If you are currently experiencing issues with debt and debt repayment, you are probably grappling with how you pay it off. As you start to look for ways to secure cash, many people turn to credit cards and their home as sources of quick money. Whether you are considering increasing your credit card limit, tapping into a Home Equity Line of Credit or refinancing to gain access to more cash, here are some things you should know before you take on additional debt.
Using Credit Cards
If you are considering asking for an increase on your credit card spending limit to help alleviate the everyday financial stresses, most credit card companies are ready, willing and able provided your credit score and history show that you are eligible. Additionally, credit cards are eager to open new lines of credit--more cash lent means more cash collected later. However, you should know that this could affect your overall credit score down the road and your ability to secure credit for things like a home loan or educational loan in the future.
Credit cards are considered to be the riskiest form of credit since it usually comes with high interest rates. The higher interest rates are as a result of credit cards being associated with unsecured credit. Unsecured credit is money issued with nothing tangible like a home, car or boat, provided in return should you default on the loan. Most lending institutions would not endorse using credit cards for money lending due to the high interest rates.
Tapping Into a Home Equity Line of Credit (HELOC)
A HELOC is provided based on the equity you have in your home. If you have paid down 15-20% of the value of your home, this is determined by an appraisal process, you may be eligible for a HELOC. Other factors taken into consideration when determining eligibility are your credit score and debt to income ratio but homeownership is the prevailing factor regarding securing credit. Essentially, you are borrowing against the value you have invested in your home. The repayment rates on HELOC vary with the market, although not as high as many credit cards today, you still need to be careful with how much money you borrow. The rate of interest can vary greatly over the life of the loan and any default on the HELOC could result in foreclosure on your home. Another advantage to a HELOC is that you could have your lump sum of cash in 30-45 days.
Refinancing Your Home
If you currently have a mortgage, another method to secure more money is to refinance your current home for more than you currently owe. In turn, you receive the equity you have accumulated between the existing loan and the new loan in a cash payout. This resets your mortgage payments, provides you money in hand and may even lower your monthly payments if the current interest rates are lower than your original rates. However, you have now reset the clock on your mortgage payments and lost whatever equity you had accumulated. For example, if you were 5 years into a 30-year fixed mortgage, refinancing for another 30-year fixed mortgage would allow you to take out any equity you built up in those 5 years and restart payments as if you just purchased your home yesterday. This process generally takes 30-45 days too.
Credit cards, a HELOC or home refinancing are a few ways to help get you out of debt. However, there are others ways to get you through a financial crisis. Before you do anything, contact us at the Law Offices of James C. Shields to help you determine the right path forward for you.