Many Americans across the nation are struggling with credit card debt. It can feel debilitating, especially when you have other financial responsibilities piling on. Fortunately, there are different ways you can pay down your credit card debt including with a home equity line of credit (HELOC).
Learn more about HELOCs, their benefits and whether this option could be right for you.
What is a HELOC?
A home equity line of credit is a type of second mortgage that uses your home’s equity as collateral. HELOCs are a line of credit, much like a credit card. However, your limit would be dependent on the equity you’ve built in your home.
A HELOC works in two phases: the draw period and the repayment period. During the draw period, you’re able to access funds from your account when you need to, up to your approved limit. This option would help you pay down your high-interest credit card debt all at once or within a shorter amount of time than without a HELOC. Additionally, you’d only be required to make interest payments during this phase.
After the draw period is the repayment period. You wouldn’t be able to withdraw any more money from your account at this time until you paid off the interest and principal balance of what you borrowed.
Benefits of a HELOC
There are a number of reasons why you might want to consider a HELOC to pay off your credit card debt over other options.
Lower Interest Rate
The average credit card interest rate in America is about 24%—far more than a typical HELOC, which currently averages at around 8%. This means you’d be saving more money in interest every month with a HELOC than with other options, such as a personal loan.
Higher Line of Credit
If you’ve built up substantial equity in your home, you may qualify for a higher credit limit on your HELOC. Lenders typically allow you to borrow up to 85% of your home’s appraised value, minus any outstanding mortgage balance. This is known as the loan-to-value (LTV) ratio. With this increased borrowing power, you may be able to consolidate and pay off high-interest credit card debt in one move, potentially saving on interest and simplifying your finances.
Repay Only What You Borrowed
If you have money left over in your HELOC that you haven’t used after paying off your credit card debt, you won’t have to repay it. You only have to repay what you borrowed from the HELOC, and you’ll have smaller monthly payments during the repayment period.
Is a HELOC Right for You?
How do you know if you should apply for a HELOC? There are a couple reasons why it may be a good idea.
If you’re a homeowner and have consistently been making mortgage payments for a while now, you may have enough equity to tap into to help pay off all or most of your credit card debt at once.
Additionally, if the interest rate on your credit cards is significantly high (which it likely is in comparison to a HELOC’s interest rates), you may want to consider using a HELOC to save money in interest.
What Else Can You Use a HELOC For?
HELOCs aren’t just for debt consolidation. There are a couple of other ways you can take advantage of one.
Home Improvement Projects
Dreaming of an updated kitchen or converting your clawfoot bathtub into a standing shower? You may be able to tap into your home equity with a HELOC and use those funds for any of your home improvement projects. By investing this money back into your home, you may even be able to raise your property value.
Investment Properties
Finding more ways to gain supplemental income can help you prepare for the future, reach financial goals and help ensure you’re secure if you were to lose your primary source of income. By using a HELOC to access your home equity to help purchase an investment property, you could expand your real estate portfolio while creating new ways to gain more income.
Pay Down Debt Today
Securing a financial solution for your high interest credit card debt doesn’t have to be difficult. A HELOC could be the answer.
Want to learn more about HELOCs? Get in touch with one of our mortgage bankers.
Intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information on financial planning or investment advice, consult a registered investment advisor or financial planner.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
