can prevent you from building the financial peace and wealth you’ll need in retirement. Don’t wait to start paying off debt. Use a budget and begin to pay down the balances, one payment at a time.