Pay Less For Debt: Credit Card vs. HELOC Calculator

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Pay Less For Debt: Credit Card vs. HELOC Calculator

Are you a homeowner looking for ways to put more money into your life? Whether it’s for relief, fun, or just to survive, moving money from a credit card to a HELOC (Home Equity Line of Credit) can save you a lot. Let’s take a closer look at how you can pay less for debt today! 

Understanding Your Debt

Nowadays, most of us have more debt than investments. Therefore, it’s smart to spend some time looking at our debt and finding ways to save money.

Example Scenario

Let’s first consider a person with three credit cards totaling $21,000. The average interest rate on these cards is 24%. Therefore, over a year, they will pay about $5,040 in interest.

Now, we know credit cards have different rates and balances, but for simplicity, let’s say each card has a balance of $7,000 with interest rates between 19% and 29%. This gives us an average interest rate of 24%.

If you want to find your average interest rate, you can use a simple spreadsheet. Just plug in your numbers to get a rough estimate.

Moving to a HELOC

What happens if this person moves their $21,000 debt to a HELOC?

A typical HELOC today has an interest rate of about 8.5%. On $21,000, that’s around $1,785 in interest per year.

The Big Difference

Let’s break it down:

  • Credit Card Interest: $5,000 per year
  • HELOC Interest: $1,785 per year

That’s a difference of $3,200 per year!

What Can You Do with $3,255?

Think about what an extra $3,255 can do for you:

  • Go out to lunch
  • Take your family to dinner
  • Go on a vacation
  • Simply enjoy life more
  • Or wake up knowing your day will be better without worrying about making payments

Real-Life Impact

This extra money can bring so much relief as well as joy into your life. Whether you decide to use it to get out of debt, enjoy life, or make sure your kids have what they need, the goal is the same: putting more money in your pocket and less in the banks.

Conclusion

By using a HELOC to pay off your credit card debt can save you thousands of dollars each year. As a result, this simple move puts more money in your pocket, and allows you to enjoy life more. Whether you use the extra cash to get out of debt, have fun, or cover essentials, the goal is to relieve stress, as well as improve your financial situation. 

Download our spreadsheet in order to see your potential savings, and start making smarter financial decisions today. More importantly, if you found this information helpful, please visit our website for more tips on managing debt and boosting your finances.

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Cash Out Refinance: Good or Bad Idea in Today’s Market?

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Cash Out Refinance: Good or Bad Idea in Today’s Market?

Are you thinking about a cash out refinance and wondering whether or not it’s a good idea in today’s market? While many people see ads promising extra cash and lower monthly payments, it’s important to consider whether or not it’s the best choice for you. On the one hand, a cash out refinance can provide immediate funds for various needs. However, on the other hand, it can also come with significant risks, as well as additional costs. Therefore, it’s crucial to weigh the pros and cons before making a decision. So, let’s dive in and examine the details.

What is a Cash Out Refinance?

First and foremost, what is a cash out refinance? A cash out refinance lets you replace your current mortgage with a new one. To clarify, the new mortgage will be for more than what you currently owe, because you are taking cash out of the equity. For example, if you owe $200,000 on your home and get a new loan for $250,000, you will be getting $50,000 in cash.

The Appeal

  • Extra Cash: You can use the extra money for anything that you need.
  • Debt Consolidation: Combine high-interest debts into one lower-interest payment.
  • Home Improvements: Increase your home’s value with updates.

The Risks

  • Higher Interest Rates: Interest rates are higher than they used to be. Therefore, if you refinance now, you could end up with a much higher rate. This means your monthly payments could as a result be bigger as well.
  • Cost Over Time: Refinancing costs money. Not only are there closing costs, which can add up fast, but you might end up paying more over the life of the loan as well. Even if your monthly payment goes down, the total amount you pay could be a lot more.

Are there Better Alternatives?

So, what should you do instead? A home equity loan is a great option. It not only allows you to keep your current mortgage, but it also adds a second loan. Therefore, by using the equity in your home, it will not change the terms of your current mortgage. Another option is a Home Equity Line of Credit (HELOC), which works like a credit card. To clarify, a HELCO allows you to borrow what you need when you need it, and only pay interest on what you borrow. Both options provide the cash you need, while protecting your financial future.

  • Home Equity Loan: This allows you to keep your current mortgage and add a second loan. The interest rate on the home equity loan is fixed, so your payments stay the same.

  • Home Equity Line of Credit (HELOC): A HELOC works like a credit card. The interest rate can vary, but you only pay interest on what you borrow.

