Save on Debt
If you have gone through all the previous lessons, you’re now in a great place to renegotiate your current debts and loans if you have any.
That’s because:
- You have a budget you follow
- You have increased your disposable income
- You spend much less than before
- You have increased your income by asking for a raise
That means you have the ability to pay your debt off faster.
Good vs bad debt
While most debt is bad, there is such a thing as good debt. Good debt is when your loan is helping you make more money somewhere else.
The only good debt most people will ever have is a mortgage, since a home will often increase in value beyond the costs of the mortgage.
Please note that the principles from the lesson about saving on accommodation still apply here. Don’t buy more house than you can afford.
Pay off expensive debt ASAP
If you have debt with an interest rate of more than 5%, prioritize paying it off ASAP. The reason for this is that it’s basically a guaranteed return on your money.
For example, if you have credit card debt with an interest rate of 18%, making extra payments will save you all that interest.
Effectively that an 18% guaranteed, risk free “return.”
Action: Consolidate your debt
The first step is to consolidate your current debts into a single cheaper loan. Doing so can instantly lower your interest rate and you can save a lot of money.
Secured vs. Unsecured Debt
When consolidating multiple debts, the difference between secured and unsecured debt can make a huge impact on your interest rates and overall savings:
Secured Debt: If you have high-interest debts (like credit cards), you might be able to consolidate them into a loan secured by an asset like your home. This reduces the lender’s risk, potentially earns you a much lower interest rate.
Unsecured Debt: Consolidating into an unsecured loan likely won’t get you the lowest possible rates since lenders have less assurance.
However, unsecured consolidation can still be a smart move to simplify payments and possibly lower your overall interest compared to multiple unsecured debts.
Action: Know your Consolidation Options
With the understanding that secured debts can offer better rates, it’s time to see if your home equity can play a role in debt consolidation.
Use our straightforward Home Equity Calculator to estimate the available equity in your home.
If you do not own a home, SKIP THIS.
The amount of equity you can access is a key factor in determining if a HELOC or home equity loan could be advantageous for consolidating your higher-interest debts.
| Description | Value |
|---|---|
| Home Value (from Zillow) | |
| Current Mortgage Balance | |
| Maximum Loan Amount (80% of Home Value) | $0 |
| Accessible Equity | $0 |
Step 1: Estimate Your Home’s Value
Visit Zillow’s website and enter your home address to find the estimated market value, also known as the “Zestimate.”
Input this value into the “Home Value (from Zillow)” field of the calculator.
Step 2: Enter Your Current Mortgage Balance
Locate your most recent mortgage statement to find your current outstanding balance.
Enter this amount into the “Current Mortgage Balance” field of the calculator.
Step 3: Review Your Maximum Loan Amount
The calculator will automatically calculate 80% of your home’s estimated value and display it as the “Maximum Loan Amount.”
This figure represents the typical amount a lender might offer for a home equity loan or HELOC, based on standard loan-to-value ratios.
Step 4: Check Your Accessible Equity
The “Accessible Equity” field will automatically update, showing the amount available for borrowing by subtracting your current mortgage balance from the maximum loan amount.
Step 5: Assess Your Borrowing Potential
Review your accessible equity to understand what you can potentially borrow against your home.
This value is what lenders consider when you apply for a home equity loan or HELOC.
Compare your accessible equity to your high-interest debts to determine if borrowing against your home’s value could cover your debts fully.
Action Steps for Those Without Home Equity
If You Don’t Own a Home or Lack Equity
If you don’t own a home or don’t have enough equity, don’t worry! There are still plenty of actionable steps you can take to manage and reduce your debt effectively that we’ll cover in the upcoming sections.
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