The Impact of Debt on Rising Mortgage Rates: What You Need to Know

Mike Mills
00:00:00

So then you ask Mike, where are rates going to go next? Well, honestly, I got no idea. And anyone that says that they do, lying, dumb, or both.

Because until reality gets into the data, a new president gets elected, we can figure out what to do with all this debt. Mortgage rate predictions are like everyone's got one. But they're mostly fully Sorry about that. Little crude, but it's the truth.

So stay tuned because this roller coaster ain't even close to being over. What's up to all you real estate rebels out there. So mortgage rates are climbing again. Personal and national debt is skyrocketing.

Surprisingly, Texas is facing a housing supply shortage despite historically low transactions. It's a market as unpredictable as that spooky neighbor's trick or treat basket each year. So what does it mean for you and your clients?

Well, it's time to load up on information for the winter and sharpen your real estate skills as we head like a bullet into 2025. This is the Texas real estate and finance podcast Market Update for the week of November 1st.

I'm your on again, off again host Mike Mills, a North Texas mortgage banker with Geneva Financial.

Think of me as your go to source for all the latest twists and turns in this unpredictable real estate market that we're all swimming around in these days. Or at least when I can stay on schedule and get this market update out each week. But hey, we're back at it today, so buckle up, friends.

There's a lot to cover, so let's get to it. First off, as always, we're going to dive into the hot topic that's always on everybody's mind. Mortgage rates.

Rates have jumped nearly three quarters of a point since the Fed's recent rate cut, and right now they're at some of the highest levels that we've seen since the summer. But why?

We're going to talk about the role of questionable data, sky high government debt, and how seasonal adjustments are skewing economic reports just before the election. So if you're wondering where rates are headed next and whether anyone truly knows, you're not going to want to miss this one.

Then we'll take a look at some housing data and how mortgage rates are shaping the current market as we know it.

A recent Housing Buyer article by Logan Matashami has some new data showing modest inventory gains and increased price cuts as sellers start to adjust to this market. And despite some growth in listings, inventory is still tight and demand remains soft.

And with some upcoming economic reports, reports and election results, I'll break down what this means for buyers and sellers in today's market. Then we're going to dive into what I would call one of the biggest stories of our lives right now.

The U S debt crisis and its growing impact on the economy and of course, how it affects mortgage rates. In just the last three weeks, the U S has added nearly half a trillion dollars to its debt, bringing us to an astonishing $35.7 trillion.

We're going to break down how this runaway debt is fueling higher mortgage rates affecting global markets and why it's become one of the biggest issues facing our economy.

And after that, we'll discuss how, despite historically low real estate transactions and rising inventory, Texas still needs hundreds of thousands of new homes to keep pace with demand. A recent report from the Texas Comptroller's office finds that urban areas like Dallas Fort Worth are seeing prices surge nearly 50% since 2020.

We're going to explore the population boom, investor influence, and why legislative changes are critical to addressing housing affordability in Texas. To wrap it all up, we're going to talk strategy.

With Americans paying sky high interest on credit card debt, home equity loans could be a lifeline for clients juggling high interest payments and struggling with cash flow.

I'll show you how rolling debt into a home equity loan, even in this current rate environment, can free up thousands of dollars for your clients and get them back on track financially.

This is the kind of information that can position you as the go to resource in helping clients manage not just their home purchase, but their entire financial picture.

Okay, really quick before we get rolling, if you find value in today's episode, whether it's a fresh new insight, a little different angle, or even just a decent little laugh, do me a favor and hit the subscribe button. Leave a review or share this podcast with someone who could use a little clarity in our ever shifting real estate market.

Or we spread the word, the more we can help others tackle these challenges head on.

And remember, if you and your clients are looking to make some smart moves, whether it's managing high interest debt through a home equity loan, preparing for a first time home purchase, or just navigating today's mortgage landscape, I'm just a phone call away. This podcast wouldn't be what it is without you and I truly appreciate all of your support. So thanks for tuning in.

Let's keep helping each other thrive in today's real estate world. Okay, let's tackle the question that seems to be more and more frustrating every single day. Hey Mike, what are the rates?

Well, according to Mortgage News daily as of November 1st of 2024, the average 30 year fixed conventional mortgage rate is 7.09%, the average 15 year conventional rate is 6.48%, the average FHA 30 year rate is 6.61%, the average 30 year VA rate is 6.62% and the average jumbo rate is around 6.95%. Now to be clear, these are average market rates provided by Mortgage News Daily and may not reflect the specific rates that you qualify for.

