Refinancing, Balance Transfers & HELOCs: When to Use Them

All right, in last week's video, we talked about how debt works, how loans work, amortized loans, credit cards, lines of credit. In this video, we're going to talk about strategy and execution. What is the smartest way for you to get out of debt? And should you focus on getting out of all of your debt, or do we really just focus on getting out of what I call bad debt? Maybe debt that has double-digit interest rates attached to it. And what do you do if you don't have any cash flow? If you're living paycheck to paycheck, you have no emergency fund, no money in the bank. Is it even possible to get out of debt if you are in that situation? So I'm going to go through strategies like the debt snowball, the debt avalanche, refinancing debt, restructuring debt, 0% balance transfers, velocity banking. I hope that you find this one helpful. Let's get to it. Is it possible to get out of debt if you're living paycheck to paycheck and you have no money in the bank? And the answer is yes, but it means that you have to focus solely on your cash flow and reducing your expenses or increasing your income. You need to have margin. There is no magic button to get out of debt if you don't have any margin in your life. You can't just shuffle money around from one debt to another. You can't borrow your way out of debt. Yes, you could reduce the interest expenses when you restructure debt or you refinance debt if you get a lower interest rate and that will help, but it does not solve the underlying problem. You need to figure out a way to build the margin. I call it the happy gap in all of my content. It is the gap between the money that you are bringing in and the money that you are sending out every month. The wider that gap is, the happier you are going to be in your life. And a lot of people these days are living negative month to month because everything is so freaking expensive right now. So if you're spending $7,000 a month and you're bringing $6,500 a month in with your income, then something needs to change or else you will just continuously go into debt and reach a point where you have to declare bankruptcy or you have to do something drastic. So the focus has to be on cash flow. And the first step of that is understanding where your money goes every month. So tracking your income, tracking your expenses, having a monthly budget, you got to go back to the old school stuff, cash envelopes, right? You got to look at where that money is going every month if you want to make a dent in it and you have to get super focused. All right. So I quickly want to describe the debt snowball and the debt avalanche. These are two very, very popular methods to get out of debt. The debt snowball was made famous by Dave Ramsey, who has the book, The Total Money Makeover, which is a great book if you're really struggling to get out of debt and you want to get super focused. So with the debt snowball, what you do is you list out all of your existing debts. So all of your credit card balances, student loans, personal loans, whatever they may be, you list them all out starting with the smallest balance that you owe. Okay. So if you have a credit card that you owe $800 on, that goes first. Then your next credit card, you owe $2,000. That goes next. Then the next one, $4,000. Student loan, $8,000. You list them all out. And what you do is you completely focus on attacking that first one with the lowest balance. All right. This way you get a quick win. And all of your money, all of your extra cash flow that you have, you attack that debt, you get rid of it, and then you take whatever money you were paying towards that smallest one and you snowball that payment down to the next one. And you go one by one attacking each debt. And as you go through, you are continuing to gain momentum. The snowball is growing, right? And you just knock out one by one debt until you are completely out of debt. Now, depending on how much you owe and everything, it could take years before the debt snowball actually gets you out of debt. But it is a very good method to go ahead, get focused, and attack everything. Now, the debt avalanche, on the other hand, it is very similar. The big difference is that instead of listing them by smallest balance to largest balance, you are listing them by interest rate. So if you have a credit card that you owe $10,000 on and it's 30%, that's the highest rate of all your debt. Then that is going to go first, even though that might be a higher balance than your other debts. All right. So if that's 10,000 at 30%, and then you have one that's 2,000 at 10%, that 30% line item credit card debt is going to go first. And you're going to throw everything at that thing until you're done with it. All right. Now, mathematically, the debt avalanche makes sense. You're going to save more in interest by doing the avalanche because you're attacking the highest interest rate debts that you have. All right. But you don't get that quick win. So you don't get that momentum, right? If your biggest debt is also your highest interest rate one, it could take you years before you pay that off. And then you don't feel like you're really getting anywhere. You're not really making a dent in it. So to me, it all depends on what your debt looks like, right? You want to do the one that you're going to stick with. It's going to get you going and that you can be consistent with. And a lot of times you can do a combination