Ways to Responsibly Manage Debt as a Homeowner

The "debt snowball method” is a strategy that involves prioritizing the smallest of all your debt and paying it off first. After you’ve repaid that debt, the funds that were being used are then reallocated to your next-smallest debt. The payments you make “snowball” from one debt to the next, growing larger and larger as the rate of debt reduction increases. This process would repeat until all of your outstanding accounts are paid off.

For homeowners who feel rewarded by paying off small debts quickly, the debt snowball method can be a good fit. Paying off your smallest debts first means you’ll be reaching new milestones faster and more frequently even though you may end up paying more in interest over time. Knowing both your financial circumstances and your motivational preferences is a great first step to take when considering the debt snowball method.

Instead of focusing on amounts owed, the “debt avalanche method” asks homeowners to focus on those debts (loans, credit cards) with the highest interest rate and pay it off as quickly as possible. Once the highest-interest-rate debt is repaid, those payments are then reallocated to the loan with the next highest interest rate. Like the debt snowball method, this process repeats until all your debts are paid off. Focusing on those debts that are the most expensive means you should end up paying less overall.

While the debt avalanche method can save homeowners money and operates on an accelerated timeline, it might mean that multiple debts remain outstanding for longer. It’s crucial to understand these factors when considering moving forward with this method.