When It's A Good Idea To Refinance Your Mortgage

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Homeowners who are considering refinancing their mortgages have one advantage to count on – interest rates remain low.

Refinancing from a 30-year or adjustable rate mortgage (ARM) to a lower rate can help consumers save money each month and cut the total amount that goes towards interest payments.

Here’s how to determine whether you will benefit by refinancing your mortgage. 

Here are the two major types of refinances:

1. Rate-and-term refinancing to save money. The majority of homeowners refinance the rest of the balance on their mortgage for a lower interest rate and an affordable loan term. (The loan term is the number of years it will take to repay the loan such as 15 or 30 years.)

2. Cash-out refinancing where you obtain a new mortgage for more than what you owe. The difference is often used to pay for renovations or to retire credit card debt.

Other reasons consumers refinance include to replace an adjustable-rate mortgage with a fixed-rate loan, eliminate FHA mortgage insurance or to settle a divorce.

Some consumers refinance to lower their monthly payment and have more money each month for bills, groceries or an auto loan.

“If a borrower is refinancing strictly to lower monthly mortgage payments and closing costs are $2,400, the borrower should expect to save at least this amount in interest payments for the duration they plan to have the loan,” says Richard Liu, a mortgage consultant for C2 Financial Corp., a San Diego-based mortgage brokerage.

Check today’s low rates on a mortgage refinance.

Determine how long it will take to break even

Mortgage closing costs add up to thousands of dollars. To decide whether a refinance makes sense, calculate the break-even point, which is the time it will take for the cost of the mortgage refinance to pay for itself.

“If you can shave one-half to three-quarters of a percentage point off your mortgage loan by refinancing, you should look into it,” says Greg McBride, CFA, chief financial analyst for Bankrate. “Just be sure the cumulative savings on monthly payments is enough to offset the costs of refinancing. If you’re planning on moving in the next year or two, it might not.”

Break-even point example

Break-even point = Total closing costs ÷ monthly savings

Example:

30 months to break even = $3,000 in closing costs ÷ $100 a month in savings

If you plan to keep the house for less than the break-even time, you probably should stay in your current mortgage.

Mind the term in rate-and-term

The formula above doesn’t measure your total savings over the life of the new mortgage. A refinance can cost more money in the long run if you start your new loan with a 30-year term.

Example:

Kris has been paying $998 a month for 10 years. If Kris doesn’t refinance, the payments will total $239,520 over the next 20 years.

With a refinance, Kris could pay $697 a month to repay the new loan in 30 years, or $885 a month to pay it off in 20 years.

$697 x 360 months = $250,920

$885 x 240 months = $212,400

In the example above, Kris borrowed $186,000 at 5 percent. 10 years later, Kris had a remaining balance of $146,000, and refinanced at 4 percent.

Use Bankrate’s mortgage calculator to compare your own loan scenarios:

• See what happens when you input different mortgage terms (in years or months).
• Reveal the amortization schedule to see how much total interest you would pay.

Good credit can save you lots of money on your mortgage. Check your credit score for free at myBankrate.

Pros and cons of cash-out refinances

Cash-out refinances often are used to pay down debt. They have pros and cons.

Imagine that you use a cash-out refinance to pay off credit card debt. On the pro side, you’re reducing the interest rate on the credit card debt. On the con side, you may pay thousands more in interest because you’re taking up to 30 years to pay off the balance you transferred from your credit cards to your mortgage.

But the biggest risk in this scenario is in converting an unsecured debt into a secured debt. Miss your credit card payments, and you get nasty calls from debt collectors and a lower credit score.

Miss mortgage payments, and you can lose your home to foreclosure. Home equity debt that’s added to the refinanced mortgage always was secured debt.

Playing Your Cards Right: Avoiding the debt zombie apocalypse

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Households with credit card debt are spending more than households without credit card debt in seven of the nine discretionary spending categories that our sister site, CreditCards.com recently asked about. This is a really big problem because the average credit card charges a record-high 17.86 percent. If you have credit card debt, you’re essentially spending 18 percent more for everything you buy.

