Total U.S. household debt has increased significantly in the first quarter of 2022, increasing by $266 billion over the previous quarter to a total of $15.84 trillion. According to a recent report, balances now stand $1.7 trillion higher than at the end of 2019, before the COVID-19 pandemic. That total includes mortgages, auto loans, student loans, and credit cards.
While some types of debt can be a helpful tool to achieve your goals, high-interest debt, in particular, can also become a drag on your finances, making it harder to reach other money goals. If you’re looking for a way to reduce your debt burden, you may have more options than you realize. If you own your home, rising home values mean that you may have access to a home equity line of credit (HELOC), which could make it easier to manage—and ultimately minimize—your existing debt.
Debt consolidation is one of the top uses of funds from a home equity line of credit, according to a recent Bankrate article. Here are 5 reasons why so many consumers are considering it:
Since you’re using your home as collateral, HELOC rates are significantly lower than credit card rates, some auto loan rates, and student loan rates. The lower your interest rate, the more money you’ll free up each month to pay down the balance or use toward other financial goals.
If you have multiple credit cards or several other loans, you can consolidate all of them into one HELOC. That means you only have one payment to keep track of each month. Make it even easier on yourself by signing up for automatic payments for at least the minimum amount, so that you’ll never miss a payment.
During the draw period of your HELOC (usually 5 to 10 years after opening), you typically have to pay only interest on the balance, which gives you more options on when and how to make your principal payments. If you’re able to make extra principal payments during the draw period, you’ll be able to reduce the total amount of interest you pay even further.
Having high credit card balances relative to your limits can hurt your credit score. Reducing those balances by transferring that debt to a HELOC could improve your credit score over time.
As long as you don’t draw down your entire line of credit, you’ll have access to additional funds if you need them in the future. Plus, as you make payments, funds will become available again. That means you have options to avoid more expensive means of accessing funds, such as new credit card debt, personal loans, or borrowing against your 401(k).
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Disclaimer: The information contained herein is for informational purposes only as a service to the public, and is not legal advice or a substitute for legal counsel, nor does it constitute advertising or a solicitation. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.