Has anyone looked at their credit card statement lately?  Like your most recent 401k statement, maybe it is best to not look at your credit card statement at this time!

Look At Your Statement?

In all seriousness, I would never suggest that you don’t look at your credit card statements.  As with most things recently, there may be some sticker shock we you look at your statement.  Rates are headed up.  These rate increases include mortgages, auto loans, personal loans, and credit cards among others.

This month, the fed increased the federal funds rate by the largest amount since 1994.  The federal funds rate is used as a rate on overnight lending between banks.  When the fed rate moves up, it becomes more expensive for banks to borrow over the short term.  In response, banks raise rates on all types of loans.

Carry a Balance?

If you are among the small percentage of people in the United States, not living paycheck to paycheck credit card rate increases may not have an impact.  If you are among the vast majority of people, every rate increase has an impact.

Record Consumer Debt?

Since the economic meltdown of 2008 -2009, the economy has been fueled by low rates.  All types of businesses from Wall Street to Main Street thrived on easy credit.  Consumers also took full advantage of the low-rate environment.  Mortgage rates, credit card rates, and personal loans were all around historic lows.

Although rates were low and credit was easy before the pandemic, the response to lock down added fuel to the fire.  In the post-pandemic world, inflation has returned.  Signs of inflation appeared in 2021 and then took off in 2022.

During this time, rents have increased dramatically.  We have seen increases in food and health care costs.  Now we are starting to see the rates on credit cards increase.  The expectation is that credit card rates will continue to increase and possibly at dramatic rates.

Home Prices Have Soared

Home property values have soared over the past few years.  In the second quarter of 2022 for the first time median home values exceeded $400,000.  The median value means that half of the homes recently sold nationwide have sold for more than $400,000.

Typically, we have been told that real estate is local.  Often that is the case, and markets can vary widely throughout the country.  For the nationwide home median to hit $400,000 is a staggering number.  Along with the median home price hitting a record; recently homeowners tappable equity also hit a record.

What is Tappable Equity?

Financial advisors will tell you that your home is a piggy bank.  One of the great benefits of being a homeowner is that you can borrow tax-free from the equity in your home.  In most cases, you can borrow up to 80% of the total value of your home.  The difference between your new mortgage amount and your current mortgage payoff + any loan costs = your cash back.

For example, if your current appraised home value is $475,000 and your current mortgage balance = $325,000

$475,000 X 80% = 380,000 (new loan amount)  – $315,000 (current mortgage balance + estimated costs) = $65,000

In this scenario, you receive $65,000 cashback that can be used to pay off existing higher-rate consumer debt, for home improvements, to purchase a second home or investment property, or other investment purposes.  The beauty of the cash out is that it is tax-free.

With Higher Mortgage Rates, Should I Take a Cash-Out Refinance to Pay Off Debt?

It is important to remember that interest rates are always relative.  When interest rates are low, banks also pay little or no interest on safe interest-bearing accounts.  When interest rates go up, costs and payments go up, but banks offer much more aggressive terms on safe interest-bearing accounts.  For example over the past 10 years, a saver was lucky to get 1% interest in the bank.  Just recently the fed is now offering I Bonds at 9%+.

The relativity of rates also applies to different loan types.  With good credit, verifiable income, and some equity in the property mortgage rates will mostly be lower than consumer debt.  When it comes to your mortgage and credit cards, a low-interest rate is great.  A consumer should take advantage of a low rate anytime time there is a reasonable opportunity.

Although the low rate is great, it is your total monthly payment that matters.  Borrowers generally only consider interest rates during the sixty days or so around the time of the mortgage transaction.  A few months later, when paying monthly bills the only thing that matters is your monthly payment.  No one thinks about interest rate when thousand of dollars comes out of their account after paying monthly bills.

Time for A Check-Up?

If you own a home and have realized equity gains over the past few years it is time for a check-up.  Regardless of whether you purchased your home or refinanced at a historically low-interest rate over the past two years, it is time for a check-up.  Anyone that has more than $10,000+ in consumer debt and some equity in their home should look at cash-out refinance.  Most likely you will be able to consolidate debt and reduce your overall monthly payment.  Doing so can help you save thousands in interest over the life of the loan.