of the two. If you have one that has a really high interest rate and the balance isn't that much higher than the other ones, then focusing on that and getting that out of your life could very well be the smart thing to do. And then you go to the smallest balance after that. So doing a mix, depending on your situation could definitely make sense. But both of those methods are great, especially if you're going to stick with it. All right, now let's quickly talk about refinancing. And typically I'm talking about mortgages when you refinance your mortgage, even though sometimes you can refinance a car loan, for example. But most of the times when somebody wants to refinance, there's usually three main reasons why. The first one is because they want to lower their interest rate, which makes a hell of a lot of sense, right? The second one is they want to improve their cash flow. They want a lower monthly payment. And then the third one is they want to do a cash out refinance. They want to get some money out of their house, tap some of the equity to use for other reasons. So let's go through those real quick. So when somebody refinances to lower their interest rate, it almost always makes sense, depending on how much you're saving. All right, it used to be a rule of thumb where if you could save 1% or more, then it makes sense to refinance. I mean, my mortgage is from 2017, I believe, which I refinanced during that time. And I'll probably never refinance again because my rate is in the low threes. But if you refinance to save on the interest rate, the key is that you don't start over again. So if you've been paying into your home for five years, say you started with a 30-year mortgage, now you're at 25 years and you want to refinance because you could get a lower rate, then what you want to do is refinance into another 25-year mortgage or even a 20-year mortgage. Because then the combination of paying it off quicker with a lower interest rate, that will save you a lot of interest throughout the years. But what people end up doing is they might be 10 years into their mortgage. So now they have 20 years left and they refinance, they get a lower rate, but they refinance into a 30-year mortgage. And then what that does extends the period of time that they're going to be paying back the mortgage. So because they have 10 more years, their payment is going to go down every month, even though their interest rate is going down too, which is good, but the payment will go down, saving them money every month, but now they're going to take 10 more years. So they're going to end up paying more interest over the course of that mortgage. And they're going to have that debt for a longer period of time. So if you do want to refinance to get a lower rate, get a lower term too. And then that really adds accelerant to it because now less interest, shorter time period, you'll pay that thing off much quicker. The second reason people refinance is for cashflow to reduce that monthly payment. And when you do this, what you're typically doing is extending the life of the loan. You're taking out a longer mortgage so that you could have lower monthly payments. And this is going to result in more interest over time because you're going to owe a larger balance for a longer period of time. And I went through the interest calculations in that last video, right? The banks aren't front-loading interest. It's just simple math. You owe a larger balance. Less is going towards principal every month. And you've just extended the term that you're borrowing the money. So you're going to pay more over the life of that. So if your goal is to get out of debt in your life, then taking a 20-year left mortgage and pushing it to 30 years, that is not the answer to doing that, but it will free up cashflow for you. Then the third reason you see people refinance, and that is to get cash out of their homes. Home prices have appreciated tremendously. People are living paycheck to paycheck. They have no money these days. So doing a cash-out refinance could make a lot of sense. It could ease the burden in your life. The real problem is right now, a lot of people have very low fixed-rate mortgages locked in. So when you do a cash-out refinance, you can't get anywhere near the same rate. It would be a terrible idea to take a three-and-a-quarter percent 30-year fixed-rate mortgage and do a cash-out refinance into a six-and-three-quarters percent mortgage. That is going to cost you a tremendous amount of interest for the next 30 years that you wouldn't have had to pay if you did not refinance. This is another reason why home equity loans and home equity lines are very popular, because people don't want to touch that first mortgage. It's like a prized possession. People don't want to move these days and give up their three-and-a-quarter percent 30-year fixed. But throughout history, people have tapped the equity in their home. And doing a cash-out refinance, it is easy to do, because you could get a large amount of money and it really doesn't change your monthly payments all that much, especially back in the day when interest rates were going down. Then you saw it much more often where you could do a cash-out refinance, take money out, and have a lower interest rate, and your payment didn't really move. So it's like, oh, I could get my hands on like 80 grand, and my mortgage payment stays very close to where it is right now. It almost felt like a no-brainer. But again, every time you