I want to highlight that these are discretionary purchases – not housing and groceries. And they’re big line items, which is important because I’m not into the whole latte-shaming thing. If you’re in debt, it’s probably not because of small luxuries. A $425 monthly car payment is much more likely to be the culprit. That’s about $5,100 a year.

Or if it’s not the car payment, maybe it’s leisure travel or dining out. The average household with credit card debt that spends on leisure travel runs up an annual bill of $2,211, and dining/takeout is close behind ($2,186).

There’s also clothing/shoes/accessories ($1,892), cell phone services/upgrades ($1,629), out-of-home entertainment ($1,538), fitness ($1,385), subscription services ($1,198) and personal care/beauty ($1,146).

Remember, these expenditures are optional! Even the car payment. You might need a car to get to work and elsewhere, but you don’t need a brand-new car. The average new car costs $37,577, according to Kelley Blue Book. On average, $31,099 of that is financed, Experian reports, for 69 months. That’s almost six years of $500+ monthly payments and a big reason why so many households are in debt.

Buying a cheaper used car or holding onto your existing car a bit longer would save a ton of money. You could also opt for public transportation or ridesharing services such as Uber and Lyft. And note, these car payment figures I’m quoting are just for the loan. They don’t even include insurance, gas and maintenance, which would conservatively add a few thousand dollars to the annual total.

Lifestyle creep is to blame

A different CreditCards.com survey found that, among those with credit card debt, 56 percent have been in debt for at least a year and 37 percent have been in debt for at least two years. More than a third of credit card debtors blamed emergency expenses for landing them in debt, and 28 percent pointed to day-to-day costs. However, many people are blurring the line between necessary and discretionary.

In all nine categories, the CreditCards.com data found fewer than half of respondents would be willing to significantly trim their spending in order to save money. Yikes!

I don’t mean to sound like you can’t have any fun. I just think there are plenty of ways to have fun that don’t end up costing you an arm and a leg. The Federal Reserve says the average household with credit card debt owes $5,700. If you only make minimum payments at 17.86 percent, you’ll be in debt for 19 ½ years and you’ll end up paying $7,526 in interest. That’s a recipe for financial disaster. How can you save for retirement, college tuitions and other priorities if you’re living like that?

The median household credit card debt is $2,300. It could potentially be retired in one year if the family opted for a staycation rather than a big trip. Even cutting your annual dining out bill in half would make a huge dent. So, turn a restaurant visit into a special treat rather than a weekly (or in some cases, daily) habit. Pro tip: bring your lunch to work for one week and see how much money you save.

Other ways to get out of credit card debt

Besides raising your income (through a side hustle, perhaps) and cutting your expenses, take advantage of balance transfer credit cards. These allow you to move a high-rate credit card balance to a new card with a 0 percent interest rate for up to 21 months.

Refrain from making new purchases on this card. Divide how much you owe by the number of months in your no-interest promotion and stick to that monthly payment schedule. You’ll knock out the average $5,700 debt with 21 payments of $271 and change. Beware of transfer fees – that 21-month offer (the Citi Simplicity® Card) charges a 5 percent transfer fee. Most balance transfer cards charge a transfer fee ranging from 3 to 5 percent.

The longest 0 percent period without a transfer fee is 15 months (available on the Chase Slate, the BankAmericard® credit card and the Amex EveryDay® Credit Card from American Express). In all three instances, you need to transfer the balance within 60 days of opening the account to get the transfer fee waived.

I’m confident that everyone can get out of credit card debt – usually in no more than a year or two – if they sign up for a balance transfer card and make lifestyle modifications such as earning more or spending less.

More from Ted:

Ted Rossman is the industry analyst and columnist at Bankrate.com and CreditCards.com. He has been interviewed by hundreds of media outlets, including the Wall Street Journal, Forbes, NBC Nightly News, CBS News, CNBC and Fox Business. Ted also writes the “Wealth and Wants” column for CreditCards.com, which focuses on cash back cards. He previously spent seven years as a member of the award-winning communications department at CreditCards.com and its sister sites, The Points Guy and Bankrate.