Cash Out Refinance vs. Home Equity Loan

Cash Out Refinance Home Equity Loan
Interest Rate Usually higher in today’s market Typically lower than cash out refinance
Monthly Payments New payments based on higher loan amount and interest rate Fixed payments on a second loan
Loan Term Extends mortgage term to 30 years Separate term, usually 5-15 years
Closing Costs High closing costs (2-5% of loan amount) Lower closing costs compared to cash out refinance
Access to Funds Lump sum received at closing Lump sum received at closing
Impact on Existing Mortgage Replaces existing mortgage with a new one Keeps existing mortgage intact
Total Cost Over Time Potentially higher due to interest over a longer term Generally lower total cost
Risk of Losing Home Higher, as you’re resetting your mortgage Lower, as your primary mortgage remains unaffected

Example: Jack vs. Jill

Jack (Cash Out Refinance) Jill (Home Equity Loan)
New Loan Amount $295,000 $90,000
Monthly Payment $2,000 $2,000 (mortgage + new loan)
Total Payment Over Loan Term $720,000 $476,000
Additional Cost Over Existing Debt $244,000 Minimal, as it adds to the existing debt separately

This comparison shows the financial impact as well as the potential risks of each option. More importantly, by considering these factors, you can make a more informed decision that aligns with your financial goals.

Conclusion

In today’s market, a cash out refinance might seem tempting, however it’s often a costly mistake. Higher interest rates as well as long-term costs can outweigh the short-term benefits. Instead, consider a home equity loan or a HELOC. Both of these options can give you the cash you need without risking your financial future. Most importantly, remember to think long-term and choose the best option for your situation. Stay smart with debt!

Contact us today to learn more about your options in order to determine which path would be best for you!

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What is an Adjustable Rate?

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Understanding Adjustable Rate Mortgages (ARMs)

An adjustable-rate mortgage (ARM) is a type of home loan with a variable interest rate. Unlike fixed-rate mortgages, where the interest rate stays the same for the life of the loan, an ARM’s rate can change. This can be good or bad, depending on the market.

How ARMs Work

  1. Initial Rate Period: This is the starting phase of an ARM. The interest rate is fixed and often lower than a fixed-rate mortgage. This period can last from a few months to several years.
  2. Adjustment Period: After the initial period, the interest rate can go up or down. The rate is adjusted based on a specific financial index plus a margin set by the lender.
  3. Adjustment Frequency: This tells you how often the rate can change. Common periods are once a year, but some ARMs adjust more frequently.

Benefits of an ARM

  1. Lower Initial Rates: You usually start with a lower interest rate compared to fixed-rate mortgages. This can save you money early on.
  2. Flexibility: If you plan to move or refinance before the adjustment period, you can take advantage of the low initial rates.
  3. Potential Savings: If interest rates stay the same or drop, your payments could go down after the initial period.

Risks of an ARM

  1. Rate Increases: Your rate and monthly payment can go up after the initial period, which could make it harder to afford your home.
  2. Payment Uncertainty: It’s harder to budget when you don’t know what your future payments will be.
  3. Complex Terms: ARMs have many details. It’s important to understand how your rate is calculated and when it can change.

Is an ARM Right for You?

Consider an ARM if:

  • You plan to sell or refinance before the rate adjusts.
  • You want lower payments at the start.
  • You can handle possible payment increases in the future.

Tips for Choosing an ARM

  1. Understand the Caps: Look at how much the rate can increase at each adjustment and over the life of the loan. These limits are called caps.
  2. Check the Index: Know which index your ARM is tied to and how it has changed in the past.
  3. Calculate Worst-Case Payments: Make sure you can afford the highest possible payment if rates go up.

Final Thoughts

An adjustable-rate mortgage can be a great option for some homebuyers. It not only offers lower initial payments but it also provides flexibility. However, it does come with risks. Make sure you understand how it works and plan for possible rate increases. Always talk to a trusted advisor to see if an ARM fits your financial situation.

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What are the Risks of Adjustable Rates?

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Adjustable-rate mortgages (ARMs) can be appealing because they often start with lower interest rates. However, they come with risks. What are the risks of adjustable rates? Let’s break it down!

What is an Adjustable-Rate Mortgage?

An adjustable-rate mortgage has an interest rate that changes over time. Unlike a fixed-rate mortgage, where the rate stays the same, an ARM’s rate can go up or down. Consequently, this variability introduces certain risks.

Key Risks of Adjustable Rates

1. Rate Increases

The biggest risk is that your interest rate can increase. When the rate goes up, so does your monthly payment. As a result, this can be tough on your budget.

2. Payment Shock

With a big rate increase, you might experience payment shock. This means your payment could jump a lot. If you’re not ready for it, this could be a big problem. In other words, the sudden increase can be overwhelming.

3. Uncertainty

You never know what will happen with interest rates. They might go up, or they might go down. This uncertainty can make it hard to plan your finances. Therefore, you need to be prepared for various outcomes.

4. Refinancing Challenges

If rates go up a lot, you might want to refinance to a fixed-rate mortgage. However, refinancing can be costly. Additionally, you might face issues qualifying for a new loan if your financial situation has changed.

