Trying to Get Out of Debt? The Solution May be Right Under Your Nose!

When people think of ways to get out of debt, they usually start with a plan to pay off large sums of their credit accounts. The problem with this is the fact that most people get into debt because they don’t have the money to pay for the things they buy or for unexpected expenses (e.g. new a/c unit, new car tires, water leak, etc.). So how do people expect to pay extra on their debt?  Most of the time it involves drastic cuts that would make it hard for anyone to sustain over a long period of time.

The second way people usually come up with to get out of debt is to obtain a debt consolidation loan. The problem with this is that most people have way more debt than they can refinance. If a person wants to pay off $30,000 worth of debt, a debt consolidation loan would be almost $600 monthly payments for five years. This payment amount may be lower than some credit card payments (with most of the payment going to interest instead of principle), but most people in severe credit card debt can’t afford a $600 payment, or can’t get approved for a loan because their credit cards are maxed out and are hurting their credit.

So is a person just supposed to live with the fact that they’re going to be in debt forever? Not so fast! The answer may be right under your nose. Most people don’t realize that year after year, they gain equity in their home, which they can utilize. In Texas, customers can borrow up to 80 percent of their home’s value. So if you have a $200,000 home and owe $120,000 on it, you have $40,000 in lendable equity {($200,000*0.80%)-$120,000}. If you took the same $30,000 loan to pay off debt but did it through a 15-year home equity, you would end up with payments around $250* per month. Plus, because the loan is a home-equity loan, the chance of getting approved is usually better because you are using your most valuable asset as collateral.

I know many people will argue that you don’t want to get a home-equity loan with your home, because “when you sell it, you will not have as much equity.” However, if someone is drowning deeper in debt each month while their credit score drops because of the debt, how is that helping anyone? Also, if they are drowning in debt, when they sell their house, they probably won’t be able get another mortgage because they will have late payments on credit accounts and have their credit cards maxed out. If they can get approved, they will pay a higher rate for a new mortgage. However, if person uses a home-equity loan, it lowers their credit card payments from $1,200 per month to $250 per month. This frees up a large amount of money each month to live off of, provides extra funds to use toward paying the principle of the home-equity loan and raises one’s credit score because they went from maxed-out credit cards to paid-off credit cards. In addition, now they can sleep at night because they know they have the money to provide for their family. How is this not a win? For some, there are also tax benefits on interest paid on a home-equity loan, but consult your tax adviser for those benefits.

Is a home equity loan for everyone? No. Are there families who would love a way to get out of debt and sleep well at night? Yes, and there are solutions for getting out of debt. People just need to know where the assets are and how to leverage them. So don’t be afraid to ask - don’t be embarrassed to ask. Know that there are bankers willing to help, and nothing gives a banker a better feeling then seeing the relief of a customer who knows that everything is going to be okay.

*Sample payment is based on a $40,000 home equity loan at 5.80% APR and is an estimate for example purposes only. All loans are subject to credit approval and all rates are subject to change at any time. Please speak with an FCB Personal Banker before estimating a payment for your specific situation.