We all have dreams. Buying the perfect home. Starting a business. Taking a fantasy vacation. Retiring in luxury.
For a growing number of households, however, going debt-free has become the ultimate financial goal.
In a Credit.com survey, one in four adults defined the American dream as getting out of debt. That was five years ago. Since then, other surveys have found that as many as 70 percent of American families are now making debt repayment a priority.
While there are many different strategies for paying off debt, from debt stacking to the snowball method, there’s one approach that homeowners often overlook: consolidating debts with a home equity line of credit (HELOC).
Unlike a personal loan or standard home equity loan, a HELOC operates much like a credit card. You get a revolving line of credit with a certain limit, and you can draw from it as often as you need to, paying only the interest on what you’ve borrowed. As long as the draw period lasts, you can borrow up to the limit, pay it back and borrow it again. When the draw period ends, usually after 10 to 15 years, it’s time to repay the balance.
When it comes to getting out of debt, a HELOC offers certain advantages. These include:
Paying less interest
Unsecured, high-interest debts have a way of piling up. Credit cards are often easy to get, easy to use and, unfortunately, easy to overuse. But their high interest rate makes them harder to pay off, since most of your monthly payment goes toward keeping up with interest rather than paying off the balance.
Consolidating these debts with a lower-interest loan such as a HELOC could help you pay them off faster. Consider: As of September 2018, the average interest rate on a variable-rate credit card clocked in at 17.32 percent. But because a HELOC is a secured loan that uses your home as collateral, the interest rates are often far lower. When you take out a HELOC through OCCU, for example, you can get an introductory rate of just 1.99 percent for the first six months, then pay as little as 5.5 percent APR.
That difference in interest rates can equate to significant savings.
Let’s say you owe $10,000 on a credit card with 15.54 percent interest. According to Bankrate, it would cost you $14,445 to pay it off if you just made the minimum payment. If you restructured your debt with a five-year home equity loan at 5 percent interest, however, you could pay as little as $11,323 over the life of your loan.
Lower monthly payment
With a HELOC’s lower interest rate, you’ll also enjoy a lower minimum monthly payment on your loan. If you keep paying the same amount as you do now, that means more of your monthly payment will go toward the balance, allowing you to pay off the debt faster.
For families on a budget, a HELOC offers the added benefit of increased financial flexibility. Instead of being committed to a higher monthly payment, you get more freedom to choose how to spend your money. In a tight month, you have the option of making a smaller monthly payment and using your HELOC savings elsewhere. You can also use the monthly savings from your HELOC to advance your other life goals, such as expanding your family or changing careers.
When one OCCU member started looking into foster care, she realized her Honda Fit wouldn’t be large enough to double the size of her family. She was able to use her HELOC to fund a vehicle loan and has now fostered 13 children. Another member used a HELOC to lower his monthly bills so he could switch from a high-stress job to one with lower pay and less stress. “This allowed me to be a better father and husband for my family,” he says.
Fewer bills to juggle
When you have multiple debts from different lenders, you have more monthly payments and due dates to keep track of. Getting out of debt can seem more complicated, since you have to make tough decisions on which one to pay off first while continuing to keep up with all of the other minimum payments.
With a HELOC, however, you have just one monthly payment to worry about, and you can funnel your resources into paying off just one debt. With fewer opportunities for late or missed payments, you may also have an easier time rebuilding or maintaining your credit score.
If you own a home and have some equity to spare, a HELOC could be the key to achieving your debt repayment dream. If you’ve got high-interest or unsecured debt, contact an OCCU loan officer today to determine whether a HELOC is right for you.
*APR = Annual Percentage Rate. Current APRs range 5.50% to 11.50%. Intro APR 1.99% for six months. APRs are variable. Rates current as of 2/7/19 and subject to change. Maximum APR 18%. $199 origination fee. Estimated aggregate credit union and third party fees $$199.00- $2,300.00.