Mortgage rates can vary widely depending on factors like your credit score, loan type and down payment, among others.

For accurate information about your personal mortgage options, it's important to speak with a licensed mortgage professional like me or your lender there compliance covered so mortgage rates are the highest that we've seen since the summer and overall almost 3/4 of a point higher than than they were when the Fed cut rates back in early October. So why in the world is this happening? Well, in short, at least in my opinion, bad data, bad debt. Let me explain. Let's start with data.

You've ever heard the term garbage in, garbage out? Well, recent jobs reports, GDP data and unemployment numbers have been filled with my new favorite term, seasonal adjustments.

So seasonal adjustments are additions and subtractions from real raw numbers that allow people to compare it across the year. It's actually a very normal thing when it comes to comparing data from say January to data from August.

But the last several months have seen seasonal adjustments to jobs added to the economy. People filing for unemployment and GDP figures to agree that we have not seen in a very long time.

And in an election year, positive economic data is good for the current administration. So right now the data's not great, at least as it pertains to its accuracy, in my opinion. Then there's bad debt.

You see, mortgage bonds that set mortgage rates compete with treasury bonds. And when the US Goes into debt, they sell Treasuries.

And if they go into a lot of debt, like is the case right now, then they have to sell a lot of Treasuries and then in order to make them attractive to investors to buy, they have to give a really high yield or return on investment. So if Treasuries have a high yield in order to compete, mortgage bonds also have to have higher yields and therefore higher rates.

So bad debt also equals high rates. And until we get better, more accurate data or we get less debt, good luck with that one. Then we're going to have higher rates.

And that's why mortgage rates have gone up instead of down ever since the Fed cut rates. So here's a few examples of some seasonal adjustments that when looked at overall, give a good picture of the US's economic health.

But if you dig a little deeper, you see that these numbers just don't quite add up. So let's take the Jolts report for example. This lets us know how many job openings are available in the economy right now.

And it showed that government job openings in September were down 111,000 jobs. But the BLS jobs report from earlier this month claimed that the government added 785,000 people to the workforce.

So how can you have job openings down by 100,000 but add 800,000 to the workforce? Somehow that math just doesn't add up to me.

But it does get a little bit closer when you add over 300,000 jobs to the raw number in seasonal adjustments, which by the way is the largest seasonal adjustment that we've seen to a job report in over 20 years. Also, the ADP payroll report doubled the actual number of jobs added through seasonal adjustments as well.

And not including Covid, this is the most that they've adjusted the numbers up in October since before 2016. And you see overall when these reports come out, they indicate to the market that the job market is plentiful and unemployment is low.

And this signals a strong economy and encourages people to continue investing in the stock market, which is a little more speculative than say the bond market, which is why you currently see the stock market at all time highs. At least one of the reasons. Cover the second one later. Back to these reports. GDP is another one.

The most recent report shows that the economy grew by 2.8% in the third quarter of 2024, which was a little bit less than the 3% that was expected, but also included 1% of growth from the government spending as the government continues to operate on a monthly basis with heavy deficit spending.

So spending is up, but credit card debt and government debt is through the roof because we're all writing checks that are going to boun one day very soon.

Now I'm going to dive further into how the US debt affects rates in a later segment here, but just know this for now, bringing mortgage rates down without a big cut or reduction in government spending is going to be very difficult because of how Treasuries and mortgage backed securities are so closely linked. Because basically the more debt that we run up as a country, more Treasuries we have to sell.

And in order to get investors to buy them, they have to have a reasonable risk reward, price so the more debt means, the more risk, and therefore higher prices on bonds, which means also higher prices on mortgage bonds. So the more debt we take on, the riskier it becomes.

And the riskier becomes, the higher the yields have to be to attract investors, which means the higher the yields have to be for mortgage bonds to also attract investors. And all that means is higher mortgage rates. But more on that later.

And by the way, if you look at the overall picture of where things are in the economy in the private sector right now, we had 512 large US companies that have declared bankruptcy so far this year. And that's only 6 less than we had during the 2020 pandemic.

In recent earning, calls from some major companies not in the magnificent seven, stocks have also not been ideal. Starbucks reported a 7% drop in sales. Hilton Hotels has lowered earnings expectations due to weaker travel demand.

And Volvo expects a negative cash flow. Heck, even Heineken and Lysol reported lower than expected sales. So these numbers just aren't adding up the way that they should.

