SafeAmerica Credit Union

alternative debt repayments

• By Kevin Alvarez

Paying Down Debt Is Saving — America Saves Week 2023

Making the decision to pay down debt, particularly consumer debt, can be mixed with emotion. You feel good about choosing to take concrete steps to pay off balances on credit cards, auto loans, student loans or other installment loans. On the other hand, you feel less positive about the amount of money you are directing into a savings account. Well, we’re here to show you how reducing debt is a form of saving, to give you strategies for the best way to do so that align with your personal situation, and to boost your financial confidence to keep you working toward your goals.

As you pay off your debt you are freeing up money, allowing you to direct those funds toward saving for something else that’s important to you – perhaps an emergency/opportunity fund, a vacation, home purchase, or retirement. This money is freed up as you spend less on interest, and possibly late fees, and lowering the debt balances themselves.

If you have more than one debt you want to pay off, for example an auto loan and a credit card balance, there are two main strategies to help you decide which debt to pay off first.

  • The snowball method focuses on the balances of each loan. In this strategy, you make the minimum payment on all your loans except the one with the smallest balance. With this loan, you put as much money as you can toward it and when it is completely reduced you allocate that money to the next smallest balance. Your confidence gets a boost every time you see an account balance at zero.
  • The avalanche method focuses on the interest rates of each loan. In this strategy, you pay the minimum payment on all your loans except the one with the highest interest rate. You apply any remaining money you have for debt repayment to the highest interest rate loan. By paying off the debt with the highest interest rate first you reduce the overall amount of interest you must pay.

You choose which method is right for you and your situation.

Once you are on a path to reducing your debt, reflect on the type of relationship you have with credit. Credit is a tool. When used wisely and with purpose, credit can help you achieve your financial goals and build financial confidence. Having a clear view on when and for what purpose you use credit is the foundation for a positive relationship.

Sometimes we’re told that there are good types of debt (home mortgage) and bad debt (credit cards). This type of categorization is based only on the financial aspect and not the personal situation you are dealing with. It may feel better to ask yourself if the type of debt you are taking on is a good decision for you or not.

For example, when an emergency expense crops up and it is large enough that it will deplete all or nearly all of your emergency savings, you may feel like you’re on shaky ground if another expense crops up before you can replenish your savings. So, you may weigh this option against using a combination of savings and credit based on what feels best for you in the situation.

Making purposeful choices about credit, something that you plan for financially and mentally, can help you build more financial confidence.

You can use the America Saves Spending and Saving Tool to calculate how much you have available for debt repayment, take the America Saves Pledge to make a plan for this repayment, or listen to the ThinkLikeASaver Podcast for even more tips.

SafeAmerica Credit Union is here to help you on your saving journey. Check out all the Savings opportunities we have to offer.

Savings Accounts

• By Kevin Alvarez

What Is A Home Equity Line Of Credit?

A home equity loan or line of credit (HELOC) allows you to borrow money using your home’s equity as collateral. This is like a second mortgage that turns equity into cash.

To begin, let’s make sure we understand these two important terms:

Collateral is something that you pledge will repay a debt. If you don’t repay the debt, the lender can take your collateral and sell it to get its money back. With a home equity loan or line of credit, you pledge your home as collateral. You can lose the home and be forced to move out if you don’t repay what you’ve borrowed.

Equity is the difference between how much the home is worth and how much you still owe on the house.

If your Home Value Goes Up

Let’s say you buy a house for $150,000. You make a down payment of $20,000 and borrow $130,000. The day you buy the house, your equity is the same as the down payment: $20,000.

Fast-forward five years. You have been making your monthly payments faithfully, so you now owe $117,000. During the same time, the value of the house has increased. Now it is worth $200,000. Your equity is the difference between them: $83,000

If Your Home Value Goes Down

Let’s say you buy a house for $150,000. You make a down payment of $20,000 and borrow $130,000. In five years your balance is $117,000.

But home prices fell. Now your home is worth $105,000. But you still owe $117,000. Because the value of your home is less than the amount you owe, you have negative equity and are not eligible for a home equity loan.

Types of Home Equity Debt

There is a difference between home equity loans and home equity lines of credit. Both are called second mortgages because they are backed by your property. Home equity loans and lines of credit are repaid in a shorter period than first mortgages. Mortgages are set up to be paid over 30 years. Equity loans and lines of credit often have a repayment period of 15 years. Sometimes it is as short as five and as long as 30 years.

A home equity loan is a lump sum that is paid off over a set amount of time. There is a fixed interest rate and the same payment amounts each month. Once you get the money, you cannot borrow further from the loan.

A home equity line of credit works like a credit card. It has a revolving balance. A HELOC allows you to borrow up to a set amount for the life of the loan. During that time, you can withdraw money as you need it. As you pay off the principal, you can use the credit again like a credit card. A HELOC gives you more options than a fixed-rate home equity loan.

Terms and Repayment

A line of credit often has an interest rate that changes over the life of the loan. Payments vary based on the interest rate. You can’t add new debt during the repayment period. You must repay the balance over the remaining life of the loan.

The draw period often is five or 10 years.  And the repayment period often is 10 or 15 years. But each lender can set its own draw and repayment periods. A customer’s check, credit card or electronic transfer accesses a line of credit. Lenders often have some requirements:

  • Take an initial advance.
  • Withdraw a minimum amount each time you dip into it.
  • Keep a minimum amount outstanding.

With either a home equity loan or a line of credit, you must repay the loan in full when you sell the home.

Information brought to you by our partner, GreenPath Financial Wellness

 

If you're looking for a home equity loan or line, SafeAmerica Credit Union can help.  We offer:

  • Low, variable APR
  • No annual fee / no points
  • Borrow up to 80% of your home's value
  • Much more!

Click below to learn more about our home equity options.

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