Homeowners

Drowning in Debt? These Loans May Help You Pay Off What You Owe Faster

Let’s be honest: Debt can be stressful and overwhelming.

That’s where debt consolidation comes in. It involves rolling multiple debts into one account, ideally with a lower interest rate than the rates you’re paying on your current debts. This may help you streamline the payoff process and potentially save some serious cash on interest.

Homeowners have a unique advantage, as they may be able to tap into the equity they have in their properties to help them pay off high-interest debt.   

So, how exactly does it work? There are different loans you can use to consolidate your debt with the ideal option depending on your personal situation.  

Here’s a quick glance at the different types of debt consolidation loans at your disposal.

Cash-out refinances may help you pay off debt

Homeowners who use a cash-out refinance replace their existing mortgages with new, larger loans. Then they pocket the difference and pay it off every month in their mortgage payments.

That money can be used to pay off debt, start a new business, pay for college, you name it.

A cash-out refinance generally makes the most sense if you can secure a lower interest rate on the new mortgage than what you have on your existing one or if you have a lot of high-interest credit card debt.

“If you can replace a credit card with a 24% interest rate with a cash-out refi [with a lower rate,] you could enjoy significant savings,” said Hallie Kraus, certified financial planner at Treehouse Wealth Advisors.

However, a cash-out refi is typically best if you need a larger sum of money as you will need to pay closing costs on the new loan. You will also want to ensure you can comfortably manage the new, more expensive mortgage payments. And homeowners should note that typically this extends the length of their loans.

Home equity lines of credit (HELOCs) can help consolidate debt

Homeowners who don’t need as much money up front may want to consider a home equity line of credit (HELOC). These loans allow you to tap into your home equity and work similarly to credit cards.

You can pull funds from them at any time during the draw period, up to your set limit.

Most HELOCs have a draw period for the first 10 years, where you’ll only pay interest on the money you take out. Once the draw period is up, the repayment period of 10 to 20 years kicks in. You’ll then have to repay your principal balance plus interest.

Typically, these loans have variable interest rates. That means the size of your payment can change over time.

To qualify, homeowners generally need at least 15% to 20% equity in their homes.

A HELOC can be especially useful if you don’t know exactly how much money you need and prefer some flexibility

However, there are risks to these loans. You must be comfortable with fluctuating rates and monthly payments that can be difficult to budget for in advance.

And if you’re unable to make your payments, you run the risk of foreclosure.

Personal loans for debt consolidation

Offered by banks, credit unions, and online lenders, personal loans offer a set amount of money at once that you pay back with interest through fixed monthly payments.

Personal loan rates can range from around 8% to 36% and are largely dependent on your credit score.

If you don’t have a lot of home equity or simply don’t want to put your home on a line, a personal loan might make sense. 

However, since most personal loans are unsecured and don’t require collateral, like your home, you may pay a higher interest rate than you would with a home equity loan or HELOC.

The good news is personal loans can still help you save on interest.

“Personal loans typically offer lower interest rates than credit cards in addition to fixed repayment terms,” said Kraus. “Plus, you don’t have to back them to your home and risk foreclosure.”

Balance transfer credit cards may help you get out of debt

In general, using a credit card to pay off other credit card debt is not a good idea—unless it's a balance transfer card. A balance transfer card has a very low, or 0%, interest rate that lasts for a specified promotional period.

If you qualify, you can move your high-interest credit card debt to the balance transfer card and then pay it off at the low rate.

A balance transfer card may only be an option if you have good to excellent credit and can pay off the transferred balance within the promotional period (anywhere from six to around 21 months).

Otherwise, the regular, higher interest rate will apply.

“A low initial or balance transfer rate can be enticing,” said Kevin Estes, a certified financial planner at Scaled Finance. “However, it’s important to prioritize repayment as the interest rate will rise once the promotion ends. Also, avoid racking up more credit card debt.”