This blog is for educational purposes only, not an offer of credit or advertisement for current loan terms. It does not provide legal advice. Refer to our loan web pages or consult professional advisors for specific information.
Managing multiple debts can be overwhelming, to say the least, especially when each has different interest rates, minimum payments, and due dates. One of the biggest questions most people feel they should answer is, “Which debt to pay off first?”
Indeed, many effective debt management plans involve prioritizing which debts to pay off first.
However, you can also consider options like home equity loans to simplify and accelerate the process.
Which is the right move for you? This guide will show how you determine which debt to pay off first and whether a home equity solution can streamline your debt management.
Start your application with MIDFLORIDA Credit Union.
How can I pay off my debt?
To pay off your debt efficiently, you need a strategy that addresses your financial situation and goals.
Here are some effective methods to consider.
Debt avalanche method
The debt avalanche method emphasizes paying off debts with the highest interest rates first.
This approach can save you the most money on interest over time.
Here’s how it works:
- List the debts with the highest interest rate down to the lowest.
- Continue applying the minimum payments on all your debts.
- Here's the key: Allocate any extra funds to the debt with the highest interest rate.
- Once the highest-interest debt is paid off, move on to the next highest, and so on.
Debt snowball method
The debt snowball method prioritizes paying off the smallest debts first.
This can provide psychological motivation by quickly reducing the number of debts you owe.
Here’s how it works:
- List all your debts, from the smallest to the largest.
- Continue applying the minimum payments on all your debts.
- Allocate your extra funds to the smallest debt.
- Once the debt with the smallest balance is gone, move on to the next smallest, and so on.
Hybrid method
A hybrid method combines elements of both the debt avalanche and debt snowball methods.
You might initially choose the debt snowball method to gain momentum and then switch to the debt avalanche method to maximize interest savings.
Consolidation through a home equity loan
A home equity loan is often a powerful tool for debt consolidation, allowing you to combine multiple debts into a single, manageable payment.
Here’s how it works:
- Assess the equity in your home: That's the difference between your home’s current market value and the outstanding balance on your mortgage. Lenders typically consider up to 85% of your home’s equity available for a loan.
- Apply for a home equity loan: This loan type provides a lump sum of funds that you can use to pay off your debts. It typically comes with a fixed interest rate and a set repayment term.
- Pay off your debts: Use the funds from the home equity loan to pay off your existing debts. This consolidates your debts into one loan with a single monthly payment.
Advantages of using a home equity loan for debt management
Lower interest rates
Lower interest rates—compared to credit cards and other unsecured debts—can be one of the big advantages.
By consolidating your various debts into a home equity loan, you can reduce the overall interest you pay, saving money in the long run.
Simplified payments
Managing one monthly payment is easier than juggling multiple payments—having different due dates and amounts can confuse them.
A home equity loan streamlines your debt repayment process, making it more manageable.
Fixed repayment schedule
Home equity loans have fixed repayment terms, which means your monthly payments and interest rates remain consistent throughout the loan term.
This predictability can be highly useful for budgeting and financial planning.
Considerations before using a home equity loan
Risk to your home
A home equity loan is secured by your home, meaning your property is collateral. If you’re unable to make the loan payments, you risk losing your home.
Ensuring a stable income and a solid repayment plan before opting for this solution is a good idea.
Loan fees and closing costs
Most—if not all—home equity loans come with fees and closing costs similar to those of your primary mortgage.
Factor these costs into your decision-making process, including appraisal fees, origination fees, and possibly others.
Long-term commitment
Consolidating debt with a home equity loan can lower your monthly payments, but it might also extend the repayment period.
Consider whether the long-term commitment aligns with your financial goals.
Steps to a successful home equity loan application
Evaluate your financial situation
Review your income, expenses, and overall financial health. Ensure you can comfortably handle your new loan payment and other financial obligations.
Determine your home equity
- Estimate your home’s current market value
- Subtract the outstanding mortgage balance
- The result is your available equity
This will help you understand how much you can borrow.
Research lenders
Compare different home equity lenders to find the best home equity loan terms. Look for competitive interest rates, low fees, and favorable repayment terms.
At MIDFLORIDA, we offer a range of home equity solutions designed to meet your debt management needs.
Gather documentation
Having the necessary documentation for your loan application ready for application time is a good idea—this includes:
- Proof of income
- Tax returns
- Information about your existing debts and mortgage
Submit your application
Complete the application process with your chosen lender, who will review your financial situation and the value of your home.
Close the loan
Once you’ve been approved, you’ll go through a closing process similar to that of your primary mortgage. Review the loan terms carefully to ensure you understand all the costs involved.
The best part: Pay off your debts
Use the home equity loan funds to pay off your debts.
A good follow-up step is to set up automatic payments or reminders to ensure you stay on track with your new loan repayment schedule.
Start your application with MIDFLORIDA
Using a home equity loan for debt consolidation simplifies the question of which debt to pay off first—by eliminating the question and combining your various debts into one easily manageable solution.
Furthermore, debt consolidation reduces interest costs and provides a clear path to a debt-free future.
MIDFLORIDA offers personalized home equity solutions to help you achieve your debt management goals.
Start your application with MIDFLORIDA today and take the first step towards financial stability.
MIDFLORIDA Credit Union does not discriminate against credit applicants on the basis of race, color, religion, national origin, sex, marital or familial status, age (provided the applicant has the capacity to enter into a binding contract), disability, sexual orientation or gender identity; because all or part of the applicant's income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. It is MIDFLORIDA’s policy to observe both the letter and the spirit of the law.
