Cash-out refinancing
If your goal is to pay off credit cards, one option is to use cash-out refinancing -- taking out a mortgage with a larger principal than your current one. Say you have a home worth $200,000, and you owe $100,000 in principal. Suppose you also have $20,000 in high-interest credit card debt. This leaves you with the option to refinance with a mortgage of $120,000, getting the $20,000 difference between the two principals back in cash. You can then use that $20,000 to pay off your credit cards.
If your goal is to pay off credit cards, one option is to use cash-out refinancing -- taking out a mortgage with a larger principal than your current one. Say you have a home worth $200,000, and you owe $100,000 in principal. Suppose you also have $20,000 in high-interest credit card debt. This leaves you with the option to refinance with a mortgage of $120,000, getting the $20,000 difference between the two principals back in cash. You can then use that $20,000 to pay off your credit cards.
Once you do this, you will no longer have any credit card debt and, therefore, you will not have monthly credit card payments. The lower interest rate on the mortgage means you could save quite a bit in interest each month. Although you may be paying a bit more for your mortgage payment, you were able to pay off your credit cards, alleviating that monthly payment.
Home equity loan (HEL)
A home equity loan allows you to borrow against the equity in your home and use the money to pay off credit cards. How much you can borrow depends on several factors, including an equation that lenders use. Lenders take the appraised value of the home and multiply it by a percentage known as the loan to value ratio, or LTV. The LTV is usually between 80 and 100 percent. However, the higher the percentage, the greater the risk to the lender, so there will be a higher interest rate. From this product, the lender subtracts the existing mortgage to determine the credit limit for the HEL.
A home equity loan allows you to borrow against the equity in your home and use the money to pay off credit cards. How much you can borrow depends on several factors, including an equation that lenders use. Lenders take the appraised value of the home and multiply it by a percentage known as the loan to value ratio, or LTV. The LTV is usually between 80 and 100 percent. However, the higher the percentage, the greater the risk to the lender, so there will be a higher interest rate. From this product, the lender subtracts the existing mortgage to determine the credit limit for the HEL.
For example, on a home that has been appraised at $150,000 where the owner owes $50,000 on the mortgage, the equation would work as follows.
| Appraised value of home | $150,000 |
| Multiplied by LTV of 80 percent ($150,000 x 0.80) | $120,000 |
| Subtract existing mortgage ($120,000 – $50,000) | $70,000 |
This means that the borrower here could get a home equity loan for up to $70,000.
HELs usually have a fixed interest rate and payment, and the term is usually 15 years. Although the interest rate is typically higher than that of a first mortgage, it also is lower than a personal loan and is usually tax deductible.
It is important to note that a home equity line of credit (HELOC) is not usually considered a good choice for paying off credit card debt. Although it borrows from your home equity like a home equity loan, you do not receive the money at once with a HELOC. Therefore, this type of loan is a better choice when you need the money in installments instead of all at once, like when you’re making home improvements, for instance.
Personal loan
If you do not own a home or do not want to use your home equity to pay off credit cards, another option may be a personal loan. A lender can approve you for a personal loan, which you can then use to repay your debts, much like you would with a home equity loan. This difference is that the loan is not secured by your home. That means that you will pay higher interest rates than you would on a home equity loan, however, the rate is generally still lower than those associated with credit cards.
If you do not own a home or do not want to use your home equity to pay off credit cards, another option may be a personal loan. A lender can approve you for a personal loan, which you can then use to repay your debts, much like you would with a home equity loan. This difference is that the loan is not secured by your home. That means that you will pay higher interest rates than you would on a home equity loan, however, the rate is generally still lower than those associated with credit cards.
Pay off credit cards
You can pay off credit cards using any of these options. Simply obtain the loan or refinancing of your choice and use those funds to pay your credit card lenders. The key is to avoid incurring more credit card debt after you do this. The plan to pay off your credit cards needs to be accompanied by a plan to use self-control with your spending, too.
You can pay off credit cards using any of these options. Simply obtain the loan or refinancing of your choice and use those funds to pay your credit card lenders. The key is to avoid incurring more credit card debt after you do this. The plan to pay off your credit cards needs to be accompanied by a plan to use self-control with your spending, too.
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