Your Life How to use a HELOC or Mortgage Refi to consolidate your debt 10.14.20 Owning a home offers more than a few benefits. These may include a great backyard where you can play fetch with your dog, or a walk-in closet that allows you ample room for your collection of vintage suits or dresses. Home ownership is also a good investment for many financial reasons, including building equity and having the option of using that equity to help make a dent in high-interest debt. Credit cards, student loans, unexpected car repairs or medical expenses…. there is no shortage of ways that debt can accumulate and be disruptive to your financial plan. To pay it down, a good method is to consolidate into one affordable lower-interest monthly payment. One great way to do this is to use your home’s equity to help through a Home Equity Line of Credit (HELOC). Atlantic Union Bank offers flexible and affordable HELOC options to meet your needs. Another option is to consider refinancing your current mortgage (Mortgage Refi). In today’s low interest rate environment, many homeowners consider refinancing to either lower their mortgage payments – in order to free up funds for other uses. Or to receive a lump sum of cash based on a percentage of their home’s earned equity – which is called a Cash-Out Refinance. Home Equity Basics If you’ve lived in your home for a while, you’ve probably built up significant equity in it. Home equity equals your home’s value minus the amount you owe on any mortgages. (Example: A house valued at $300,000, with a mortgage balance of $200,000, has approximately $100,000 in equity). Generally, lenders allow you to borrow up to 80% of the value of the home when seeking to do a Cash-Out refinance. What is a Home Equity Line of Credit (HELOC)? A HELOC is a line of credit and the collateral for this line of credit is the equity that you’ve built up in your house -- you are borrowing against the home’s equity. Also, a HELOC usually has a lower interest rate, although variable, than other types of loans. When you start to repay your balance during your HELOC’s term, your amount of available credit is replenished, meaning you can borrow up to your credit line at any point if you need to. HELOC at a Glance Low Interest Rate - HELOCs typically carry variable rates that are lower than credit cards or other personal loans. No or Low Closing Costs and Fees - We can work with you on HELOC options that include no closing costs or annual fees. Need-Based Borrowing - Borrowers may realize they don’t need as much as first thought with their approved HELOC. Borrowers can use their available credit as needed until the draw period comes to an end. Flexible Repayment Options - HELOCs can give you a lot of flexibility. During the draw period, you are usually only required to make interest only payments? Some of our HELOCs have a required P&I payment, and there is also a minimum payment that may sometimes include principal. HELOC: Considerations Variable Rates - With a variable rate HELOC, interest rates may rise or fall based on market changes. If rates go up, borrowers with a variable-rate may end up paying more than was initially thought. But, also may end up paying less, if rates drop. If rates do increase, some products offer the opportunity for customers to lock-in rates. It makes sense to keep an eye on rates as you manage your overall budget and understand options. Your Home is Collateral - If you look into getting a HELOC, make sure you can comfortably afford to make payments since your home is the collateral for the line of credit. Using a HELOC to Consolidate Debt By using a HELOC for debt consolidation, you’re utilizing a portion of your home’s equity to pay off your higher interest non-mortgage debt. By consolidating all your monthly payments (credit card, student loan, car payment, etc.) into that one HELOC payment, it’s certainly easier to keep track of and it should save you some money in the long run. What is a Mortgage Refi? When you refinance a mortgage, you’re getting a new loan to pay off the existing loan(s). Homeowners who refinance are usually looking to take advantage of lower interest rates which then reduce their monthly payments. Lowering your payments then frees up money each month that can be used to pay off other debt that you may be carrying. Another benefit may be the ability to eliminate the mortgage insurance that came with the original loan, or switching from an adjustable-rate loan to a fixed-rate loan. Any reduction in a monthly payment then frees up funds to use in other ways, including paying off other debt payments. Using the Cash-Out Option to Consolidate Debt A cash-out refinance replaces the existing mortgage with a new loan that is for more than you currently owe on the house. You pay off the existing mortgage(s) with a new one, and the amount you borrow in excess of what you currently owe on the house, goes to you in a lump sum to use any way you wish. Paying higher interest debt is one of the more common reasons homeowners choose this method. If you’ve built up significant equity, it might make sense to consolidate all your debt using a cash-out refinance. For example: you owe $200,000 on your current mortgage, but your house appraises at $300,000. That’s $100,00 in equity. With a cash-out refinance, you’d get a new mortgage to pay off what you owe and then the extra as a lump sum of cash. As mentioned earlier, banks usually allow you to borrow against the equity an amount up to 80% of the home’s value. The amount you can borrow depends on the home equity you have built. With this option, you may have a bigger mortgage payment you’re also consolidating other debt into this payment amount. Refi at a Glance Lower Interest Rate - If market rates have dropped since your original mortgage – which they probably have – you may be able to save money on interest with a lower rate. Cash-Out Option - The cash-out option (receiving a cash payment after paying off the current mortgage, as mentioned above) allows you to pay bills, consolidate debt, finance new purchases, etc. with a lump sum amount based on equity you’ve accumulated. Rate and Terms may be Improved - Moving from an adjustable-rate to a fixed-rate may help avoid market fluctuations and keep payments the same amount. You can usually get a lower interest rate if you shorten your loan term. If you lengthen your loan term, you may be able to get a lower monthly payment. Refi: Considerations Changing Terms - Lengthening your loan term may result in paying more interest over the life of the loan. Cash-Out Risks - Cashing out on your equity may mean your loan might be more than the original mortgage. Even if you refinance with a lower rate, monthly payments may increase on your mortgage if the borrowed amount is greater. Closing Costs - You need to factor in closing costs as they typically come with mortgage refinance. Your Home is Collateral - Make sure you are comfortable with the new payments since you are using your home to secure the loan. It’s Your Choice Consolidating debt is no easy task. Do some math and make sure the numbers and the terms of any option work for you. It’s always a good idea to do your research and crunch some numbers. Atlantic Union Bank can always consult with you before diving in to any financial decision. But in the end, a HELOC or Mortgage Refi may be a choice that allows you to pay less interest in the long run, while continuing to work towards your financial goals.