Credit Card debt is at an all-time high, going over $1 Trillion for the first time in history. The average rate for a credit card during the pandemic was 14.39%. Currently, the average rate has skyrocketed to over 22%! The scariest part of an increase in interest rates is the increase in delinquencies. I get calls every day from homeowners deep in debt and struggling to make their payments. Add on top, the end of the student loan payment forbearance and you have the makings for a financial nightmare. People are desperate for a solution to get their payments under control and reduce the massive stress they are experiencing from the current cash crunch. Financial stress has been linked to Heart disease, Diabetes, Migraines, Sleep problems, and Depression. These conditions can lead to serious, high-cost medical problems which, in return, can lead to even more financial worry and instability.
Homeowners want to access their equity to reduce their monthly payments. The dilemma is mortgage rates are higher as well. Do you refinance your low-interest mortgage, take out a home equity loan or do you just try to make it through and hope you don’t fall delinquent and or end up sick due to the stress?
Your home appreciates over time. Over the last 10 years, homes have been appreciating at amazing rates. Some areas appreciated over 30% just during the 2020 & 2021 housing markets! This equity is your hard-earned cash sitting there doing nothing. Your home will continue to appreciate, but you don’t realize those gains until you sell. Why not use that equity NOW to help you lower your monthly expenses?! This allows you to live better, save more and lowers your financial stress to help keep you and your family healthier. Sounds like a win-win, right?
There are 2 ways to access your equity. You can refinance your existing mortgage, or you can use a home equity loan. Here are the pros and cons of both.
Refinancing your current home
This means you would pay off your current loan with a new loan. In the new loan, you would pull out a higher loan amount than you currently owe and use that extra cash to pay off debt, like credit cards, car loans, and student loans. You can also use cash out for remodeling, buying an investment property, or putting some money aside as a safety net.
When clients call me about refinancing, they usually have a much lower rate than what is out there currently. Although they may have a rate of 3% and in order to refinance, they will go to a rate potentially in the high 6s or low 7s, there are still opportunities to refinance in this situation. The two reasons, you may want to do this are if you have a lower credit score, due to maxed-out credit cards and/or recent delinquencies or if you need a substantial amount of cash (Usually $30K-$40K+)
A real example
A recent client needed desperate help to get out of debt. They had over $80K in debt between 2 car loans and 7 credit cards with payments totaling $2386/month (Keep in mind this is using the minimum monthly payment on the credit cards, so the actual amount is much higher)! They also needed to do some home improvements that could not wait. Their current rate was at 3.25% and her payment was only $2360 per month. After refinancing into a 7% rate, their payment went up to $3500/month. Terrible, right? Nope. Not only did they skip 2 monthly payments (Putting an extra $4600 in their pocket), but when their new payment kicked in, they saved over $1300/month in cash flow! Plus, they were able to complete some home improvements to make their house more livable & safer. Bye-bye stress!
This loan changed their lives. And the best part is mortgage rates are predicted to drop significantly over the next several years. With just a drop in the rate of 1%, they will save an additional $500 per month! Think of this another way, even if rates never drop and if they decided to pay the extra $1300 of cash flow on their new mortgage, their new mortgage would be paid in full in less than 15 years!
Pros: One payment. Easier to qualify for.
Cons: Potential to increase your current rate. Closing costs can be expensive.
Home Equity Loans
What if you don’t need $80K or even $40K? There are other options to consider, like a Home Equity Loan. A home equity loan is a 2nd lien secured against your property. There is not much risk with these other than they are tied to the equity in your home, so if you don’t make your payments, they can foreclose but this is no different than your first mortgage. The advantage of a home equity loan is it has no effect on your current mortgage – you get to keep the lower rate on your current mortgage.
There are 2 types of home equity loans: a fixed-rate home equity loan and a home equity line of credit (HELOC).
Fixed Rate Home Equity Loan
Pros: Ideal for smaller loan amounts. Fixed-rate and fixed payment.
Cons: Harder to qualify for. Higher rate and payments than a HELOC and you need to take out all the cash and pay interest on the full amount as soon as the loan is complete.
Home Equity Line of Credit (HELOC)
Pros: Ideal for smaller loan amounts. Works like a credit card, so more flexibility in usage and access. You only pay interest on the amount you borrow. Allows for a minimum payment of interest only, which gives you more payment options. HELOCs are also ideal for homeowners with variable income, like self-employed or commission income.
Cons: Harder to qualify for. HELOCs are usually based on the current Prime Rate plus a margin, this means the rate adjusts when the Federal Reserve raises or lowers rates. Typically, the flexible part of the HELOC with access to the line of credit and interest-only payments is usually only open for 10 years. After 10 years, you need to start making principal and interest payments to pay it in full over the final 10-15 years.
Bottom Line: There are multiple options to put your equity to work and make your life better.
I use a Debt Consolidation Calculator to determine whether refinancing or a home equity loan is a better option for consolidation. The Calculator takes into consideration interest rates, loan balances and monthly cash flow to determine which option is going to save the most money. If you would like to see what options are best for you, please email me at JeffM@NFMLending.com and I can send you the information I need to create your own personal debt consolidation plan.
Jeff Miltenberger is a licensed mortgage banker who has been helping families build wealth through real estate for over 29 years.
Jeff Miltenberger
Senior Loan Officer | NMLS #108278
Miltenberger Team powered by NFM Lending
Phone: (206) 295-8455
Email: JeffM@nfmlending.com
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Jeff Miltenberger is not affiliated or registered with Cetera Investors or Cetera Investment Services LLC. Any information provided by Jeff Miltenberger is in no way related to Cetera Investors, Cetera Investment Services LLC or its registered representatives.
Disclosures
This is for informational purposes only. All information contained herein is gathered from different mortgage & debt sources and subject to change at any time. Interest rates are subject to change daily and without notice. Rates effective September, 12th 2022, *Refinancing an existing loan may result in the total finance charges being higher over the life of the loan. This is for informational purposes only and is not intended to be legal advice. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to the completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas.
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