Cash-Out Refinance: Avoid the $250,000 Blunder Most People Make

Categories: , , ,

Are you thinking about a cash-out refinance? While it might seem like a great idea to free up some cash each month, it creates further financial strain in the future. Therefore, before you jump in, let’s look at the numbers in order to see how this decision could cost you a whopping $250,000 over time. Let’s begin by looking at the average debt provided by Dave Ramsey. 

What is a Cash-Out Refinance?

To clarify, a cash-out refinance allows you to take out a new mortgage for more than you currently owe, as well as pocket the difference. It’s tempting if you’re looking for some extra cash or want to consolidate debt. However, in today’s market, with interest rates climbing, you might be setting yourself up for a costly surprise.

Cash-Out Refinance
New Loan Interest Rate Monthly Payment New Total (Current Payment $2,669 – Cash-Out Refinance $1,962)
New Mortgage Balance $295,000 7% $1,962 $707 (Monthly Relief)

Cost of Cash-Out Refinance
Monthly Payment Remaining Number of Payments Cost Over Loan Life Additional Money Out of Your Pocket!

 (Refinance Cost $706,550 – Total Cost Previously $454,591 
$1,962 360 $706,550 $251,959

What is a Home Equity Loan?

A Home Equity Loan, on the other hand, is a type of loan where you borrow against the equity you’ve built up in your home. To put it another way, it’s a second mortgage with a fixed interest rate, a set repayment term, as well as consistent monthly payments. Unlike a HELOC, which acts like a credit line, a Home Equity Loan gives you a lump sum upfront that you repay over time. Therefore, it is a stable option for consolidating debt or financing big expenses.

Home Equity Loan
New Loan Interest Rate Home Equity Loan Payment  + Mortgage New Total (Current Payments $2,669 – Mortgage with HEL $1,959)

(Credit cards and auto loan paid off)
Home Equity Loan  $57,500 9% $793 + $1,166 = $1,959 $710 (Monthly Relief)

Cost of Home Equity Loan
Monthly Payment Remaining Number of Payments Cost Over Loan Life + Mortgage Additional Money Out of Your Pocket!

(Home Equity Loan Cost  $461,249 – Total Cost Previously $454,591 
$793 105 $83,287 + $377,962 =

$461,249

 $6,658

Monthly Payment Relief: What Does It Really Cost?

Sure, both options give you that monthly payment relief you’re looking for, however, only one of them doesn’t mortgage your future. Therefore, by choosing the home equity loan over the cash-out refinance, you will not only save big now, but in the long run as well. 

Out of Pocket Difference Between the Two Options 
Cash Out Refinance $706,550 $245,301
Home Equity Loan $461,249

Bonus: Short-Term Impact

Some people say they won’t keep their mortgage for 30 years. However, the financial impact of a cash-out refinance can be seen after just one year! 

BONUS: Cash Out Refinance: Cost By Year 
Year Cost 
First Year $12,975
Third Year $26,987
Fifth Year $42,894
Tenth Year $80,679 + $11,898 = $92,577

Your Best Option in Today’s Market

In today’s market, a home equity loan is often the better choice. It not only provides the monthly relief you need, but it also doesn’t cost you a fortune in the long run. Remember, it’s not just about getting by today, it’s about protecting your future, too. 

0 Comments/by

Do You Know How to Calculate Your HELOC Payment?

Categories: , ,

Do You Know How to Calculate Your HELOC Payment?

Thinking about adding a Home Equity Line of Credit (HELOC) to your financial toolkit but unsure about the payments? You’re not alone. Many people want to know what to expect before they sign on the dotted line. In this guide, we’ll break down a simple way to calculate your HELOC payment using real examples. Let’s get started!

Understanding HELOC

What is a HELOC? A Home Equity Line of Credit (HELOC) is like a mortgage on your house, however, it works more like a credit card. You get a starting balance that you can borrow against, and during the draw period, you can borrow and pay back as much as you like. To clarify, this draw period usually lasts 5 to 10 years.

Example Scenario

Let’s look at an example to see how it works.

Someone wants to move $20,000 of debt to their HELOC because they have credit cards with higher interest rates. They want to know what their payments will be after the first month.

Step-by-Step Calculation of your HELOC Payment

  1. HELOC amount: $20,000
  2. Interest Rate: Most HELOCs start at Prime. For this example, let’s use an 8.5% interest rate.

Calculating the Interest

  • Yearly Interest:
    • $20,000 × 8.5% = $1,700 per year.
  • Monthly Interest:
    • $1,700 ÷ 12 = $141.67 per month.

So, the rough monthly payment is about $140. Remember, this is just an estimate. The actual amount can vary slightly each month since interest on a HELOC is calculated daily.

Comparing HELOC Payments to Credit Card Payments

In this case, the person was paying about $600 a month in credit card payments. Of that, $400 was just the interest. By moving everything to a HELOC, they now pay around $140 in interest. This change saves them about $260 per month.

Conclusion

Calculating your HELOC payment can help you understand your financial options better. If you have questions or need more examples, feel free to ask in the comments. We’re here to help!

Download the HELOC Payment Calculator here! 

For more tips and tools, check out our other videos and resources. And remember, the goal is to use debt wisely so it doesn’t use you.

0 Comments/by

Pay Less For Debt: Credit Card vs. HELOC Calculator

Categories: , ,

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.

0 Comments/by

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

Categories: , , ,

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!

Watch our most recent video to find out more!

0 Comments/by

What Is Debt?

Categories:

Debt is when you borrow money from someone and promise to pay it back later. To put it another way, people and businesses use debt to buy things they can’t afford right now.

How Does It Work?

First, Borrowing Money: You ask for money from a lender. This could be a bank, a friend, or a company.

Second, Promise to Pay Back: You agree to pay back the money over time. This is called a loan.

Finally, Interest: The lender charges a fee for letting you borrow money. This fee is called interest and is a percentage of the loan.

Types of Debt

Credit Cards

Credit cards let you buy things now and pay later. They are handy; however, they come with high-interest rates if you don’t pay off the balance each month.

Mortgages

A mortgage is a loan to buy a house. It’s a big loan that you pay back over many years. The house is the collateral, which means the bank can take it if you don’t pay.

Student Loans

Student loans help you pay for college. You pay them back after you finish school and start working.

Car Loans

Car loans let you buy a car. You pay back the loan over a few years. The car is the collateral for the loan.

Good vs. Bad 

Not all debt is the same. Some can be good, and some can be bad. Let’s see the difference:

Good Debt

This will help you grow your wealth or income. For example:

  • Student Loans: Help you get an education and a better job.
  • Mortgages: Help you buy a home, which can increase in value over time.
  • Business Loans: Help you start or grow a business.

Bad Debt

This doesn’t help you grow. Instead, it can hurt your finances. For example:

  • High-Interest Credit Cards: These can be hard to pay off.
  • Payday Loans: These have very high fees and can trap you in a cycle of debt.

How to Manage Debt

Managing your finances well is important. Here are some tips:

  • Make a Budget: Know how much money you have and where it goes.
  • Pay On Time: Always try to make payments on time to avoid extra fees.
  • Pay More Than the Minimum: This helps you pay off debt faster.
  • Avoid Unnecessary Debt: Think twice before borrowing money for things you don’t need.

In Conclusion

Debt is a way to borrow money and pay it back later. It can help you reach your goals if you manage it well. Always remember to borrow what you can afford to pay back. With smart choices, debt can be your friend, instead of your enemy.

Contact Us Today!

Do you need help navigating your financial future? Contact us today!

0 Comments/by