It’s always been an overarching dream in America to buy a home. A place to permanently call ours, raise a family, and if we’re lucky, grow old in.
U.S. homeownership reached its all-time peak in 2004, with 69 percent of households owning their own home. The next 11 years saw homeownership rates fall to under 64 percent, not far removed from the record-low rates of 62.9 percent set in Q2 1965. This slide wasn’t such a bad thing, though. A higher rate of homeowners — particularly via the bevy of subprime loans and reckless mortgages offered — left the market unstable. Too many people owned homes who couldn’t afford it.
Since Q2 2016 however, homeownership rates have risen, most recently reaching 64.3 percent in Q2 2018. But a rising percentage of homeowners brings the fair question of households balancing debt — especially with student loans higher than ever and the average credit card user carrying an average balance of $5,472.
So, how can homeowners get out of debt? Let’s look at the different options below.
Take a DIY Approach
Before you take any permanent actions, it’s always best to pick up the phone and see what asking can yield. Tally your finances and know the exact number you owe and to whom. Then ask your creditor(s) for reduced interest rates, payment grace periods, or if a balance transfer card to lower your overall interest rate and simplify your repayments.
You can even be transparent with creditors about your situation and offer a lump-sum amount to absolve a debt. They may not bite, but creditors prefer some money over no money, so it’s worth a shot. Exploring these options and proactively reaching out before late or missed payments could save your credit score from being wrecked, jeopardize your ability to put food on the table, or potentially lead to foreclosure on your home.
Refinance Your Mortgage Terms
Refinancing a mortgage is a common option homeowner use to reduce the burden of their mortgage, either through reduced long-term interest or smaller monthly payments. However, when you’re in debt, the goal of refinancing your terms should be to get a lower interest rate, not a reduced monthly payment. It may appear attractive to have a lower monthly payment and more money to pay back debt, but all you’re doing is adding more money to your overall mortgage. If you’re trying to extend your terms on a 30-year mortgage, you might never pay it off. Aim to decrease your terms, which will decrease your interest rate and save you thousands in the long run. Refinancing your mortgage makes the most sense when you plan to be in your house long-term. After all, you’ll need to recoup the costs of the refinancing closing cost, which can be a few to several thousand dollars depending on your mortgage.
Cash-out refinancing is a popular method homeowner use to free up funds for a home-improvement project. According to NerdWallet, a cash-out refinance differs from a traditional mortgage refinance because it pays the difference of your mortgage balance and home value, contains a higher interest rate (to match your higher loan amount), and limits cash-out amounts to 80-90 percent of your home’s equity.
However, higher interest rates may not apply depending on how high interest rates were when you bought your home. Cash-out refinancing gives you liquidity to pay back your high-interest rate credit cards, which in turn will improve your credit score. Mortgage interest payments are also tax-deductible. Cash-out refinancing could increase your tax refund. It might go without saying, but to leverage cash-out refinancing, you’ll need to have a good chunk of equity in your home and have no doubts you can make your payments to avoid any foreclosure scenario. And like mortgage refinancing, it’ll carry a closing cost between three and six percent.
Sell Your Home and Rent
Of course, when you’re facing debt and have a mortgage, there’s always the option of selling your home and paying less in rent somewhere. Selling your home is a better strategy for homeowners with more equity in their homes than they currently owe. Otherwise, the debt problem will only momentarily intensify. Another telltale sign to sell a home is when the mortgage payment exceeds 28 percent of your gross monthly income. When factoring your other debt with your mortgage, the total number shouldn’t exceed 36 percent. But even if the numbers make sense, you still need to consider the real cost of moving, such as your kids changing schools, having a longer commute to work, being farther away from friends and family, etc.
Seek Debt Relief
If you have large debt and don’t want to involve your mortgage in any type of debt solution, your options include working with a debt settlement provider or declaring chapter 13 bankruptcy.
Debt settlement companies negotiate with a debtor’s creditors to lower debts. Upon successfully reducing a debt that a debtor agrees to pay, settlement companies will charge a fee for their services. According to Freedom Debt Relief reviews on Consumer Affairs, the debt settlement process takes between two and four years to play out.
When you declare bankruptcy, your debt balances will be eliminated in exchange for a three-to-five-year payment plan. You’ll also be liable for the cost of an attorney, court fees and mandatory financial management courses. Both debt settlement and chapter 13 bankruptcy will stay on credit reports for up to 7 years.
The key factors to pay attention to when deciding on the best debt plan to proceed with are the actual cost of moving out of your home, how much equity you have in your home, the percentage of your current budget your mortgage comprises, and of course, how much unsecured debt you have. With all these details in mind, you’ll be able to choose the option that offers the best balance of risk and debt-relief effectiveness.
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