Blog posted On February 02, 2022
In a rising rate environment, credit cards typically get hit the hardest. Interest rates on credit cards are generally much higher than interest rates on a mortgage. While average mortgage rates have been hovering between 2% and 4%, average credit card rates have largely been hovering between 15% and 20%. And credit card rates typically follow the federal funds rate much more closely than mortgage rates. So what should you do if a federal funds rate hike is coming?
Unlike mortgage rates, credit card rates rarely have a fixed interest. When the market rates rise, credit cards rates rise. When the market rates fall, credit card rates fall. “Fed rate hikes tend to be passed along to credit card holders within a month or two,” writes Susan Tompor, personal finance columnist. While card issuers may have some flexibility, especially with new customers, existing customers would likely see an increase in rates if the Federal Reserve increased the benchmark rate.
Pay down credit card debt
If you’re an existing credit card holder, it would be a good idea to pay down any current credit card debt as much as possible. When rates rise, it tends to become harder to pay off the existing debt. If you can, try to make some extra payments towards that debt now. If you’re looking for an efficient way to pay off your credit card debt while potentially lowering your mortgage payment at the same time, it might be worth exploring your cash out refinance options.
Consider a cash-out refinance
With a cash-out refinance, you can do almost everything that you can with a typical refinance (lower mortgage rates, cancel mortgage insurance, switch to a fixed-rate mortgage etc.). The main difference is, as the name suggests, that you can take cash out from your existing home equity. Then, you can use the money you take out from your equity to pay down any debts that have higher interest rates than mortgages (credit cards, auto loans, etc.). To explore different financial scenarios of a cash-out refinance, check out our refinance calculator.
Explore HELOC options
An alternative to a cash-out refinance would be getting a home equity line of credit (HELOC). Like a cash-out refinance, a HELOC allows you to take money out of your home’s equity. Unlike a cash-out refinance, a HELOC allows you to take out money more than once. So, instead of charging your credit card for large purchases in the future, you can use your HELOC, saving you a great deal of interest.
If you would like to learn more about the benefits of taking out a HELOC or cash-out refinance, let us know. You can also click “Get Started” to apply today.