Using the ABCs of Equity to Help Get Through Uncertain Times

April 21st, 2020

Planning a financial strategy for your life is something many people put off until they’re forced to do it. Recent refinance application data suggests that many people have arrived at this point in early 2020, in the wake of the health concerns and virtual economic standstill brought on by the Coronavirus pandemic. 

Your home is an excellent tool to help not only plan your financial future, but to help tget you on the right track right now. There are three critical steps in the process: The ABCs to Financial Freedom. So, what are those ABCs? Analyze, Budget and Cut the debt. 

Analyze the Situation 

Sit back and take a good, hard look at your financial situation. What are your short-term goals? What are your long-term goals? What does your debt look like? What things would you like to change? Identifying your strengths, your weaknesses, and your goals is a critical first step. This should be done in-depth, not just at a surface level. Be honest with yourself and be realistic when creating goals.

List all debts owed, and decide which ones are most important for you to pay down first. Dig deep and decide which debts are most critical and which can wait. Figure out what your goals are not just for in the distant future or your retirement, but also for right now. Identify ongoing problems and try to brainstorm solutions for them.

Know Your Budget

Next, break down your budget to find out what you can truly afford. Everyone needs a budget, no matter how much income they have. Your budget should include all of your expenses and include several possible scenarios when it comes to restructuring your finances. For example, if you choose to cash out your equity and refinance your mortgage to pay off high interest credit card debt or student loans, you’ll want to account for a possible increase in mortgage payment (in some cases), but note the decrease in debt payments.

Cut the Debt

There is no doubt about it: nothing stunts plans of financial freedom like debt that you cannot pay off. Did you know that if you have $15,000 in credit card debt at a 15% interest rate, it’ll take you nearly 15 years to pay it off if you’re making only the minimum payments? That’s only true if you stop making any additional charges, too. It’s a staggering statistic, and since the average American does, indeed, have $15,000 in revolving credit card debt, it’s one that hits eerily close to home.

There is good news in all of this, however. As a homeowner, you already have an investment that can help to solidify your financial future and set you up for success: your home. Think about it—your mortgage sits constantly at a low, single-digit rate that you can likely count on one hand. Your credit cards, on the other hand, require three, four, or sometimes even five hands to count their interest rates. After all, many retail cards have rates in excess of 20%. So how can you use that fact to your advantage?

A Matter of Equity

Refinancing your home and cashing out some of your equity is the answer you’ve been searching for. Just imagine, you refinance your home, most likely at a lower interest rate than you are currently paying, and you cash out some of your equity to pay off those pesky high interest credit cards. You’ll be effectively rolling that credit card debt into one low, simple payment each month at an interest rate that credit card lenders simply cannot touch.

In the meantime, you adjust your new mortgage’s term to reflect something similar to where you left off (for example, if you had paid for 10 years on a 30-year mortgage, you can refinance at a 20-year term) so you can get your house paid off just as quickly as you would have otherwise. If you’ve got the budget for it, you can even shorten your term beyond what you had and get it paid off faster. The kicker? Interest rates for mortgages vary greatly and are often higher for longer loan terms, so you could potentially save tens of thousands of dollars over the life of your loan not only on credit card interest, but on mortgage interest as well (versus your old loan).

A Bright Financial Future is Within Reach

Your equity is a big part of the solution when it comes to financial freedom. When utilized strategically, you can make some very smart financial moves and build wealth over time—all while saving money in the process. If you’d like more information, you can find a Wallick & Volk Trusted Mortgage Advisor, by visiting our website at http://www.wvmb.com.