This article will not be for
everyone. If you have a low interest rate on your home loan and have no debt
and no use for extra money in your life, then you can stop reading.
That said, if you have high interest credit cards or medical
bills, really need to remodel and don't have the cash on hand, want to start or
grow a business or have any other important (yes, ONLY important) needs for
cash, then your home may be a great place for you to turn to help with your
financial needs.
You may be saying right now, "but Jeff, I have such a low
rate on the home how can it possibly be a good idea to take money out of the
home now that rates are up some?" To you, I say, you have a good point. As
I said at the beginning of this email, this isn't for everyone. Consider
this though, if you have credit card debt it
is likely to be in the high double digits in interest rate (up to 26%) and the
minimum monthly payment is typically close to a thirty-year payoff, just like
your home loan.
For many people it's not about
the rate on the mortgage, it's about the "blended rate" on all the
debts you pay. The blended rate is a weighted average of all the debt you
carry. Even when the home debt is 60 -80% of the balance of all the debt you
have having credit card debt in the high teens or even 20s can skew your
blended rate to 7-9%. Refinancing and renegotiating that debt could easily
lower monthly payments by $300 to $600 a month and I have personally seen
people save over $1200 a month in payments not to mention simplify their life
dramatically by reducing the number of accounts they have to pay each
month. Imagine how life changes and how much easier it can be
to reach other, more important, financial goals.
This doesn't even consider the fact that you may increase your
available tax-deductible interest by converting non-tax-deductible debt into
debt that can be deducted (in most cases) off your taxes. This would also
include a line of credit on your home which under the new tax code cannot be
deducted any more.
Speaking of lines of credit, many of these loans have grown very
expensive as the Fed has pumped up short term rates and many are coming due. People
will be forced to begin the process of fully repaying the loan which can easily
result in a doubling (at least) of the current payment they have been
making. If you have a second line of credit you need to check your
current rate and find out when it converts. That alone may make it worth
considering a change.
The Fed has made it clear they are still not done raising rates. At
this time the official line is that they expect to raise rates three times in
2019. This doesn't include the likely .25% increase that is planned for
this month. All told, a year from now the likely scenario is that your
line of credit and adjustable rate credit cards will be another full one
percent higher in rate.
Let's quickly touch on remodeling. Maybe right now you don't
have a lot of debt, but you really want a new kitchen or need more room. Maybe
the roof, flooring and paint need done. Did you know that remodeling a house
that's fewer than 1,000 square feet costs an average of $18,347, while a 3,000-
to 4,000-square foot home costs an average of $36,121? Many of these home
improvements end up on credit cards. In fact, in 2017 alone, U.S. consumers
charged more than $141 billion in home improvement products and services to
their credit cards. Does this really make good financial sense?
As I said at the beginning, this message isn't for everyone. However,
if you or someone you know is considering tapping into your home equity, let me
run the numbers for you. I have a great calculator that I use that can help you
make a clear determination if this is a good move or not. Give me a call
or email me.