Post-Fed rate cut: Here’s how credit cards are affected

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The Federal Reserve has announced its plan to cut rates, meaning cardholders across the country might experience slightly lower interest rates from their credit card issuers.

At the July 2019 Federal Open Market Committee (FOMC) meeting, the Fed voted to cut interest rates by 25 basis points — a relatively small decrease — with the intention of slightly boosting the economy in case of economic downturn.

Fed Chairman Jerome Powell has been hinting at a rate cut for the past few months. With risks to the economic outlook arising, the Fed hopes the cut will preemptively reinvigorate the economy.

The meeting in summary

“[The cut] is intended to ensure against downside risks from weak global growth and trade policy uncertainty; to help offset the effects these factors are currently having on the economy; and to promote a faster return of inflation to our symmetric 2 percent objective,” Powell said at the July 31 meeting.

The chairman also clarified his previous statements, confirming that the boost would not mean a series of further cuts.

“We’re thinking of it essentially as a mid-cycle adjustment to policy,” said Powell. “I’m contrasting it there with the beginning…of a lengthy cutting cycle. That’s not what we’re seeing now. That’s not our perspective now, or outlook.”

What this means for credit cards

The federal funds rate, determined by the Federal Reserve, typically affects the prime rate — or the interest rate banks charge customers with the highest credit ratings. This chain reaction, in turn, continues as the primate rate affects credit card interest rates.

As long as you’re paying your balance in full every month, you likely won’t see an impact from the increase or decrease of rates. But if you have credit card debt or are planning a large purchase in the coming weeks, the lowering of rates can make paying off debt a tad cheaper.

“While credit cards are affected directly by the prime rate, most consumers will feel a minimal impact with this cut,” says Mike Kinane, head of U.S. Bankcards at TD Bank. “We’ve had nine consecutive rate increases since 2008, so one .25 percent decrease won’t result in a dramatic change to a customer’s monthly credit card bill.”

Pay off debt now, not later

With the Fed rate cut, now is the time to pay off your credit card debt. Consider balance transfer card options that can help you consolidate and pay off your debt within an introductory zero percent APR window.

For example, the no annual fee Capital One® SavorOne℠ Cash Rewards Credit Card offers an introductory zero percent APR for 15 months on purchases and balance transfers (16.24% – 26.24% variable APR thereafter). You can transfer your debt to the SavorOne — for a 3 percent balance transfer fee — and pay it off over the course of 15 months while not owing anything in interest.

After your debt is paid off, you’ll still find value in the card’s unlimited 3 percent cash back on dining and entertainment, 2 percent at grocery stores and 1 percent on all other purchases.

The bottom line

The Fed’s rate cut may only marginally impact your cards’ interest rates, but it’s still a good idea to jumpstart your debt payoff as soon as possible.

Learn more about how to start budgeting, paying off your debts and choosing the right cards for your lifestyle here.

5 Ways To Spot Student Loan Scams

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There is an estimated $1.5 trillion of outstanding student loan debt. The burden is taking a toll on Americans, from preventing homeownership to delaying other major life milestones, like marriage.

Still, it’s easy for Americans to want to eliminate that debt as soon as possible — and criminals are capitalizing on the growing desire to do so.

The Federal Trade Commission (FTC) has been cracking down on scammers in recent years, claiming they’ve have been charging illegal upfront fees and misleading consumers.

While it may be tempting to go after a quick fix to eliminate student loan debt, it can have numerous and costly consequences.

Here are five warning signs to watch for when looking for student debt relief.

1. The company asks you to pay upfront fees

Companies charging upfront fees to help with consolidation is illegal. According to the Federal Student Aid website, consumers should “never have to pay for help” with student loans.

