Billionaire businessman Mark Cuban, a cast member on the hit TV show “Shark Tank,” has advised young people that the best investment they can make is paying off their credit card balances.
Since the average interest rate on a credit card is around 16 percent, Cuban asks “where else can you get a guaranteed 16 percent return on your money?”
A fin-tech home equity lender recently put a figure on how much homeowners are spending on high-interest loans such as credit cards and personal loans. Figure Technologies puts the number at around $100 billion, suggesting homeowners could save a lot of money by tapping the equity in their homes. That works out to about $6,225 per homeowner.
"Currently, borrowers are paying the highest interest on credit card balances of any time in the last 24 years," said John Sweeney, head of Wealth and Asset Management at Figure. "Refinancing expensive debt using home equity may be the easiest way for a homeowner to save thousands of dollars."
Note of caution
Experts at Bankrate say that paying off high-interest debt with a home equity loan can be a prudent thing to do, but they add a note of caution. If you use a home equity line to pay your credit card balance down to zero, make sure you don’t go back into debt on that credit card.
Talk to a non-profit credit counselor if you need help putting together a money-management plan. If you had been paying $600 a month on your credit card bill, apply that same amount to the home equity line each month. Instead of 15 percent, the interest rate is likely to be around 5 percent, meaning the balance will go down a lot faster.
Experts say it’s never a good idea to tap your home’s equity to pay for an expensive vacation or to finance a luxury item that will quickly lose value.
Why home equity loans have lower rates
Lenders offer lower interest rates on home equity lines than credit cards because credit cards are unsecured loans and home equity loans, as the name implies, are secured by the equity in your home. Banks often lend money at their prime rate, the rate offered to their best customers.
Lenders usually charge closing costs on home equity lines, just as they do on mortgages. The costs are normally based on the amount of the line.
In Figure’s calculations, homeowners paying 8 percent interest on a home equity line and who have enough home equity to refinance $12,549 in high-interest debt could get out of debt at least two and a half years faster.