If the economy was truly booming, you look at the government, it would suggest that the economy is thriving right now, which also usually leads to higher mortgage rates. Government deficit spending is occurring at record levels and at a record pace, which also leads to higher mortgage rates.

And what's really nuts about all this is that, at least for now, the market is pricing in a 98% chance that on November 7, two days after the presidential election, the Fed will again cut rates another 25 basis points. So then you ask Mike, where are rates going to go next? Well, honestly, I got no idea. And anyone that says that they do, flying dumb or both.

Because until reality gets into the data, a new president gets elected, we can figure out what to do with all this debt. Mortgage rate predictions are like everyone's got one, but they're mostly fully. Sorry about that. Little crude, but it's the truth.

So stay tuned, because this roller coaster ain't even close to being. All right, let's move on to a little housing data now.

So, with these higher than expected mortgage rates that have hit us over the last couple of weeks, what has that actually done to the housing market as a whole?

According to a recent Housing Wire article by Logan Matashami, we're starting to see a mix of small gains in inventory and steady price cuts as the market continues to adjust to these higher mortgage rates. First, let's start with new listings.

So, for the past few weeks, new listings have been holding steady at around 60,000 per week, with a slight improvement over this time last year. And just to give you an idea, last week's numbers came in at around 60,158 new listings, compared to 56,634 in 2023.

And that's good news for affordability, but it's still well below what's needed to balance out demand in many markets across the country. And rising rates are most likely keeping some home sellers hesitant from listing.

Because remember, in order for prices to come down at any dramatic level, we will need a big amount of supply to hit the market. Demand has fallen off a cliff already, so you cannot go much lower there.

So in order to get prices down, we need supply to heavily outweigh demand for a long period of time. Okay, so what about demand?

Well, pending sales have shown some growth over the last year with about 356,127 pending contracts last week, compared to 319,464 and 2023. But keep in mind, last year's numbers were historically low.

So that year over year growth is modest and heavily influenced by historically low sales in 2023. So we did get a blip, especially with rates being just a little bit lower for a bit.

But with the recent spike in seasonality, I would expect October, Novemb and December to stay low and maybe even lower than what we saw in 2023. In fact, mortgage applications fell by 17% last week, and that's the biggest drop that we've seen since April of 2020.

And on top of that, the mortgage purchase applications recorded its worst September since 1994.

And as a result, the mortgage demand index is down almost 60% since its January of 2021 peak and currently sits at the lowest level that we've seen in 29 years. Overall inventory is another area showing incremental growth, but still tight compared to pre pandemic levels.

Last week, active listings fell from 739,000 to 737,000. Now, this is typical for this time of year.

In the wintertime, listings tend to fall off as people tend to wait to list their homes until after the new year. But it just kind of highlights how low inventory remains overall.

And just for a little Context, back in 2015, active listings for the week of October were around 1.17 million, and that's more than 50% higher than what we're seeing today. So anyone telling you that prices are going to crash anytime soon is just not correct.

Now, on the pricing front, elevated mortgage rates mean that we're seeing a higher percentage of price cuts about 39.5% of listings right now have had a price reduction this year, and that's up from 39% from last year. But the standard market average of homes taking price cuts in any general market is around 36%.

So right now it is higher for sure, but it's just a little bit higher from that perspective. So while prices aren't falling sharply, there's more flexibility from sellers as they work to adjust to the current market.

Now, I couldn't find any specific data on this, but I'd be interested to know how many deals are coming with seller concessions.

I know just from my own personal loans that almost all of them in our market are coming with these concessions coming from sellers instead of price cuts.

And these are basically the same overall because ultimately the seller nets out the same amount of money regardless of if it's a price cut or seller concession.

Now, as for what's next, there's some big economic reports coming out this week that could push bond yields and by extension, mortgage rates up or down. There's going to be information on jobs data, inflation numbers and bond auctions that all happen by the time many of you hear this.

And then of course, there's the big presidential election next week on Tuesday. Over the next couple of weeks, markets are expected to move up or down quite a bit, depending on the data and the election results.

If rates stay high, we'll likely continue to see this careful balancing act in the housing market. Slow incremental gains in inventory, higher price cuts, and only slight demand growth.

So overall, the takeaway here is that housing inventory is improving, but it's a long way from pre pandemic levels.

At least on a national level, buyers might see more price flexibility, but affordability challenges are still the main issue facing most potential home buyers.

