This Is Budgetnista Tiffany Aliche’s Least Favorite Option for Paying Down Debt
Written by
Sean Bryant
Edited by
Jenna Klaverweiden
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Are you in debt and looking for a way out? If so, cashing out on some of your home equity might have crossed your mind.
There are two primary ways to pull equity out of your home: a cash-out refinance or a home equity loan. A cash-out refinance allows you to convert the equity in your home into cash in exchange for a new mortgage. A home equity loan gives you a lump-sum loan for the equity in your home, which will be repaid.
While home equity may seem like a saving grace, it may not always be the best choice to use to pay off debt. Budgetnista Tiffany Aliche recently discussed this option on Instagram, calling it her “very least favorite option for paying off debt.”
Here’s why Aliche isn’t a fan of this method for paying down debt.
Semi-Hidden Refinance Fees
Banks don’t typically offer loan products without fees. Although you might not need to pay commissions as you did when you initially purchased your home, you will need to foot the bill for closing costs. These expenses might include title charges, appraisal costs and lender fees.
According to U.S. Bank, you can expect to pay 2% to 5% of the loan amount in closing costs for a cash-out refinance. For a home equity loan, expect to pay 2% to 6% of the loan amount in closing costs, per Rocket Mortgage.
Is a cash-out refinance or a home equity loan saving you more interest than the upfront fees? If not, you might want to pursue other methods for paying down debt.
More Debt Accumulation
There are only two ways to improve your financial situation: earn more money or spend less. When you take out a home equity loan or pursue a cash-out refinance, you aren’t doing either. Instead, you are adding to your debt load.
For example, you might take $40,000 out of your house to repay credit card debt, but you are still left with $40,000 in debt. By not addressing the root cause of your debt and implementing actions that improve your overall financial situation, you are kicking the can down the road.
“Too many people end up in even more debt because they go back to using the now-paid-off credit cards,” Aliche wrote.
Higher Interest Rates
Interest rates play a major role in your loan amount. Cash-out refinances work like any other mortgage, repaying over a set term at a defined interest rate. With current interest rates high, you might pay more in interest on your new loan compared with the interest you would be saving by paying off other debt.
The same is true for a home equity loan. Home equity loan rates often change in response to changes with the federal funds rate set by the Federal Reserve. Per CBS News, the average home equity rate is upward of 8%.
As a result, other debt paydown options might be better for your situation.
A Last Resort
Climbing out of debt can be challenging, leaving you to feel like your only hope is to pull money out of your home through a cash-out refinance or home equity loan. “If you’re literally in financial peril and have no other options, be as smart as possible about these types of refinances,” Aliche explained.
However, in most cases, there are other options, including credit card consolidation and changing your money habits. These alternative options will not only help you get out of debt but also stay out of debt.
For those who have no other option, though, Aliche offered some words of wisdom. “Take ONLY what you need to pay off your debt, and ensure the interest offered with the refinance or loan is lower than the average interest rate of the debt you’re paying off,” she wrote.
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