4 Homeowner Mistakes to Avoid When Paying off Debt
So, you’re ready to start paying down your debt? That’s great! But if you’re not careful, you could end up with more debt than you have now. That’s not so great. Here are four mistakes homeowners often make when consolidating and paying off their current loans.
Avoid these common pitfalls and you’ll be well on your way to a debt-free future.
Mistake #1: Paying off the Wrong Debt First
When developing your consolidation strategy, it’s important to realize that not all debts are created equal. Say you have a student loan with a minimum monthly payment of $150 and a credit card that charges a minimum monthly payment of $25. You might think it’s smarter to start paying down the student loan first. After all, it’s costing you more money per month, right? Not so fast. Your student loan interest rates are likely significantly lower than those charged by your credit card. If your goal is to minimize the interest you pay over time, tackling that high-interest credit card debt first is likely the smarter move.
Wondering which debt to tackle first? Read “How to Make the Best Decision for Your Unique Situation”
Mistake #2: Paying off Debt Without Establishing an Emergency Fund First
Before you devote a single extra penny to your debt refinancing strategy, you have to build an emergency fund first. Why? If you put all your money into paying off your credit card and then get hit with an unexpected car repair bill, you may find yourself back where you started. Money coach Whitney Hansen recommends starting with a $1,000 emergency fund. That should be enough to cover most deductibles and unexpected bills. It will also prevent an inconvenience like a flat tire or busted car battery from undoing all the amazing progress you’re making on your get-out-of-debt goals.
Mistake #3: Not Having an Estate Plan
A what plan? An estate plan ensures all your assets (your home, car, etc.) are managed appropriately should something happen to you. It’s especially important for couples and families to have one in place. Before you start an aggressive debt repayment program, you’ll also want to make sure you have adequate life insurance as well as a plan for who will make important medical and/or financial decisions on your behalf should you suffer a major illness or accident.
Mistake #4: Taking out a Loan You Can’t Afford
When considering your options for getting out of debt quickly and painlessly, a personal or home equity loan can seem like a great idea. Instead of messing around with multiple monthly payments and interest rates, you only have to deal with one bill each month. Sounds amazing, right?
Before you sign on the dotted line, it’s important to understand what you’re getting into. With a home equity loan, your home is your collateral. That means if you can’t make your monthly payments, you may need to find a new place to live. Sometimes taking out a new loan to pay off existing debt can also increase the interest you pay in the long run. For example, you’re not doing yourself any favors by taking out a home equity loan with a 6% interest rate to pay off a medical bill that charges only 3% interest.
There are alternatives to taking out a loan. With a Hometap Investment, for example, you can access a percentage of the equity you’ve built in your home now in exchange for a share of your home’s future value. This allows you to pay off your current debt without taking on any additional loans or monthly payments.
No matter how you pay down your debt, try to avoid these common mistakes as you find the debt payment strategy that works for your current financial situation and future goals.
Take our 5-minute quiz to see if a home equity investment is a good fit for your debt-payoff strategy.
You should know
We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.