Managing household finances is more challenging than ever. Ongoing inflation, rising auto and student loan debt, and the demands of growing families all contribute to financial strain. Data from the Federal Reserve Bank of New York reveals that household debt in 2024 is at an all-time high, making it difficult for many families to stay financially stable.
For most families, housing debt constitutes the largest portion, but making payments toward a mortgage balance builds equity — opening up a new avenue to pay down high-interest debt, such as credit cards. Average credit card debt in Maryland increased by 5.99% between Q3 and Q4 2023, placing our state among the top ten with the most debt accumulation during that period.
Fortunately, homeowners with built-up equity have a powerful tool to manage and pay down debt: a Home Equity Line of Credit (HELOC).
What is a HELOC Loan?
A Home Equity Line of Credit (HELOC) allows homeowners to use the equity they’ve paid into their homes as collateral toward a revolving line of credit. Unlike a traditional home equity loan, where you receive a lump sump of money upfront, a HELOC provides a flexible borrowing option, similar to a credit card.
How it works:
- Equity as Collateral: The amount you can borrow is based on your home’s equity — the difference between its market value and your remaining mortgage balance.
- Revolving Line of Credit: Borrow what you need, when you need it, up to a predetermined limit. This limit is usually a percentage of your home’s appraised value, minus the mortgage balance.
- Draw and Repayment Periods:
- Draw Period: Lasting up to 10 years, this is when you can borrow funds as needed and make interest only payments or amortizing payments.
- Repayment Period: After the draw period, you pay back both principal and interest over a set period, often up to 20 years.
Advantages of Using a HELOC
- Flexibility: Access funds as needed, making it ideal for ongoing expenses or projects.
- Lower Interest Rates: HELOCs generally offer lower interest rates compared to credit cards and personal loans.
- Potential Tax Benefits: In some cases, the interest paid on a HELOC may be tax-deductible. Consult with a tax advisor for details.
With a variable-rate line of credit, no annual fees, and no pre-payment fees, SECU’s HELOCs are designed to make debt consolidation easier and more affordable. To learn more about how a SECU HELOC loan can help you manage and pay down your debt, schedule an appointment with a member advisor.
How to Pay Down Debt with a HELOC
Using a HELOC to pay down debt can help you take control of your financial situation, reduce interest payments, and simplify your monthly obligations.
Consolidate High-Interest Debt
- Lower Interest Rates: HELOCs typically offer lower interest rates compared to credit cards and personal loans. By consolidating high-interest debt into a HELOC, you can significantly reduce the amount of interest you pay over time.
- Combine Debts: Merge multiple debts into a single, manageable monthly payment. This makes it easier to track and stay on top of payments.
Types of Debt to Consolidate
- Credit Card Debt: Credit cards typically come with high interest rates, sometimes exceeding 20%. Transferring this debt to a HELOC can result in substantial savings.
- Personal Loans: If you have personal loans with higher interest rates than your HELOC, consolidating them can lower your monthly payments.
- Medical Bills: Large medical expenses can be overwhelming. Using a HELOC to pay off medical bills can reduce financial stress by spreading payments over time.
- Other High-Interest Debts: Any other forms of high-interest debt can be consolidated into a HELOC for more favorable repayment terms.
Is a HELOC Right for You
- Assess Your Debt Situation: Evaluate all your current debts and their respective interest rates. Prioritize debts with the highest interest rates for consolidation.
- Calculate Your Available Equity: Determine the amount of equity you have in your home to understand your borrowing capacity.
- Apply for a HELOC: Submit an application with your chosen lender, providing necessary documentation such as income verification, existing debts, and your home’s appraisal.
- Transfer Balances: Once approved, use the HELOC to pay off high-interest debts. You can either directly pay off the debts or transfer the balances to the HELOC account.
- Manage Your HELOC Responsibly: Make consistent payments. If you opted for interest-only payments during the draw period, remember that you will need to start repaying the principal as well once the draw period ends.
Refinance Debt with Home Equity
By leveraging the equity in your home, you can consolidate high-interest debts, simplify your monthly payments, and potentially save a significant amount in interest. This strategy not only helps in reducing your financial burden but also provides a clear path to achieving your financial goals.
SECU’s HELOC loans provide a flexible, cost-effective solution for homeowners looking to consolidate debt and improve their financial health. Schedule an appointment with a SECU financial advisor to discuss your debt repayment options and learn how a HELOC can help you achieve your financial goals.