But for clients needing to sell in this environment, it may be important for you to let them know that they have to remain flexible on pricing and concessions and commissions in order to have the ability to attract more buyers in such a high rate environment. Good news is I'm going to keep an eye out for you and let you know when things start to shift. So stay tuned.

Okay, let's talk about our first story today. Did you know that the US Added nearly half a trillion dollars to its debt load in just three weeks? That's right. 455 billion just since September.

And our total national debt right now stands at a whopping $35.7 trillion. So what does this mean for the economy? And more specifically, what does this mean for mortgage Rates. Well, let's start with the numbers. The U.S.

deficit hit 1.8 trillion in the fiscal year of 2024. So far, that's about six and a half percent of our GDP. And it's the largest yearly spending deficit since 2021.

And according to the CBO, that's 139 billion more than last year and nearly 400 billion higher than in 2022.

Government spending overall has climbed to $6.8 trillion, with the biggest portions going towards Social Security, interest on the debt and Medicare, totaling 1.5 trillion, 950 billion and 869 billion, respectively. Just last week, the US federal debt hit a record $35.7 trillion, climbing by 2.2 trillion over the last year alone.

What's more, US debt has risen by nearly half a trillion dollars since just September 26th. So in three weeks, it's up 455 billion. And recent monthly deficit spending has been staggering.

347 billion in May, 660 billion in June, 244 billion in July, and 380 billion in August. In deficit spending. That's 1.6 trillion in deficit spending in just four months, which should be a major red flag to anybody paying attention.

Now let's talk about how serious this actually is. Interest payments on public debt have soared to historic highs. They now consume about 17.9% of federal revenue. That's the highest share since 1993.

And this percentage has doubled in just the last three years.

Now, to give you an idea where we're headed, the CBO projects that in the next 30 years, interest payments will account for over a third third of federal revenue. That is unprecedented. Even higher than we saw during World War II. So why should you care?

Well, obvious reasons aside, this massive debt is putting a stranglehold on mortgage rates. You see, mortgage backed securities, or MBSs, are the financial products that drive mortgage rates up or down based on their price.

Mortgage backed security prices and yields move inversely of each other. As mortgage prices go up, yields go down, as do mortgage rates. And as MBS prices go down, yields go up and so do mortgage rates.

And just like any financial instrument in the market, mortgage backed securities are in direct competition with U.S. treasuries or investors. And it's no different than Apple competes with Microsoft for investors. Same idea.

Mortgage backed securities compete directly with the ten year treasury, which, by the way, I've explained in previous episodes on exactly why.

I'll put a link in the description, but In a nutshell, 10 year treasuries are closely tied to mortgage rates, since the average life of a mortgage is around 10 years. So as US debt has skyrocketed, more Treasuries are issued to fund that debt.

And in order to make Treasuries appealing to investors, especially when the stock market is at record highs, the government has to offer higher yields on that purchase debt.

And due to the nature of competition, if treasury yields go up, mortgage backed security yields have to rise in order to stay competitive, which means mortgage rates climb as well. And that's why we've seen mortgage rates remain high regardless of what the Fed has been doing with short term rates.

So then the next question is, when will this change? Now, the Fed's lowering rates will eventually bring some relief here, but it's going to take time.

You see, the Fed's rates directly impact the government's cost of borrowing.

So as the Fed cuts rates and the government interest burden reduces, we'll start to see less of a need for massive issuance of Treasuries, which could stabilize or even lower yields and by extension, mortgage rates. But that is a long term solution. In the meantime, the debt crisis could continue to push mortgage rates up and keep them elevated.

Okay, so rates stay higher for longer. Big deal. You just won't buy or refinance anything anytime soon. Now, you can go about your day, but let's take a little step back, okay?

The debt crisis has broader implications than just mortgage rates. The US Dollar's position as the world's reserve currency relies on global confidence in the U.S. economy.

If our debt becomes unmanageable, we risk undermining the confidence, which could destabilize not only the US Economy, but potentially global markets as well. And this is why, as of late, assets like real estate, stocks, crypto, gold and other commodities have been performing so strong.

People want to protect themselves against the possibility of the dollar weakening and inflation skyrocketing. So they're moving their cash into assets that they hope will hold better value than the dollar.

And look, right now, in my opinion, the debt crisis is one of the most critical issues facing our country, only second to the threat of nuclear war.

And if, as a country, we don't address this now and as quickly as possible, we could see unprecedented challenges with major repercussions for inflation, interest rates, banking stability, and our overall economic health as not only a country, but as a globe. In my opinion, debt is the biggest threat to the US Economy and our way of life today.

