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Understanding Homeowner Debt: Save Thousands by Moving from Bad Debt to Good Debt

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Debt is a reality for most homeowners, but not all debt is created equal. Understanding the distinction between “good” and “bad” debt can help you optimize your finances and save thousands of dollars in the long run. So, let’s explore how you can use your home equity to pay down or pay off higher interest debt, providing you with practical strategies to improve your financial situation.

What Are the Key Factors to Optimize Your Debt?

To begin optimizing your debt, it’s important to consider several factors:

  1. Debt Type: Start by identifying the various types of debt you have. This could include credit cards, student loans, auto loans, personal loans, and mortgages.
  2. Debt Source: List the sources of each type of debt. For example, if you have multiple credit cards, it’s essential to identify each card’s balance separately.
  3. Amount Owed: Make a note of the outstanding balance for each debt source, categorized by debt type. This information will be crucial in determining the potential savings through refinancing.
  4. Minimum Monthly Payment: Part of the DTI calculation, this is the minimum amount you’re required to pay each month on each debt source. For example, an auto loan the payment is normally the same each month, so that is also the minimum payment. But, a credit card balance of $10,000 might have a minimum payment of $250/mo.
  5. Interest Rate: Take note of the interest rates associated with each debt. This information can be found on your paper/PDF account statements or account website.
  6. Tax Advantages: Consider whether there are any tax deductions available for the interest on your debt, like your mortgage. If so, these tax advantages can significantly impact the effective interest rate, making it more advantageous to prioritize certain debts.
  7. Revolving or Not: Determine if your debt is revolving or not. Revolving credit allows you to access credit continuously without requiring a new loan each time. Credit cards are a common example of revolving credit. It’s beneficial to have some revolving credit available to address ongoing expenses.

An Overview of Common Debt Types:

Interest RateSecuredTax AdvantagesRevolving
Primary MortgageLowestYesYesNo
Cash-out refinanceLowestYesYesNo
Home equity loanLowYesYesYes
Home equity line of credit (HELOC)LowYesYesYes
Auto LoanMediumYesNoNo
Student LoanMediumNoYesNo
Personal LoanHighNoNoNo
Credit CardHighNoNoYes

How Do You Optimize Debt?

Now that you have a clear understanding of your debt situation, it’s time to optimize it for maximum savings. Here are some steps to consider:

  1. Shop Around for the Best Interest Rates: House Numbers can do this for you! We can help you compare interest rates between different types of debt, such as a home equity loan or home equity line of credit (HELOC) versus a credit card. Additionally, when considering a specific home equity product, we’ll search multiple lenders to find the best deal. Rates can vary significantly, so finding the most favorable ones will make a substantial difference in your savings.
  2. Move Debt from Higher to Lower Interest Rates: Lowering your interest rates can save you significant amounts of money in the long term. Consider transferring your debt from higher interest rate sources to lower interest rate options. This strategy will reduce your overall interest expenses and help you pay off your debt faster.


If you move $25,000 in debt from a 20% interest rate to a 12% interest rate, you would save over $400/month. And, if you instead maintained the same monthly payment as before, you’d pay off the debt up to 6 years sooner!

  1. Consider Affordability: While lowering your interest rates usually reduces your monthly payment, this may not be the case if you choose a shorter loan term. Ensure that you can comfortably afford the new monthly payment.
  2. Take Advantage of Tax Deductions: Account for any tax advantages associated with your debt. Calculate the tax-deductible interest for the year, considering your effective tax rate. This adjustment will help you accurately assess the cost of your debt. Additionally, familiarize yourself with IRS limits on mortgage, home equity, and student loan interest deductions to ensure compliance.

The Obligatory Words of Caution

It’s important to exercise caution when optimizing your debt. This approach works best when you’re not accumulating excessive new debt. If you continue to spend more than you earn, optimizing your debt may become ineffective. It’s crucial to maintain a balanced approach to your finances.

Furthermore, falling behind on debt payments can harm your credit score, making it more challenging or expensive to obtain new loans. In cases where the debt is secured, such as a mortgage, defaulting on payments could even lead to the loss of your home or other collateral.

We’re here to help

But, by understanding the various types of debt you have and strategically leveraging your home equity, you can optimize your debt and save thousands of dollars. House Numbers is here to help you navigate the process and finding the best rates and terms. With careful planning and informed decisions, you can transform your debt into a powerful tool that works in your favor, ultimately leading to greater financial stability and freedom.

Disclaimer: The above is provided for informational purposes only and should not be considered tax, savings, financial, or legal advice. All information shown here is for illustrative purpose only and the author is not making a recommendation of any particular product over another. All views and opinions expressed in this post belong to the author.

Jeff Levinsohn

Written By Jeff Levinsohn

Jeff is the CEO of House Numbers and a home wealth management geek. He’s obsessed with tools and information that empower homeowners to save money, access their home equity, and build long-term wealth.