A higher percentage of homeowners than ever before have interest rates below 3.25%. Is it a good financial decision to keep that rate or is it a false sense of financial security?
The average homeowner lives in their home for eight years. Unless they have purchased their forever home, they will be financing another mortgage at the time of the next purchase and will be subject to current interest rates. The idea that they are locked in for 30 years (unless they are one of the few who actually stay in their home for 30 years) is already a false sense of security. The best way to ensure financial stability is to eliminate high-interest debts, even at the expense of a low-interest first mortgage.
We are facing record inflation with no sign of it slowing down. Many homeowners who got in on the low-rate action are now relying on credit cards, personal loans, or home equity lines of credit just to pay their bills. For some homeowners, it could make sense to refinance their current first mortgage to pay down some of those high-interest bills. Fixating on a low-interest-rate first mortgage may be costing them an enormous amount of money and put their credit at risk. Here’s why.
The average credit card interest rate is now over 19% and, for consumers with credit blemishes, rates can be even higher. High balances can cost consumers thousands of dollars in high interest payments, making it difficult for the average consumer to catch up on their bills. Homeowners who aren’t leveraging their home’s equity to pay off their high-interest credit cards with moderate to high balances could be paying way more in interest than they need to.
Personal loans can be a good option in certain situations, but not all. Interest rates can be higher than those for credit cards or loans secured by collateral, especially for borrowers with poor credit. The loans may also have stricter requirements than other types of funding options. Some personal loans have high fees and prepayment penalties if you want to pay off the balance before the end of your loan term. Unlike credit cards, which require small minimum monthly payments and no deadline for paying your balance off in full, personal loans require a higher fixed monthly payment and must be paid off by the end of the loan term.
A home equity line of credit is a flexible option that enables consumers to borrow against the equity in their home without refinancing their first mortgage. HELOCs have a variable interest rate that can increase unexpectedly, potentially leaving consumers with higher payments than they anticipated.
Mortgage loans often have lower interest rates and more flexible underwriting guidelines than other types of loans. Fixed rate mortgages offer a consistent monthly payment, typically with no prepayment penalty should the homeowner want to pay off the loan faster. Although mortgage interest rates have ticked up in recent months, the impact of an increased rate may be minimal on the monthly payment. For example, increasing a rate by 0.5% — from 3.25% to 3.75% — will only increase a monthly payment by about $42 on a $150,000 mortgage loan. Homeowners may be able to tap into their home equity with a cash-out refinance and receive a lump sum payment. That cash can be used to pay off high-interest debts and lower overall monthly payments.
There are a lot of options for getting cash, and it can get quite confusing to choose the correct financial plan. The best option is to look at the full financial picture and involve the help of either a financial advisor or a licensed loan officer. They can review credit balances and interest rates to calculate a blended rate. From there, they can make suggestions on the best plan to ensure financial stability for the long term. Many homeowners will be surprised to find that hanging on to their low-interest-rate first mortgage is costing them more than they thought.