Aggregate household debt in the third quarter of 2023 stood at $17.29 billion, according to the New York Fed. U.S. mortgage balances stand at $12.14 trillion and home equity lines at $386 billion. Credit card balances stand at $1.08 trillion, according to Fed data. For homeowners in deep debt, does the recent mortgage rate downswing mean it’s time to refinance or add a second mortgage or home equity line-of-credit? If your credit card debt and the like is manageable, and you can continually knock down the balances each month, then you should consider staying the course. Protect your piggyback (home equity). Annualized, approximately 8% of credit card balances and 7.4% of auto loan balances transitioned into delinquency, according to the New York Fed data. Do whatever you can to keep the payments on time. Late charges and delinquencies will crush good FICO credit scores. If cash flow is a challenge or your savings are getting into the red zone (because your monthly household debt output is greater than your monthly net income), then it’s time to do some equity-tapping math.

For example, let’s say you took out a $500,000 mortgage during the pandemic, with the rate sitting very nicely at 3.5%. Your home is worth $1 million. And you have a 750 middle FICO score. But you also have run up $25,000 of credit card debt at a 20% interest rate. The simple math tells us it’s obvious you don’t want to be trading a 3.5% fixed rate for something in the high-5s or 6s to get rid of a comparably small balance, but high rate. In this case, you should consider putting a HELOC or a fixed rate second mortgage behind your first mortgage. You may be able to find a no-closing-cost HELOC with starting rates lower than prime (prime rate is 8.5% today) or prime plus 1% or 2%. Even if you paid 10% on a HELOC, you are reducing your borrowing cost by 10%. Assuming interest-only payments, $25,000 of credit card debt at a 20% interest rate costs you $5,000 in annual interest. Chopping the rate down to 10% saves you $2,500 in interest charges.

I should add that most HELOC’s have terms of 25-30 years. For the first 10 years, borrowers have the option of making interest-only payments. In year 11, the principal and interest amortization is required for the remaining term. That said, be disciplined and continue making the same payments as you were before the HELOC. That way, you’ll accelerate the credit card principal balance reduction with cheaper borrowing costs. And you don’t want to get caught up pushing credit card balances out over say 30-year HELOC term.

Source: Jeff Lazerson for the Orange County Register