I know what you're thinking. How in the world can I take advantage of this housing market with interest rates at around 5%? Well, I can promise you there is a way, but not in the way you would typically expect. If you have any kind of debt, such as credit card debt, student loans or home equity loans; I highly recommend reading this all the way through. Allow me to show you how to use the new equity in your house to lower your monthly payments. I will also dive into why home equity lines of credit are actually a bad idea for the foreseeable future.
Home Equity Is Very High
Home values have been appreciating at abnormal rates over the last 12 to 18 months. With that being said, it is likely that if you have been a homeowner these last 2 years, you are sitting on a lot of new equity. Appraisers use comparable sales to determine home values, so if there are homes around you being sold over asking price, your home would appraise for much more! (Pretty cool, right?) Remember, most homes that sold in January were contracted in November or December of last year. At the height of the market, February and March contracts of this year didn’t close until March and April. This means that super-high values will be supported at least through the end of summer, if not a little longer. In a nutshell, the more equity you have, the more you can borrow.
Before moving to this next section, I’d like to mention that I built an excel spreadsheet that will calculate all of your monthly and total savings as well as closing costs. Head over to my website to explore for yourself!
Rates on Home Equity Loans Will Sky Rocket
With the Fed’s aggressive stance on bringing inflation back to the 2-2.5% mark (image 1), there will be an increase in the rates that affect all consumer loans. For example, home equity loans, credit cards, student loans, etc. Using your home equity to consolidate these debts into your mortgage will alleviate the risk and volatility that would come with the upcoming change to consumer rates. To confirm this is a good course of action, I like to do a blended rate analysis to see how much true interest you are saving with the refinance.
The bottom line is, if you hold on to credit card debt into the fed rate hikes, it’s going to cost you.
Your Overall Payments Will Drop Drastically
Most debts being paid off have an extremely high interest rate. The concept behind debt consolidation is using your home equity to lump all of your debts into a mortgage payment which is fixed and amortized over 30 years. This will bring down your overall monthly payments and allow you to catch up financially. Not too shabby, huh?
Your Credit Score Will Improve After the Payoff
Needless to say, your credit score will improve substantially after paying off your revolving credit card debt, especially if you are up at the limit. This will put you in a better position to refinance your loan down the road in the upcoming rate drop. (Nice!)
Be Prepared for the Refinance Boom in 2023
Yes, rates are high right now, but they are already dropping due to the massive Fed funds rate hikes. As I mentioned before, The Fed intends to get the inflation rate back to 2-2.5% by driving us into a recession. A recession = lower mortgage interest rates. Refinancing gets a bad rap for being a complicated process, but it is actually very simple! Not to mention, it is even easier when a lender already has everything on file.
PRO TIP: Do NOT Get a Home Equity Loan or Line of Credit
These rates are tied to the prime rate, which will be rising quite a bit as the Fed continues to tighten the screws on the economy. Even if you have a good rate on your existing first mortgage, it almost always makes more sense to simply consolidate when you have the equity. It is also fairly difficult to refinance a home equity line of credit into a new first mortgage.
The Main Takeaway…
If you have any revolving debts or student loans, for example, there is a very good chance that you will benefit from consolidating your debts into your mortgage. You will be taking a higher interest rate now, but can later refinance to a lower and fixed interest rate. This will not only help you stay ahead of your finances and regain control, but it will also lower your monthly payments and prevent even higher payments as the prime rate increases. Not a bad deal, if you ask me!
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