In 2017, the Federal Trade Commission started a nationwide crackdown on student loan debt relief scams called “Operation Game of Loans.” The operation was a result of scammers taking over $95 million in illegal fees from consumers over a number of years.

If you call a relief company and they ask for money before helping you, the company is participating in illegal activity; hang up and file a complaint with the FTC.

2. Think twice before signing a power of attorney

Scam companies will ask consumers to sign over a power of attorney, which will give it power to make decisions on your behalf. Often, they will use the power to put your loans in forbearance, which is a major warning sign, writes Robert Farrington on The College Investor, a blog for student loan advice.

Here’s how it works: After you sign a power of attorney, the company will put your loans in forbearance, resulting in you not having monthly payments sent directly to your servicer. Instead, the company will ask you to pay it directly.

Instead of your money going toward your loans, the company will keep it for itself, instead of putting it toward your loans.

“The problem is, these scams usually involve the company taking your money, your student loans remain in forbearance for months or years, and the borrower finds out that the forbearance has expired and that nothing was done,” Farrington writes.

This strategy capitalizes on consumers who aren’t familiar with the many different repayment options for loans.

When a loan is in forbearance, payments temporarily stop or are lowered. Under forbearance, you are still responsible for any interest incurred while not making payments; under a deferment, you might not be.

According to the Federal Student Aid website, forbearance and deferment should be considered only as temporary or short-term solutions if you’re struggling to repay your loans. Long-term solutions to high payments are income-driven repayment plans, which determine your monthly payment based on your pay.

3. The provider offers ‘quick relief’

Most scams make false promises, such as fast loan forgiveness through dispute or programs that don’t exist. These scams often promise quick relief without having specific details of individual accounts and situations.

As of now, there is no quick fix to eliminate student debt. There are loan forgiveness programs available, such as public service loan forgiveness, but even those programs require years of payments before the balance being forgiven. Additionally, student loans cannot be discharged through bankruptcy.

There is no quick fix for eliminating student debt. Those struggling with payments and can’t get relief through payment plans can consider refinancing to a lower-interest loan to make payments more manageable.

4. Think twice before paying to get on a payment plan

While it’s legal for companies to offer services to help customers navigate the student loan repayment system, the FTC says it’s an unnecessary cost.

“Consumers can apply for loan deferments, forbearance, repayment and forgiveness or discharge programs directly through the U.S. Department of Education or their loan servicer at no cost,” the FTC writes on its Game of Loans website. “These programs do not require the assistance of a third-party company or payment of application fees.”

5. Do your research

Those who are feeling unsure about a debt-relief program should do their due diligence in research before committing to or paying for any services.

Use the Better Business Bureau (BBB) search tool to determine if the business is BBB accredited. This tool will also pull up any reviews and complaints made by other consumers.

What to do if you’ve fallen victim to a debt relief scam

If you’ve given away personal information, such as your FSA ID, or have paid a company that might not be legitimate, there are steps you can take before further damage is done.

The Federal Student Aid website lists the following steps you should take:

Change your FSA ID: If you provided your FSA ID to a company, you should log in and change your username and password.

Contact your loan servicer: Be sure to revoke any power of attorney you may have signed over to the party. Review any recent changes or actions that were taken on your loans.

Block all payments: Contact your bank and block any payments to the scam company.

File a complaint: Log on to the FTC website and file a complaint. After, file a report in the FSA feedback system.

Cosigning A Student Loan Can Be A Risky Move For Parents

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With the total amount of outstanding student loan debt surpassing $1.5 trillion, many borrowers are beginning to feel the consequences of their burdens — and that doesn’t just mean students.

When a student doesn’t receive enough financial aid to fund their educations, their families often turn to private loans to help cover the remaining costs. Parents are commonly asked to cosign on loans in order to get their child a better rate, or approved altogether. That willingness to help could be detrimental.

“Would you give a teenager who is irresponsible the keys to your financial future?” That’s how Mark Kantrowitz, student loan expert and vice president of research at Savingforcollege.com describes the risk in cosigning on a child’s student loans.

