APM BLOG

High interest credit card debt can suck the life out of anyone. Paying off your credit card debt at today’s high interest rates can also take major sacrifice—but it doesn’t have to. Not if you’re a homeowner, anyway.

You could pull your purse strings tighter than you’ve ever imagined, living off of ramen and ad-riddled movies and TV shows. Or you could leverage the reward of built-up home equity to achieve something useful.

Using a Home Equity Loan to Pay Off Credit Card Debt

Your home equity can become a beacon when you’re staring down the dark hole of credit card debt with high interest rates.

Through a cash-out refinance, home equity line of credit (HELOC), or home equity loan (HELOAN) you can pay off your debt or consolidate multiple credit card accounts with high interest rates into one manageable payment. This payment is typically lower than the combined monthly payments you had been making to all your creditors. 

How It Works

A cash-out refinance will replace your existing mortgage with a new, larger mortgage. You’ll receive the difference between the new loan balance and your old loan balance in cash. You can then use this money to pay off high interest credit card debt.

To start the process, a mortgage lender will evaluate your refinance application and order an appraisal to determine how much your home is worth. The cash disbursement will be used to first pay off what you owe on your mortgage. And then the remainder will go to you to tackle that credit card debt. 

Your second option, a HELOC, lets you take out a line of credit against your home. Though terms may vary, you generally have a 10-year draw period in which you can withdraw money up to the maximum credit line. You then have 20 years to pay back the principal and interest on whatever you withdrew. During the draw period, you’re required to pay interest only on the money you withdraw.    

Another option is a home equity loan (HELOAN), also known as a second mortgage. This is a fixed-rate mortgage that is typically 15 years in loan term. Instead of the revolving credit line a HELOC offers, it’s a fixed home loan. You’ll get a check at closing for a specific amount, the rate and payments are fixed, and you can use the funds to consolidate your debt.

Whether you opt for immediate cash in hand with a cash-out refinance or use a HELOC or HELOAN to pay off or consolidate high interest credit card debt, you’ll want to understand that you’ll have a new mortgage loan—or, in the case of a second mortgage—a new interest rate. 

Benefits of Using Home Equity to Pay off High Interest Debt

Leveraging your home equity might be the debt reduction solution you have been seeking. Consider these benefits of tapping into your home equity.

1. You can pay off debt faster.

By consolidating your high interest personal loans, student loans and credit card debt into your mortgage, you can take advantage of lower interest rates. This reduces the overall cost of borrowing. It also allows you to pay off your debt more quickly, which would save you thousands of dollars in interest payments over time.

2. You can improve your credit score.

Your credit score is almost guaranteed to improve as you pay off your credit card accounts and reduce your debt load. A higher credit score opens up better terms and opportunities on future loans and credit lines. However, you want to exercise these options wisely to ensure that you don’t end up with more high interest credit card debt.

3. You can build your savings.

A HELOC, home equity loan, or cash-out refinance frees up extra money that can throw your debt consolidation efforts into high gear. Paying off these debts faster means you can: 

• Divert those old monthly payments into your savings account.
• Build up your savings nest egg again.
• Save for retirement, an opportunity, or an emergency.
• Start putting away money toward your next large purchase or a vacation.

The possibilities are endless once high interest credit card debt is off your plate forever.

4. You can move toward financial security.

As you might have gathered from the section above, debt consolidation provides some breathing room by opening up your credit card limits and creating a cushion in case of emergencies. Having this financial security will help you sleep better at night.

5. You’ll get a streamlined payment process.

Managing multiple monthly payments with different interest rates and due dates can be overwhelming. A cash-out refinance or home equity loan simplifies the process.

The lump sum can be used to pay off your debt. Or if that’s not enough, these programs can combine all debts into one payment with a more favorable fixed interest rate. This makes it much easier for you to stay on top of your finances. 

And staying on top of your finances will—you guessed it—have a positive impact on your credit score. 

6. You can nix higher interest rates for good.

Paying off your debt won’t result in a significantly lower interest rate on your credit card, unfortunately. But it will erase all that compounding interest you’ve been paying on your principal balance and wipe out your credit card balances. This can total hundreds or thousands of dollars in debt payments, depending on your credit card debt, the interest rate, and whether you’re only making the minimum payment every month. 

It’s true that a HELOC or cash-out refinance will bring about new mortgage terms, including a new fixed rate, but today’s mortgage rates pale in comparison to the high interest rates carried by most credit cards. If your debt is substantial and you’ve got home equity built up, trading in your current mortgage rate for a new one can be a wise move.

Considerations with a Debt Consolidation Refinance

Refinancing your mortgage to tap into your home equity isn’t all roses, though. That’s why you need to make sure it’s the right move for you and your financial future. Refinancing your mortgage to tap into your home equity isn’t all roses, though. That’s why you must ensure it’s the right move for you and your financial future.

 We've put together blog on the pros and cons of a debt consolidation refinance that you may find helpful. Additionally, consider the following.

1. Higher monthly mortgage payments

Your monthly mortgage payments will increase since you’re taking on new terms and a new mortgage balance. However, if you’re consolidating your debt into a lower interest rate with a single payment, the overall savings can outweigh the cost.

2. More mortgage interest

A debt consolidation refinance can save you tons of money on high interest credit card debt. But you will end up paying more in interest on your mortgage over the life of the new loan. 

3. Loss of deductibility

Unlike mortgage interest, interest tied to other outstanding debts, such as high interest credit card debt, is not tax-deductible. 

4. Long-term commitment

A cash-out refinance or home equity line of credit will commit you to a new loan and repayment structure for the next 20 to 30 years. 

5. Closing costs

Tapping into home equity comes with closing costs. These costs typically range from 2% to 6% of the loan amount, plus you will incur third-party fees like a home appraisal and title and escrow fees.

Thinking of Using the Equity in Your Home?

Using home equity to pay off high interest credit card debt can be a great move for homeowners who can swing their new monthly payments and plan to stay in their home for a while. Not only can you pay off that credit card debt faster, but you can bump up your credit score and save big on credit card interest that would have been eating into your financial dreams.

It’s true that these options may come with higher monthly mortgage payments and additional closing costs. But the long-term benefits may make one of them a viable solution if your high interest credit card debt is out of control and ruining your life. 

If this sounds like you, we’re here to help! Give one of our trusted APM Loan Advisors a call today to discuss your unique financial situation and all your debt repayment options.