And if we don't start chipping away at it, we're going to Be on a path that nobody wants to follow. Stay tuned because this is going to be a story to watch very closely.

It affects everything from mortgage rates to the stability of our entire financial system. So sleep tight. All right. Love being fun like that. Sorry, guys. It's just when we're talking about this stuff, it is important.

And you guys have to know, and I hate to be doom and gloom all the time, but you know, this is kind of where we're at right now. So this is just what it is. All right, let's move on to a local story that's affecting people here in Texas right now.

So real estate transactions are at historic lows. Inventory is building up. And here in Texas, it's moving even slower than most other states.

So why does a new report from the Texas Comptroller's office say that Texas needs to build hundreds of thousands of new homes to meet demand and curb rising home costs? Well, according to the report, Texas needed about 306,000 additional homes as of 2020 to match the pace of population growth.

And while we are seeing more inventory, it's still nowhere near enough to meet the needs in urban centers. Specifically, places like where I live in Dallas, Fort Worth are feeling the squeeze more than most.

In many areas, home prices have risen 50% since 2020, pushing the median price of a home from 267,000 to over 400,000 in just four years. Now, the key issue here is that population growth is still outpacing new housing development. So let's take Dallas Fort Worth again.

We led all US metro areas in net migration from 2020 to 2023, with our population now exceeding nearly 8 million. And this kind of growth requires massive housing expansion.

And despite Texas issuing the most building permits since 2008, it's still not enough to meet demand. According to this report, DFW alone is short by almost 50,000 housing units.

And most, if not all of that is needed for affordable options for lower and middle income earners.

But because inventory levels haven't grown at the same pace as demand for the last several years, prices have remained elevated, even with a significant decline in transactions over the last 24 months. So if we're building more and demand is down, why aren't we getting more affordable homes?

Well, the comptrollers report points to factors like restrictive zoning and land use regulations, which keep new projects from being developed quickly enough to meet demand. Another factor, institutional investors buying up homes.

Especially after the 2008 housing crisis, which has pushed prices up and kept home ownership out of reach for Many would be buyers. In fact, in the second quarter of 2024, investors purchased over 30% of these affordable homes available for sale in the U.S.

and a Star Telegram reported that in 2021 that 52% of the homes sold in Tarrant county were purchased by investors, which was the third highest rate in the country for counties with more than 50,000 people.

Governor Greg Abbott and Comptroller Glenn Hager are both calling for legislative solutions to make housing more affordable, including property tax relief and cutting back on regulations to speed up home construction, which I am all for now. What does all this mean for Texas residents?

Well, in short, until we can match new housing supply to this level of demand and minimize the amount of investor purchases of affordable homes, we're going to see prices stay high. Buyers and renters, especially in urban areas, will continue to feel the squeeze.

And without some substantial regulatory changes, Texas housing affordability is going to remain a major challenge. Bottom line is this. Despite today's slow transactions and growing inventory, the need for new housing is still more pressing than ever in Texas.

Our growing population means demand is not going anywhere.

And when mortgage rates do finally come down and the pent up demand for houses spikes back up again, we're going to see this shortage of homes become even more exacerbated, causing prices to rise even more.

So with DFW and other Texas metro areas leading national growth, meeting this demand and building our way to affordable housing is the only way to make the dream of homeownership a reality for more and more current and future Texas residents. So build, baby, build. All right, let's get to the final story for this episode. Today's main event.

Did you know that Americans now carry a record 628 billion in unpaid credit card debt? And that credit card debt carries an average interest rate of around 25%.

That means that people are shelling out thousands of dollars each year to keep up with just interest payments alone. And here's the surprising part.

Millions of Americans have access to hundreds of thousands of dollars that they could use to pay down this high interest debt and save thousands. But most are very concerned about using this cash only because they've never actually looked at the math.

So today we're breaking down how to use home equity to pay off bad debt that can transform your cash flow and get you out of the credit card and consumer debt spiral. So right now, the average homeowner in the United States is sitting on about 299,000 in home equity. That's right.

Most American homeowners have about $300,000 in cash sitting in their home right now. Currently, US credit card debt sits at a staggering $1.12 trillion. But more importantly than that, 1.2 trillion.

A record 628 billion in either unpaid or rolled over debt each month. And over the last three years, revolving credit card balances have increased by 52%. That's an additional $204 billion.

During that same time, credit card interest rates have jumped from around 15% to a record high 25% and growing.