Reasons why parents probably shouldn’t cosign

Only private student loans can utilize a cosigner — Federal student loans do not allow the practice. With a cosigner, a student with low or no credit can be offered a better rate or increase the chances of seeing their loans approved. Helping a child qualify for a way to pay for their education may seem like a given for most parents, but it comes with immense risks.

Here are some important reasons why parents may want to think twice before cosigning on their children’s private student loans, according to Kantrowitz.

Cosigners are financially responsible if a student defaults on the loan

Cosigning on any type of loan means you are now on the hook for the balance, should the primary signer fail to make payment. And that doesn’t mean the student loans have to end up in default in order for the lender to come after a cosigner, either.

“Actually, as soon as the student borrower is late with a payment, the lender will seek repayment from the cosigner,” Kantrowitz says.

Around two-fifths of general loan cosigners end up repaying the debt, according to CreditCards.com, a Bankrate sister site. If you aren’t capable of repaying the student loan balance entirely on your own, this could cause serious financial distress.

The risk of damaged credit

Cosigning on a private student loan means the loan balance will show up on your credit report. Considering debt-to-income is a major factor in determining a credit score, the large balance can hurt your score.

Kantrowitz also notes that a delinquency won’t only hurt the student — it’ll hurt the cosigner, too.

“Delinquencies and defaults will show up on the credit history of both the student borrower and the cosigner, ruining the cosigner’s credit, not just the student’s,” according to Kantrowitz.

Once your credit is damaged, it will be harder to get approved for good rates on credit cards, auto loans or mortgages. The implications of poor credit stretch far beyond just a low number.

There are no financial benefits for the cosigner

While a parent may be helping a child invest in their future, they won’t receive any direct benefits from cosigning on the student loans.

“All of the benefits — qualifying for a loan, getting a lower interest rate — are received by the student, not the cosigner,” Kantrowitz says.

Seniors facing student loan debt put their retirements at risk

Should any of the private student loans end up in default, the affected cosigner could face an unstable financial future.

In total, Americans who are 60 years old and over owe $86 billion in student loan debt. That number has surged by 161 percent since 2010, as reported by the Wall Street Journal.

Should retirees be unable to repay loans in default, they face an alarming realization in that their retirement will be put at risk. More than 40,000 people aged 65 and older in 2015 faced garnished Social Security benefits because of defaulted student or parent loan debt, the Wall Street Journal reports.

Tips for parents who cosign on a child’s student loans

After considering all of the risks, some parents still might make the decision to cosign on a child’s student loans as every situation is different. While cosigning on any type of loan can have dire consequences, cosigners have rights, should the loans end up in default.

Seek a cosigner release

Under this agreement, the cosigner can be freed from financial responsibility after the primary borrower meets certain requirements. For example, a cosigner can be released from the financial responsibility of a loan after the primary borrower makes a certain number of consecutive payments that are all on time.

Those seeking a cosigner release should contact their lender for more information and to create a plan. The lender will likely ask for proof of your income and creditworthiness, in order to determine eligibility.

Consider refinancing

If you’re unable to be granted a cosigner release, refinancing the loans might be a good idea. In doing so, you will be able to have your name removed from the balance entirely.

(See today’s personal finance loan rates)

Learn more:

5 expert strategies for paying off graduate school student loans

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Graduate school: It’s one of the biggest investments of your life. Not only does it extend your academic career, but it has the ability to make your student loan debt burden skyrocket.

If you go to graduate school, chances are you’re going to need help paying for its costs. Graduate student loan debt is proven to have higher borrowing rates and larger balances than undergraduate student loan debt, according to a 2018 report by the Urban Institute and AccessLex Institute. Those balances were more than three times the amount of undergrad balances during the 2015-2016 school year — and can seem like a daunting obligation to fulfill.

Just how much money are we talking? Research by New America finds one in four borrowers have a combined undergraduate and graduate student loan balance of nearly $100,000 — almost half of the national average mortgage debt in 2017.