do that, you are starting the clock over. If you only have 24 years left, you do a cash-out refi into a 30-year, right? Now you're increasing your balance and you're increasing the term, which is going to result in you paying more interest over the life of that loan. All right, so let's talk about restructuring debt. So now, say you don't even own a home, right? You have a bunch of credit card debt, maybe you have some student loans, you have some other debt that's out there, personal loans, and you're having a hard time keeping up with the payments. Sometimes, depending on how your credit is and everything, right, you might get one of those offers in the mail for a 0% balance transfer. So if you're currently juggling 30% interest rates on multiple different cards, then doing a 0% balance transfer, it could make a lot of sense. Now, all of this goes back to you need to solve the underlying problem. You can't just shuffle this money around, because eventually, it is going to catch up with you, and it is going to kill you. So what you need to do is have the plan first. You need to know your cash flow, right? Everything we already discussed. You need to have that plan in place before you go ahead and you make a move like this, all right? But doing a 0% balance transfer, it can make a lot of sense. If it's going to save you 30% on your debt, then you got to do it. But you have to get laser focused on paying it off before that promo expires. And another thing to understand is that they will charge you a fee to do the balance transfer. So that might be something like 3% or 4% of the amount of transfer you're doing. So if you do $10,000, then right off the bat, you have a $400 fee that is tacked onto the card that you're going to have to pay back as well. So you have to factor that in. So I am a fan of using 0% balance transfers as long as you go in eyes wide open, you understand how it works, and you're very strategic as to how you're going to pay it off. You need to solve the underlying problem before you go ahead and you shift this debt around. So now what about personal loans and debt consolidation? So the same rule applies to all of this debt. Once you understand how it works, then the same rule applies. If you're going to consolidate your debt, say you have five or six different credit cards and maybe a personal loan, and you get an offer for debt consolidation. If the interest rate is lower, all right, then you're saving right there, right? If you're paying an average of 22% and the interest rate on this debt consolidation loan is 12%, then that can make a lot of sense. But you have to have a plan. You have to know, can I make this monthly payment every month? What is the term? How long am I going to have to pay this back? And then what happens is you're going to have availability. Once you consolidate, if you still have credit cards that are open, you could find yourself in a world of pain if you go ahead and you start using those credit cards again, right? If you clean up your debt and now it's all in one consolidated loan and you could afford that payment, what happens if you don't have the cash flow? What happens if you don't have that strategic plan to get out of debt? If you start racking up those credit card debts again, now you're in worse shape than you were before. So restructuring will hopefully reduce your interest rate, buy you some time, and let you get a plan together to get out of that debt. What it should not do is give you a sense of comfort that you solve the problem because just restructuring it does not solve the problem. You need to figure out how to reduce your expenses or increase your income so it's sustainable, so you don't find yourself in debt again. All right, let's quickly talk about home equity lines of credit, HELOCs, or personal lines of credit that are unsecured that you could get through your bank. Now, I am a big fan of having lines of credit. You do have to be very responsible. You cannot look at lines of credit as just being money that you could pull from whenever you need to because then things could get very ugly. And with a home equity line of credit, that is attached to your house. There is a lien against your house. So the last thing you want to do is take consumer-driven debt, right? You go out, you go shopping, you buy this, you buy that, you racked up all this debt, and then you go ahead and you transfer it onto a home equity line of credit where your house is now the collateral, and then you go run up your debt again. That is the last thing you want to do. It has to be used very responsibly. But I like having them in case of an emergency. If I need to pull money beyond my emergency fund, all right, I call my home equity line of credit the backup to the backup of my emergency fund in case I really needed to get my hands on money. I've used my home equity line of credit in the past as an investment accelerator. So back in 2016, I was buying rental properties, and I used to use my HELOC to go ahead and put a down payment on the property, and then I would focus everything on paying it back off. And then I would use it again, pay it off, use it, pay it off, and it's a revolving line of credit. And the interest rates could be, they used to be very, very low. Now the prime rate is around six and three quarters as of the time I'm making this video, and that's typically what a HELOC rate will be, and they're variable. So they change depending on where the interest rates are. But we're