Inflation is hitting consumers right and left. Seems like everything is going up these days and one of the most expensive types of debt has just got even more expensive- consumer loans. If you have consumer loans including student loans, personal loans, even a home equity line of credit, or credit cards expect the costs of such obligations to rise. Here are ideas you might want to consider as relates to combining your debt for payment relief…
The Federal Reserve just increased the Fed funds rate by seventy-five basis points. That has made mortgage rates improve as corporate money is now costing more. This led to bond market improvement driving mortgage rates down. 30-year mortgage rates with good credit are no longer in the high 6% range. Based on that, you might want to rethink combining your debt into a fixed-rate, new, first mortgage. Here is the conundrum that homeowners face. A 3% mortgage on their first while simultaneously supporting the debt payments on credit cards, car loans, and other obligations straining the family budget. The options are a new first mortgage giving up the low rate into today’s prevailing fixed rate mortgage, going into a home equity line of credit that is continuing to rise, or getting a fixed rate second.
The things to consider are home equity lines of credit and fixed-rate second mortgages are no longer tax deductible. A first mortgage to combine and or cash out to pay off debt is still tax deductible. The payment on a home equity line of credit is interest only and, it’s effectively a giant credit card tied to your home. It reports to the credit bureaus the same way which a credit card does which means if you max out your home equity line of credit, that can hurt your credit score, in the same way, maxed-out credit card balances do. So, should you combine your mortgage? Get rid of your first mortgage in the threes, pay off all your consumer debt, save $100’s a month, and go into a 5% loan on a first mortgage. It’s possible that it could make sense. Five percent is a lot better than 6.5% which is where mortgage rates were just 60 days ago. As a result, know that this is a temporary situation in the markets right now as it relates to inflation. Meaning if you did consolidate into your first mortgage you could always refinance in the future again when rates come down. Notice it’s when rates come down not if rates come down.
Let’s take a pause and rewind the clock before the COVID-19 pandemic. Mortgage rates average from 2009 through early 2020 on average were between 4%-5.25% on a 30-year fixed rate mortgage. The interest rate in that range is more indicative of where rates will drop when this inflation cycle ends. Based on that you should determine whether cash-out refinancing into a new first mortgage would be beneficial or not. Consider this if everything right now is rising including a home equity line of credit, a home equity line of credit today will cost you more in the future. A home equity line of credit is a variable rate mortgage compared to a fixed rate mortgage where you could effectively fix your payment and your costs.
Look at it like this, you can take out a 30-year fixed-rate mortgage to combine your debt, cash out, and fix your payments. If you sign up for a home equity line of credit, you’re essentially signing up for uncertainty particularly if you draw on that and incur a balance as a result. You are understanding that correctly. A home equity line of credit is uncertain, unlike a guaranteed first mortgage.
When you’re looking at the overall balance sheet of your monthly budget and looking at food costs, gas costs, and every other cost in your life that is also unstable and rising. Why sign up for a home equity line of credit which also will add to the future erosion of your income? Remember when costs rise you see less of your monthly income. It still costs you to live and in an inflationary environment, it costs you more as a result. Whereas in a fixed-rate mortgage it’s one less thing to have to worry about in the broader sense of your household budget.
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