If the thought of your interest rates is enough to keep you awake at night, you’re not alone. In fact, over 42% of Americans are now deeper in debt than they were two years ago. With interest rates skyrocketing due to the Federal Reserve’s 2022 rate hikes, looking for ways to lower your interest rates is a logical move.
Whether it’s a mortgage loan, an unsecured personal loan, or a credit card balance, high-interest rates can cost borrowers thousands of dollars a year. There are ways to transfer credit balances and refinance mortgages or loans, but homeowners have another option they may not have considered.
HELOC interest rates are usually much lower than the rates of credit cards or unsecured personal loans. If you have at least 20% equity in your home, a HELOC will allow you to use it as collateral in exchange for a borrowing limit that can often cover your high-interest debt.
Much like a credit card, you can choose to spend it when you need it, and you’ll make payments every month. However, many HELOCs feature a withdrawal (or draw) period that only requires you to make payments on the interest of the HELOC. These interest-only payments during the withdrawal period can be smaller than those found with traditional home loans, although HELOC payments will increase to pay back the principal during the repayment period.
This 10-15-year HELOC draw period is the perfect opportunity to use your HELOC to lower interest rates on other balances you owe. Since you’ll be making smaller payments on the interest and not the principal, it can also provide you with a little relief from monthly high-interest balances.
Here are some of the most common ways that homeowners are making the best of HELOC interest rates:
Pay Off High-Interest Credit Cards
If your HELOC is large enough to pay off credit card balances that have high-interest rates, consolidating your debt with a HELOC converts your high-interest debt into lower-interest HELOC debt. Credit card interest rates are often 20% or higher, which can be considerably more than the rates you’ll be charged for using your HELOC. Not only will you save yourself a lot of money, you’ll also give your credit score a boost by paying down your revolving credit card debt.
Consolidate Your Debt
HELOC interest rates are typically so low that it only makes sense to consolidate outstanding debt. At the same time you’re lowering interest rates, you’ll also be eliminating multiple monthly payments that can be as difficult to manage as they are expensive.
By consolidating debt with a HELOC, you’ll give yourself a repayment plan that can fit your budget.
Make Home Improvements
It might sound counterintuitive, but updating, improving, or remodeling parts of your home is one of the most common ways homeowners take advantage of appealing HELOC interest rates.
As home improvements can add value to your home, you can contribute to building more equity, especially with renovations that target key areas of your home like your kitchen.
A HELOC can help lower your interest charges
Don’t let high-interest rates cause you stress. When you use a HELOC to consolidate debt, eliminate credit card balances, or invest in your home, you’re making a big step toward your savings goals.
Talk to your lender about the ways HELOC interest rates can help you reduce interest charges that translate to affordable monthly payments.