Can You Leverage Your Home Equity to Reduce Your Interest Rates?

2 minutes

If you’re like a lot of American homeowners, you may be paying more to have unsecured debt — credit cards and signature or personal loans, despite having enough equity available in your home to qualify for a home equity loan or a home equity line of credit.

Is using home equity a good way to refinance credit card debt?

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Despite the fact that interest rates on credit cards have reached an all-time high recently, credit card debt in the U.S. is also at it’s highest recorded level. This means there is a tremendous amount of unsecured debt outstanding, at interest rates that are likely higher than any other type of debt.

Mortgage interest rates remain near their all-time lows, so the interest rate differential between these types of debt is widening. According to Federal Reserve data for the 3rd quarter of 2019, the average interest rate on credit card accounts assessing interest was 16.97%, compared with the 30-year fixed rate mortgage average in the U.S. which was 3.68% as of December 2019. That’s a spread of 13.29%.

Even if you’re not looking to refinance your mortgage in order to take cash out in order to pay off your credit card debts, a secured home equity loan could be a good bet. According to the L.A. Times and Informa Financial Intelligence, the average interest rate for a new HELOC was 6.45% as of September 2019.

Is there untapped opportunity out there for home equity?Home Purchase Home Sale

U.S. homeowners are sitting on a record amount of home equity — topping $6.3 trillion this year and far exceeding the levels seen before the financial crisis in the late 2000’s. This pent-up potential hasn’t gone unnoticed. In a recent study undertaken by John Sweeney and Figure.com (a home equity lender):

We found that there are 16.3 million US homeowners who are borrowing in aggregate over $200 billion at unsecured rates and simultaneously have sufficient home equity to potentially qualify for a secured loan that would allow them to refinance at lower cost.

Why are so many Americans willing to pay higher interest rates on unsecured debts while simultaneously holding onto significant equity in their homes? These are three of the most likely contributors:

  • Home equity loans, like home mortgages, require more in-depth qualification criteria and a demonstrated ability to repay the loan — much more stringent standards than most credit cards and personal loans. Not everyone can qualify to tap into their equity.
  • Defaulting on an unsecured debt, like a credit card or personal loan won’t result in the loss of the home, unlike defaulting on a mortgage or home equity loan could.
  • The lasting psychological effects of the mortgage meltdown haven’t faded away and many people are leery about using their home equity like an ATM.

The bottom line: taking advantage of the rate differential between unsecured loans (like credit cards and personal loans) by using secured loan products (like home equity loans and HELOCs) can save you on your interest payments. All types of borrowing should be carefully considered though, and understanding your personal financial situation is key to making good choices.

As with any type of debt consolidation, we recommend making sure that you have a plan (and a budget) in place to ensure you won’t simply rack up credit card balances and/or personal loans balances again, in addition to your new home equity loan.

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