5. Negative Amortization

Some ARMs have a feature called negative amortization. This means your payment might not cover all the interest you owe. Consequently, the unpaid interest gets added to your loan balance, making it grow over time.

6. Prepayment Penalties

Some ARMs have prepayment penalties. If you pay off your loan early, you might have to pay extra fees. This can be a problem if you want to sell your home or refinance. Hence, it’s crucial to understand these penalties before committing.

How to Manage These Risks

Know Your Terms

Understand the terms of your ARM. Know when and how often your rate can change. This helps you plan ahead. Furthermore, being informed about your mortgage terms can prevent surprises.

Budget for Increases

Prepare for rate increases. Set aside extra money each month. This can help you manage higher payments in the future. Thus, a well-planned budget is essential.

Consider a Cap

Some ARMs have caps on how much the rate can increase. Look for loans with these caps to limit your risk. Therefore, these caps provide a safety net against extreme rate hikes.

Refinance Options

Keep an eye on refinance options. If rates are low, it might be a good time to switch to a fixed-rate mortgage. Consequently, monitoring the market can save you money in the long run.

Stay Informed

Stay informed about market trends and interest rates. Knowing what’s happening can help you make smart decisions. In addition, staying updated ensures you are always ready to act.

Conclusion

Adjustable-rate mortgages can offer lower initial rates, but they come with risks. Understanding these risks and planning ahead can help you manage them. If you’re unsure, talking to a mortgage advisor can be a big help. Remember, being prepared is key to navigating the ups and downs of adjustable rates.

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HELOC or Fixed-Rate Home Equity Loan?

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Are you considering tapping into your home’s equity? You might be wondering about your options. Two popular choices are a Home Equity Line of Credit (HELOC) and a Fixed-Rate Home Equity Loan. So, what’s the difference between them? In this article, we will explore the key distinctions between a HELOC and a Fixed-Rate Home Equity Loan. First, let’s understand the basics of each option. Then, we’ll dive into the pros as well as the cons. Finally, we’ll help you decide which might be the best fit for your financial needs.

What is a HELOC?

HELOC stands for Home Equity Line of Credit. Think of it like a credit card that uses your home as collateral.

Key Features of a HELOC:

  • Credit Line: You get a line of credit to borrow from as needed.
  • Variable Interest Rates: The interest rate can go up or down over time.
  • Draw Period: You can borrow money during this time, usually 5-10 years.
  • Repayment Period: After the draw period, you pay back the borrowed amount.

What is a Fixed-Rate Home Equity Loan?

A fixed-rate home equity loan is like taking out a second mortgage on your home.

Key Features of a Fixed-Rate Home Equity Loan:

  • Lump Sum: You get the money all at once.
  • Fixed Interest Rate: The interest rate stays the same throughout the loan term.
  • Set Repayment Schedule: You repay the loan in equal monthly payments.

How They Work

HELOC:

  1. Apply for the HELOC: Get approved based on your home’s value and your credit.
  2. Borrow Money as Needed: Use the line of credit for home repairs, emergencies, or other needs.
  3. Pay Interest Only at First: During the draw period, you might pay interest only.
  4. Repay Principal and Interest Later: After the draw period, pay both the principal and interest.

Fixed-Rate Home Equity Loan:

  1. Apply for the Loan: Get approved based on your home’s value and your credit.
  2. Receive a Lump Sum: Use the money for big expenses like home improvements or debt consolidation.
  3. Start Repaying Immediately: Make regular monthly payments of principal and interest.

Pros and Cons

HELOC:

  • Pros:
    • Flexibility to borrow as needed.
    • Pay interest only on the amount borrowed.
    • Variable rates can be lower initially.
  • Cons:
    • Variable rates can increase over time.
    • Requires discipline to manage spending.
    • Risk of foreclosure if you can’t repay.

Fixed-Rate Home Equity Loan:

  • Pros:
    • Predictable monthly payments.
    • Fixed interest rate.
    • Good for large, one-time expenses.
  • Cons:
    • Must take the entire amount at once.
    • Interest on the whole amount from the start.
    • Less flexibility than a HELOC.

Which is Right for You?

Choosing between a HELOC and a fixed-rate home equity loan depends on your needs:

  • HELOC: Great for ongoing expenses or if you want flexibility.
  • Fixed-Rate Home Equity Loan: Ideal for one-time, large expenses and if you prefer predictable payments.

Final Thoughts

In conclusion, both HELOCs and Fixed-Rate Home Equity Loans offer unique benefits for homeowners looking to leverage their home equity. On one hand, a HELOC provides flexibility with variable rates and the ability to borrow as needed. On the other hand, a Fixed-Rate Home Equity Loan offers stability with predictable payments. Ultimately, your choice depends on your financial goals and preferences. Therefore, carefully consider your needs and consult with a financial advisor. By doing so, you can make an informed decision that best suits your situation. Do you need help navigating your financial future? Contact us today!

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