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Smart Equity Move: How Upgrading Your Home Can Slash Your Monthly Bills, Despite Higher Rates

We recently assisted a client in the transition to a larger home in a new school district they were targeting. What makes this story so compelling is that they never thought it was possible in the first place. You see they, along the many other families, were fortunate enough to grab a fantastic interest rate by refinancing back in 2021. With interest rates now closer to 7%, they just assume that the combination of a larger home and higher interest rate would put the payment out of reach. But like many, they had some rather significant consumer debt. When this is the case, what we want to explore is whether it makes sense to take part of the proceeds from the sale of their existing home to pay off the consumer debt and still have adequate funds for the down payment. Once the consumer debt is extinguished, the goal is to keep the overall monthly cash flow equal to or less than what they currently have. In other words, the new house payment would be less than what they were currently paying for their existing home plus the consumer debt that we would eliminate, notwithstanding the significant increase in the mortgage interest rate. To illustrate, this couple had a home that they had purchased in 2019 for $375,000. They originally put down 5% so they started out with a $356,000 mortgage which they had paid down to around $315,000. Their payment on their existing mortgage was $1,753. They were able to sell the home for $553,000 thereby walking away with $525,000 after expenses. They were looking at purchasing a home for $700,000. We had $210,000 in total equity to work with. If they put 20% down ($140,000) that left them with a monthly payment of $3,678. On the surface, this $1,925 increase in their monthly payment seemed insurmountable. But when we dug into their consumer debt, we found that they had $30,000 in credit cards with a minimum monthly payment of $900. In addition, they had two car loans; one with a balance of $15,000 and a payment of $687 and the other had an approximate balance of 25,000 with a payment of $856. By utilizing the remaining $70,000 in equity to pay off these two car payments and the credit cards, we saved them $2443 per month. Net, net they upgraded their home and the school district they were in, paid off all of their consumer debt and still saved $518 per month in their overall cash flow. If you are considering making a move that you did not think was possible, please give us a call so we can help you explore your options.

From 3% to Freedom: How a Higher-Rate Refinance Can Clear Your Consumer Debt

On the flipside, let’s assume that you have no intention or interest in moving. You have a wonderful rate that’s down in the twos or threes on your existing mortgage. The challenge is that although you have built up significant equity over the last 5+ years, you also have accumulated some sizable consumer debt that you would love to be able to utilize the equity to pay off. Let’s take the example of a couple we just helped navigate this challenge notwithstanding the much higher interest rate environment. They reached out to us because their daughter was getting married, and they were looking for a home equity line to help pay for the wedding and some legal bills they were obligated to pay for a recent lawsuit they were involved in. Upon further inspection, we found that they had significant credit card debt that could be paid off. They had a first mortgage balance of $334,000 at a rate of 3.625% with a payment of $1,938 and a 2nd mortgage of $126,500 with a 5.25% rate and payment of $1,220. They had $56,000 worth of credit cards with payments of $1,887. They needed another $165,000 for the legal bills and the wedding. The result was a new $700,000 mortgage at 7.5% (this was a rental property) resulting in a new payment of $4,894 which was actually $150 cheaper than all their existing debt that we paid off plus putting $165,000 cash in their pocket. Have a scenario you would like help exploring, give us a call, you just might be surprised at how we can help unlock your equity!!