Those considering graduate school shouldn’t be intimidated by the large balances, though. A graduate degree can double your earnings, according to the Urban Institute, making it an investment with the potential for generating a positive return.

Best ways to pay off graduate school loans

Bankrate asked a number of experts to share some of the best ways to pay off graduate student loans. Here’s what they recommend:

1. Find a repayment plan that matches your ability to pay

One of the hardest parts about having student loans is figuring out how to afford monthly payments. The higher the total balance, the more you’ll owe each month on a standard repayment plan, which spreads out an even number of payments over 10 years.

There are ways to lower monthly payments, though, which include putting yourself on a repayment plan. That includes some income-driven repayment plans, which cap payments at 10 percent of your discretionary income.

“I’m on an income-driven repayment plan, which means I can breathe a little bit knowing my payments won’t bankrupt me,” says Felicia Golden, a 30-year-old public relations specialist in London who had around $28,000 in student loans after graduate school. “But for me, it’s really important to pay as much as I can each month and not just the contractual minimum. Because then the interest just builds up until it’s unmanageable.”

Pros: Your monthly payment will likely be capped at 10 percent of your discretionary income, meaning they will be more affordable than payments on a standard repayment plan.

Cons: Some repayment plans stretch out payments for longer periods of time, meaning you might end of paying much more in interest than you would on a standard repayment plan.

Best for: Graduates with moderate-to-low incomes.

2. Consider refinancing to save on interest

If you took out private loans for graduate school, refinancing them can likely lower your interest rate. Plus, you can consolidate loans from multiple servicers, meaning you’ll likely only have one payment to make each month. This could also potentially lower your monthly payment, making it more manageable in your budget.

Before choosing a company to refinance with, it’s important to shop around for the best rate. Comparison tools like Bankrate’s help individuals look at refinancing options with multiple lenders in one easy place, allowing them to choose a loan with the best terms. (Compare student loan rates on Bankrate.)

Pros: Refinancing loans can save you thousands on interest and potentially lower your monthly payment.

Cons: Federal loans cannot be refinanced through government lenders, meaning if borrowers choose to refinance privately, they will forfeit their ability to use payment plans. Getting approved for private refinancing will depend on creditworthiness.

Best for: Individuals with fair-to-excellent credit scores who have private student loans.

(Check out Bankrate’s guide to refinancing student loans)

3. Figure out ways to earn more money

Earning extra money is quickly becoming a common way of life in America. A recent Bankrate survey found that nearly half of working Americans have a side gig outside of their primary job and use the money for a variety of purposes, such as spending, paying for regular living expenses or savings.

For someone with a large graduate loan debt balance, getting a side gig could be a great way to knock off that debt faster.

“I’m a firm believer that everyone can earn an extra $100 per month if they try to,” says Robert Farrington, founder of The College Investor. “That extra $100 per month can be applied to your student loan debt, eliminating $1,200 per year from your loan balance.”

Pros: Working a side gig can have multiple rewards, including creating your own schedule

Cons: Working more hours means not only giving up valuable personal time, but you run the risk of burnout. Be sure to get strategic with any side hustle, and keep in mind that gigs like driving for Uber won’t make you rich — they’ll just make a few extra dollars available toward paying back your loans. Additionally, many side-gig employees work on a freelance basis, and therefore are usually not eligible for standard employment benefits.

Best for: People willing to be flexible and put in extra effort for the extra cash.

4. Seek out state assistance

According to Farrington, 45 of the 50 U.S. states, as well as the District of Columbia, offer some type of student loan assistance. These programs are often used as incentives to retain or attract talent in certain fields of work.

For example, Kansas offers student loan forgiveness up to $15,000 over five years for residents living in certain parts of the state; California offers loan forgiveness for doctors, health professionals and dentists.

Pros: Thousands of dollars in assistance are available to put toward your loan balance.

Cons: Some of these programs require individuals to live in rural opportunity zones, meaning they could be far from big cities with advantages like public transportation or easy accessibility. Additionally, these programs aren’t intended to forgive your loans in full, but they will help pay a good chunk of them off.

