Reduce Debt with Your Home Equity

Your house could help you pay off debt.

That probably sounds confusing, seeing as a mortgage is debt you’re still paying off (albeit debt that’s also helping you earn equity in an asset).

It’s the equity that comes with paying down a mortgage that can be used to help improve your financial situation.

Do you have credit card or personal loan debt? Any student loan debt still hanging around, or do any of your children have prohibitive student loan debt? A car loan or any other monthly payments inhibiting freedom in your budget?

If any of those are true, it might be a good choice to leverage your home equity to pay off that higher-interest debt that is preventing you from getting ahead financially.

How it Works

If you’ve got some equity in your home, you may be eligible to restructure your mortgage.

To get started, first, an appraiser will value your home.

You can then use that appraised value of your home, with the help of a bank or credit union, to restructure your mortgage for up to 80 percent of the appraised amount.

There are a few considerations that factor into determining if this is a good choice for you, including how much equity you already have in your home, the interest rate of your current mortgage and other debts, how much you’ll need to pay in fees for a restructuring, and the state of your overall financial situation.

To help illustrate, let’s walk through an example with simple numbers:

Let’s say your home is valued at $300,000, if you qualify, you could take out a new (not second, just a replacement) mortgage for up to $240,000. Now, say you’ve been paying off your house for several years, so you’ve only got $100,000 left on the loan. You could take the difference ($240,000 – $100,000) and put it toward other debt.

You wouldn’t be on the hook to take the full 80 percent of your home’s value. Instead, you can do the math to determine how much is needed to pay off your current debt, and see what amount you may need to make up that difference.

There are many considerations within this possibility, it’s true. A restructure comes with up-front fees, so you’ll need to account for them. But taking advantage of this option can be good in several ways!

How it Can Help

  • If you have an adjustable rate mortgage, this can be an opportunity to change to a standard rate. Even if the fixed rate is a bit higher than where you’re at right now, it will be more sustainable for the long term, especially if the Federal Reserve continues to increase interest rates.
  • While it may mean you pay a slightly higher interest rate, depending on when you got your mortgage, it will likely be a much lower interest rate than any other debt you’re carrying. 10 percentage points separate the average 30-year-mortgage from the average credit card interest rate.
  • You could decrease the term of your mortgage, depending on equity levels and pay off your home sooner.
  • Pay off other debt in one fell swoop! Get more cashflow and have more freedom in your spending by “moving” the debt to a much lower interest rate with your mortgage.
  • Move beyond paying off debt by building up your savings for emergencies or future major purchases (Your next car? College for your kids?)

Everyone’s financial situation is different, and you know your own picture best. If you’d like to look into the option of a mortgage restructuring, get in touch with AmeriChoice FCU to consult with us on a Personal Financial Analysis. Through that process, you can discover ways to reduce your debt, increase savings, and find financial freedom.