COVID Have you in over your Head in Debt? Try This
COVID did more than harm the health of millions of people – it damaged the household finances of millions too. As we move out of the pandemic and into our ‘new normal’ you have to pick up the financial pieces.
Whether you lost your job, lost hours, or couldn’t work, you may have incurred a large amount of debt. As you figure out what to do next, consider looking at your home as a resource to get you out of financial distress.
Home Values Remain Steady
While we face a lot of uncertainty in the world, one factor remains steady – home values. As a homeowner, this is great news. You can use your home to help bail you out of your financial issues.
Most homeowners can tap into 80 percent of their home’s equity. If you’ve paid down your first mortgage, this means you may have ‘free money available to help get you out of debt. For example, if your home is worth $300,000 and your first mortgage balance is $150,000, you have $90,000 available in equity. You can use that equity to get out of debt.
Interest Rates are Low
If there’s one good thing that came out of the pandemic and the destruction it caused, it’s the low-interest rates. Refinancing your current mortgage just got a lot more affordable. You can take advantage of rates in a couple of ways:
· Rate/term refinance – Lower rates mean lower mortgage payments. If you can lower your rate enough, you could see significant savings monthly and over the life of the loan. If finances got tight, this could be a great way to free up some cash each month.
· Consolidate debt – If you have a lot of debt to pay off because of the pandemic, consider refinancing for a larger amount than you owe and using the money to pay off your debts. You’ll only have one payment and a much lower interest rate to pay as you work your way out. Options to Get your Home’s Equity As a homeowner, you have a few options to get your home’s equity:
· Cash-out refinance – If you prefer to have just one mortgage, refinance your first mortgage as a cash-out refinance. You take out a larger amount than you owe on your first mortgage, using the difference between your new and old mortgage amount to pay off your debts. We don’t tell you how to use the money, but the best use would be to consolidate your debts.
· Home equity loan – If you want to leave your first mortgage alone, consider a home equity loan or second mortgage. This loan gives you the equity (up to 80%) in one lump sum. You can use the funds to pay off your debt, consolidating it into one loan.
· Home equity line of credit – If you prefer a line of credit (like a credit card), consider the HELOC. This is also a second mortgage, but it works differently. You don’t receive the funds in one lump sum unless you want to. Otherwise, the money sits in a line of credit which you can draw on when you need it. You make interest-only payments for the first 10 years, which is the draw period. After 10 years, you pay principal and interest payments and cannot draw from it any longer.
How to Qualify
Tapping into your home’s equity may be easier than you thought. Just like when you bought your home, you need average credit and a decent debt ratio. If you have these qualifications, you may have many options to tap into your home’s equity.
We have a variety of options available including second mortgages and a cash-out refinance option. We’ll work closely with you to help you determine which loan would suit your needs the most.
As you explore your options, look at the big picture. Don’t focus only on the interest you’ll pay monthly, but on the overall money, you’ll save on interest when you pay off your high-interest debt. Mortgage rates are considerably lower than consumer debt rates, making it a great way to get out of debt, keep your budget intact, and make the most of this time as we work our way through the COVID-19 pandemic
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