Best for: Those willing to relocate and establish residency, or provide professional services for a continuous period of time.

5. Learn how to budget

Creating a budget may seem like an obvious tip for conquering student loan debt, but Golden says it’s the “biggest thing” that has helped her manage her student loan debt.

“Once I started to seriously budget (using a template spreadsheet my very practical uncle gave me), I was able to cut down on wasteful things and divert that towards my monthly loan payment,” Golden says. “I was also able to determine how much I could realistically pay each month.”

Creating a budget not only will help you stay on track with your plan to payoff the debt, but it will give you the opportunity to analyze where you’re overspending. When it comes to interest accumulating on your loan balance, every extra dollar you’re able to put toward it will help.

Need help creating a budget? Start by writing down your spending and expenses. After seeing it all in one place, it’ll be easier to determine what your discretionary spending should be after accounting for your fixed expenses.

(Ready to get started? Here are Bankrate’s 5 secrets to creating a budget)

Pros: You’ll have a clearer picture of where your money is going each month. Additionally, you’ll be able to find ways to cut spending and be able to funnel additional money to your student loans.

Cons: Some folks have a hard time sticking to a budget. Keep in mind that budgets can be flexible; if you happen to spend more in one category, adjust the allowance of others to make up for it. You can easily adjust a budget using apps like Mint or You Need a Budget (YNAB).

Best for: Everyone! A budget is an essential tool no matter your financial situation.

Read more:

How To Use Home Equity To Consolidate Your Debt

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If you feel like you’re struggling with debt, you’re not alone.

The average amount of non-mortgage household debt in the U.S. reached $24,706 in 2017, according to Experian’s State of Credit Report. The good news is that home equity interest rates are still near historic lows. Assuming you have enough equity in your home, this avenue of debt consolidation could be a better and cheaper alternative to carrying high-interest debt.

“It’s generally a good option to pay down credit card debts or personal loans, assuming it’s done responsibly,” says Andrew Weinberg, principal at Silver Fin Capital Mortgage in Great Neck, New York. “It can save a lot of money.”

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Get Started

There are two ways to access home equity – a home equity loan or a home equity line of credit, or HELOC. A home equity loan offers a one-time lump sum payment of funds taken as a second mortgage on your home. A home equity line of credit is a revolving line of credit that enables you to withdraw money over time as you need it and pay back the loan as you can.

Your home’s equity is its current value minus the loan balance you still owe. Tapping too much of your equity is risky, and you could wind up underwater in your mortgage if market conditions turn. This means you might owe more on the house than it’s worth, making it difficult for you to move without putting up cash to make up the difference.

“The value of a house goes up and can go down. As a general rule, I would never recommend anyone borrow more than 80 percent of their home’s value,” says Mike Zovistoski, managing director at UHY Advisors.

Pros of using home equity to consolidate debt

Whether you use a home equity loan or HELOC, tapping your home equity to consolidate debt can offer several advantages:

1. You’ll have just one payment

If you’re juggling car loans, a personal loan, medical bills and credit card debt, you already know how challenging it can be to keep track of due dates. By consolidating your debt, you may be able to combine it all to one single payment per month, simplifying your bills and reducing the chance of missed payments.

2. You’ll know when your debt will be paid off

Assuming you don’t keep using your cards, using a home equity loan or HELOC to consolidate debt streamlines the process of paying those accounts off. With a home equity loan product, you’ll have set repayment terms and know the exact date when the loan will be repaid.

3. You can get a lower interest rate

Because the debt is secured against your property, home equity loans and HELOCs have significantly lower interest rates than credit cards. The average variable credit card interest rate was 17.87 percent as of late April, according to Bankrate data. Meanwhile, the average rate of a home equity loan was 5.9 percent and 6.75 percent on a $30,000 HELOC.

A home equity loan also enables you to lock in an interest rate, unlike a credit card that can increase at any time. Additionally, with a home equity loan, more of your monthly payment goes toward the principal rather than the interest.

