The recent news about one major financial institution closing all existing personal lines of credit and no longer offering them to customers may sound like a scary proposition. 

Let’s discuss why. 

Personal lines of credit 

Personal loans (or lines of credit) are given from a lender and not secured against any asset they have. These lines of credit are typically anywhere between $3,000 and $100,000, and consumers use them as a way to consolidate higher-interest credit-card debt, pay for home renovations or avoid overdraft fees on checking accounts. 

The loans are given based on your creditworthiness. If approved, the amount is given along with repayment terms. In most cases, personal loans will be for five years and less, have an origination fee, have interest applied and require monthly payments. 

You may have been relying on personal lines of credit as a way to:  

  • Access money quickly, sometimes within 24 hours 
  • Borrow against if they don’t have assets 
  • Borrow money at lower interest rates lower than APRs on credit cards 
  • Maintain predictable payments  
  • Have the flexibility to choose the length of their loan 

So, if more significant lenders follow suit to continue this trend, more of you may be looking for alternative ways to secure credit. You need to have resources available if you need to quickly get your hands on cash for emergencies or necessary purchases. 

Strategic refinancing 

One good alternative you should consider is a “strategic refinancing” of your current home. This will allow you to leverage the equity you’ve built up, which is one significant benefit of owning a home. It’s an investment that can pay off when you need it. 

In general, there are a lot of reasons you could consider refinancing your home mortgage. Those reasons include: 

  • Change to a loan with the same term (to get a lower rate) 
  • Switch from a 30-year term to a 15-year loan to pay off the home sooner  
  • Move away from a variable rate to a fixed rate 
  • Lower monthly payment 
  • Secure cash to be used now 

With a personal line of credit becoming less of a resource for accessing cash when you may need it, you may want to explore the benefits of refinancing. Specifically, what is called a “cash-out” refinance.  

A cash-out refinance allows you to borrow money by using the equity you’ve built in your home. In effect, you are using your home as collateral to get the loan. With a cash-out refinance, you can borrow more than the remaining mortgage balance and get a check (cash) for the difference. 

That helps you meet the same objectives you could have using personal lines of credit, like securing cash to be used for home renovations or repairs, using the money for education or medical expenses, or simply having an emergency fund.  

You could also utilize the funds from a cash-out refinance to pay off credit card balances that may be subject to 20 or 25 percent interest. That could make sense, especially now when mortgage loan rates are at near-historic lows. 

While a cash-out refinance can be an excellent alternative option for some who have relied on personal lines of credit, every case is different. And, like with every financial option, there are potential cons. 

You’ll want to make sure you understand that your situation may be unique. Before making any type of commitment, speak with a financial advisor and/or mortgage lender to explore all the options that can help you achieve your goals. 

*A cash-out refinance increases your mortgage debt and reduces equity you may have in your home. Your monthly mortgage payment may be higher.

SOURCES 

Backman, M. (2020, December 25). 3 Mortgage Refinance Strategies to Consider in 2021. The Motley Fool. https://www.fool.com/mortgages/2020/12/25/3-mortgage-refinance-strategies-to-consider-in-202/.  

Omega Lending Group, & *, N. (2020, August 17). 6 Strategies to Consider When Refinancing Your Mortgage – Omega Lending. Omega Lending Group. https://www.omegalendinggroup.com/refinance/6-strategies-to-consider-when-refinancing-your-mortgage/.  

Cash-Out Refinance vs. Home Equity Line of Credit. Bank of America. (n.d.). https://www.bankofamerica.com/mortgage/learn/cash-out-refinance/.  

Jessica WalrackJessica Walrack is a personal finance writer at SuperMoney. (2020, February 7). What Are The Most Popular Types of Credit? SuperMoney! https://www.supermoney.com/credit-cards-vs-personal-loans-vs-home-equity-loans/.