The US economy grew at a 2.1% annualized rate in the second quarter of 2023, according to the Bureau of Economic Analysis. This follows a 1.6% growth rate in the first quarter. The second-quarter growth was driven by strong consumer spending and business investment.
Home values also continued to appreciate in July, rising 0.8% from June. This marks the 20th consecutive month of home price appreciation. The median home price in the United States is now $433,300.
The combination of economic growth and rising home values is prompting borrowers to consider consolidating high-cost debt using their home's equity. This can be a good way to lower monthly payments and save money on interest over the long term.
However, it is important to weigh the pros and cons of a home equity loan or cash-out refinance before making a decision. One of the biggest risks is that if home values decline, borrowers could be underwater on their mortgage.
The Federal Reserve announced last week that it would pause interest rate hikes for now. This is good news for borrowers in the short term, as it means that mortgage rates may remain stable or even decline slightly.
However, the Fed has also signaled that it may raise interest rates again later in the year. This means that borrowers who are considering consolidating debt should act sooner rather than later, as interest rates are likely to be higher in the future.
Borrowers Consolidate High-Cost Debt
There are a number of factors that are driving borrowers to consolidate high-cost debt using their home's equity.
First, home values have been rising steadily for several years now. This means that many homeowners have equity in their homes that they can use to borrow against.
Second, interest rates are still relatively low. This means that borrowers can often get a lower interest rate on a home equity loan or cash-out refinance than they are currently paying on their high-cost debt.
Third, the economy is growing. This means that borrowers are more likely to be able to afford the monthly payments on a home equity loan or cash-out refinance.
Pros and Cons of Consolidating Debt with Home Equity
There are a number of pros and cons to consider before consolidating debt with home equity.
Pros:
Lower monthly payments: Consolidating debt can help to lower monthly payments by combining multiple debts into one loan with a lower interest rate.
Save money on interest: Over the long term, borrowers can save money on interest by consolidating high-cost debt with a home equity loan or cash-out refinance.
Tax benefits: The interest paid on a home equity loan or cash-out refinance is generally tax deductible.
Cons:
Risk of foreclosure: If home values decline and borrowers are unable to make their mortgage payments, they could be foreclosed on.
Higher overall debt: Consolidating debt can increase a borrower's overall debt burden.
Fees: Home equity loans and cash-out refinances can come with fees, such as closing costs and appraisal fees.
How to Consolidate Debt with Home Equity
If you are considering consolidating debt with home equity, there are a few things you need to do.
First, you need to determine how much equity you have in your home. You can do this by subtracting your mortgage balance from the appraised value of your home.
Second, you need to shop around for the best interest rate on a home equity loan or cash-out refinance. Be sure to compare rates and fees from multiple lenders.
Third, you need to consider the terms of the loan. Some loans have variable interest rates, which means that your monthly payments could fluctuate. Other loans have fixed interest rates, which means that your monthly payments will stay the same for the life of the loan.
Finally, you need to make sure that you can afford the monthly payments on the loan. Be sure to factor in your other monthly expenses, such as your mortgage, car payments, and credit card payments.
Conclusion
Consolidating debt with home equity can be a good way to lower monthly payments and save money on interest over the long term. However, it is important to weigh the pros and cons carefully before making a decision.
If you are considering consolidating debt with home equity, be sure to shop around for the best interest rate and terms. And be sure to make sure that you can afford the monthly payments on the loan.
Additional Tips
Get pre-approved for a home equity loan or cash-out refinance before you start shopping. This will give you an idea of how much you can borrow and what your monthly payments will be.
Be sure to read the fine print carefully before you sign any loan documents. Understand all of the terms and conditions of the loan, including the interest rate, fees, and repayment schedule.
Consider working with a financial advisor to develop a plan for consolidating your debt and managing your finances.
Here are some additional tips:
Only consolidate debt if you have a plan to stay out of debt in the future.
Make sure that you can afford the monthly payments on the loan, even if interest rates rise.
Use the money from the home equity loan or cash-out refinance to pay off all of your high-cost debt, such as credit card debt and payday loans.
Avoid using the money to finance lifestyle expenses, such as a vacation or a new car.
Consolidating debt with home equity can be a good way to get your finances on track. However, it is important to do your research and make sure that it is the right decision for you.
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