in the lowering rate environment right now, so hopefully that rate will continue to go down throughout 2026. So you want to be strategic. Another nice thing with the home equity line of credit is you only have to make interest-only payments. Now again, this is a double-edged sword, right? If you're only making interest-only payments, then that means that you're not paying off any of the principal. But it gives you flexibility. So in months where it might be tight, you do an interest-only payment. In months, maybe you get a bonus, or you get a big commission check, or you just have more cash flow that month. You take it, you dump it into the home equity line of credit to pay it down, and then if you need it, you could use it again. So it is a tool, okay? It is not a way to invest for the long term. It's not a pot of money that you could just grab and go. It gives you permission to buy a new car or put a pool in the backyard, right? Maybe these are things you want to do, but doing them on the home equity line of credit could be very risky, especially if you could only afford the interest-only payment, because that means you're never going to pay the thing off. And most of them have a 10-year draw period, which means you have 10 years to use it like a line of credit, where you could use it, pay it back, use it, pay it back. At the end of 10 years, then it turns into an amortized mortgage, usually for 20 years. Some are 15 years. So all banks offer different products. So for example, if you owe $150,000 on the home equity line of credit and it expires, the 10 years, the draw period is up, then you'll get another 20 years to make principal and interest payments on that home equity line of credit. So it really becomes like a second mortgage payment. Now, personal line of credit, it works pretty much the same way. The lines are usually going to be smaller. It's unsecured, meaning there's no collateral with it. And you go to the bank, you apply for one, and they usually attach it to your checking account. So maybe you have a $5,000 line of credit. So if you overdraw your checking account, it could pull from the line of credit, or if you need money in the pinch, you could take it, move it from your line of credit over into your checking account. So those could be a great tool for flexibility. And if you have an emergency, if something comes up and maybe you have an investment that you don't want to liquidate, and you can take a couple thousand bucks and transfer it over and then pay it back the next month. So they're great for those purposes, but you have to be super careful. And again, this all comes back to the underlying problem. If you have positive cash flow, then you're able to save money, have an emergency fund, invest money. What these lines of credit do is sometimes they give you permission to push a little bit. If you see an opportunity and you want to get money into an investment, and you might not have it all right there, but you have a plan to be able to make that investment and then pay it back over the course of the next few months, then those lines of credit might become helpful to you. All right, well, I've run over time again, so I'm going to cut this one here. I did want to talk about Velocity Banking a little bit. I think I'm going to do another video. I've done a bunch of videos on Velocity Banking, but it's been a few years. So I think I'm going to do another one on Velocity Banking. That's a whole rabbit hole that you could go down where they claim that you could pay off your mortgage within five to seven years. And a lot of it is some of the stuff that I described in here about using the home equity line of credit and the personal line of credit, which I am a fan of using those things, or at least having them available to you in your life for easy access to money when you need it, when you have a plan to pay it off, you know, in a quick turnaround. But anyway, rules of thumb, things to remember is that in order to get out of debt, you need to have margin, okay? So you need to have more money coming in than you have going out. Reducing interest rates is always a good thing, all right? If you could reduce the cost that you are paying on the debt you are carrying, then that is a great thing. When you take the term and you extend it, you take a 30-year mortgage and you pay off 10 years, now you have 20 years left. You go back to a 30-year, what you are doing is increasing the amount of interest you are going to pay. Even with the car loan, if you have 10 months left on the car loan, but the payment is big and you need to free up cash flow and you refinance it into a 5-year, into a 60-month car loan, then you are going to pay a hell of a lot more interest on that because now you just turned your payments into 60 payments instead of the 10 you had remaining, but it will free up cash flow for you. So when you are doing this, maybe that makes sense. If you have a bunch of credit cards, they are at 30% and you could go ahead and you could then take that extra cash flow and knock out 30% credit cards when your car loan might be at 6%. So it could make sense in cases like that, right? Everybody is different, but you want to understand these terms and how it works so that you can make smart decisions around it. All right, I hope that you found this one helpful. I will see you again next week with a new video. Take care. If you want to check out my website, SchoolOfPersonalFinance.com. See you again soon. Thanks. Bye.