“It’s almost always going to be a better deal than the rates you’ll pay on credit cards,” Weinberg says of home equity products.

4. You can save money

The ability to lock in a lower rate not only saves money in the long term, but can also equate to a lower monthly payment and help you pay down the debt faster.

For example, if you had $10,000 in credit card debt at a 16 percent interest rate, you’d pay $243 per month and more than $4,591 in interest by the time you pay it off. Consolidating that debt with a five-year home equity loan would not only allow you to pay off the debt faster, but also reduce your monthly payments to $193 and save $3,391 in interest.

“If the borrower is able to continue making the same monthly payment amounts that were originally scheduled on the high-cost debt, they would be able to repay the debt over a shorter period of time and save money,” Zovistoski says.

Use a home equity debt consolidation calculator to find out how much you could save.

Cons of using home equity to consolidate debt

While a home equity loan or HELOC can be a good way to consolidate and better manage debt, it comes with several risks and downsides:

1. It takes time

Unlike opening a credit card or filling out an application for a personal loan, applying for a home equity loan or HELOC is a more in-depth process. The bank will typically want an appraisal of your home along with two years of tax returns, W-2s and bank statements. It can typically take up to 30 days or more to close on a home equity loan or HELOC and get access to the money.

2. Your house is the collateral

HELOCs and home equity loans are forms of secured debt that use your home as collateral. This enables lenders to offer much lower interest rates and more favorable terms than credit card companies, but it presents a greater risk: losing your home if you fail to repay the loan.

While credit card companies and personal lenders can’t come after your home, a bank could foreclose on your home if you default on a HELOC or home equity loan. In other words, don’t take out a HELOC or home equity loan unless you can comfortably afford the payments, in addition to your normal monthly mortgage payment, Zovistoski says.

3. Lender fees and closing costs

Depending on the lender you choose, you’ll likely face some charges such as closing costs and appraisal fees, all of which can add to the cost of the loan. When shopping for a lender, make sure you understand the closing costs that each lender charges and how it will affect overall borrowing costs. Some may claim to offer no fees, then add them back in later as penalties if you close the account before the term ends, Weinberg says.

4. You may fall back into debt

One of the greatest risks is that you may use home equity to pay off your credit card debts only to run those same cards up again. People who have a history of debt problems can be susceptible to falling into the hole again. It’s not an uncommon scenario, Weinberg says.

“They may come back in a couple of years and be back where they were with more credit card debt,” Weinberg says. “You can only do it so many times before you run out of equity.”

5. Tax deductibility is restricted

Under previous tax laws you could deduct the interest you paid on a home equity loan or HELOC, regardless of its use. The new tax law now restricts the mortgage interest deduction on home equity loans or HELOCs to use the money to buy, build or renovate the home you’re borrowing against. Even so, the significant savings in interest rates on home equity products compared to credit card rates still make home equity borrowing a worthwhile option.

Other alternatives for consolidating debt

Tapping home equity may not be the best option for people with serious debt and credit problems. If that’s the case, or if you don’t have enough equity in your home, debt relief programs may be a better option.

One avenue is to work with a certified, non-profit credit counseling agency on a debt management plan. It won’t hurt your credit score but will require you to close all your accounts included in the plan. You’ll have to make monthly payments to the agency which in turn then makes the payments to your creditors. If you have debts with multiple credit cards or lenders, you’ll be saved the hassle of tracking multiple bills and due dates.

Another option is a debt settlement plan. While you’ll be able to reduce the balance by agreeing to settle with one or more creditors for less than what you owe, your credit score will suffer significantly. You’ll also have to pay fees and income taxes on the amount forgiven, a consideration that could make debt management less attractive.

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Bottom line

It’s a smart idea to shop around with several different home equity lenders to ensure you get the best rates and terms. Having a plan for how you’ll attack high-interest debt — and how you’ll repay your home equity loan or HELOC — can set up your finances for a more secure future.

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