So if you're carrying a balance on your credit card, or for that matter, several credit cards, like many Americans are, well, that's a lot of interest each month just for having the privilege of holding onto that debt. And these credit traps have also started to show serious signs of delinquencies from consumers recently as well.

In fact, over 9% of credit card balances became delayed delinquent just over the last 12 months. And that's the highest level of delinquency that we've seen in 13 years. And this inability to pay isn't just limited to credit cards.

Americans are also falling behind on auto loans. About 8% of all auto loan balances have become delinquent this year as well. That's the highest in 14 years.

And when people miss payments, it doesn't just trigger higher rates and heavy late fees. It also impacts their credit scores, making it harder and harder to borrow down the line.

If you have a true emergency, or unfortunately, just for some basic needs like housing and cars. Which is why being proactive about mounting debt is very critical right now. Okay, so how does a home equity loan come into play here?

Well, if you're already dealing with high interest credit card debt or other types of consumer debt, using a home equity loan to pay it off could save you a ton in interest.

Even if the rate on that home equity loan is 6, 7, or even 8%, in some cases, it's still far lower than what you would be paying on a 25% credit card. But wait a minute, Mike. Why would I finance a credit card into a 30 year mortgage?

Aren't I just paying interest on that credit card debt for 30 years? Well, yes and no, but let me explain. First, let's start with the idea of cash flow.

You see, just like a business, a household relies on cash flow to cover expenses, save for the future, and prepare for emergencies.

And when high interest debt eats up a big chunk of your monthly income for minimum monthly payments on five credit cards and two car payments, it significantly limits your ability to do any of these things that are so critical to your financial future.

So by consolidating debt into a home equity loan with one payment, you're reducing your overall short term interest paid and freeing up cash flow that can be redirected towards savings, investments, or even paying down more of the debt on the mortgage that you just added to. And when you factor in inflation, fixed interest rates can be your best friend.

Imagine you borrow $100,000 at a fixed 6% interest rate on a 30 year loan. Your monthly payment is around 600 bucks, and that stays the same every year because it's on a fixed rate. Now, let's add inflation to that picture.

Let's say inflation averages at about 3% a year, what it's kind of doing right now. And unfortunately, things keep going the way they have been, this might be going up.

So that means that over time, both your income and the prices of goods and services rise around 3% annually. And after 10 years, if your income keeps pace with inflation, you're likely to be earning about 30% more than when you took out that $100,000 loan.

However, your monthly payment on that loan is still $600. It hasn't changed at all because it's a fixed rate.

So while your income and obviously many expenses have increased with inflation, that 600 payment feels like a smaller and smaller portion of your income. So in effect, you're using cheaper dollars from today to pay down the same fixed amount of debt from the past.

So in this way, inflation makes the real cost of your debt lower over time as your rising income outpaces those fixed loan payments. Finally, that equity debt that you took out on your home can be refinanced every time rates change.

So if you get a 7% rate on your debt and mortgage today, but rates drop to 5% over the next couple of years, you can refinance that debt again and continue lowering your payments, freeing up cash flow and saving for retirement, or even paying down that debt even faster.

So while financing credit card debt over 30 years may seem counterintuitive, it can actually be a smart move for managing your cash flow, lowering your overall interest, and giving inflation a chance to work in your favor. So by using a fixed rate equity loan, you're stabilizing payments now and creating more financial flexibility down the line.

And if rates drop, you can always have the option to refinance that debt and save even more. Now, if you still think I'm crazy, then you can stop listening to this and move on. But if not, then your next question probably is.

Okay, so what are actually my options? Well, the three most common types are home equity loans, home equity lines of credit, and cash out refinancing.

So let's walk through each one of those real quick. Home equity loan. So this is often called a second mortgage. It's a lump sum loan that uses your home as collateral.

It usually has a fixed rate, meaning your monthly payment is predictable. And this makes it a great option if you know exactly how much you need to borrow.

But unfortunately, with this type of, of loan, it typically has to be applied to a specific purpose, like putting in a pool or adding to your home. So there aren't a ton of options for this type of loan when it comes to consolidating debt.

And right now, rates on these loans might be somewhere between 11 to 15%, which is still much better than 25% credit card debt. The next type is a home equity line of credit, or HELOC, as many people call it. So HELOC works more like a credit card with a limit.

So during the initial draw period, you can borrow as needed needed, only paying interest on the amount that you use. And this draw period typically lasts about five years.

Now, this can be ideal for covering uncertain expenses, but it is important to remember that HELOCs typically have variable rates and they'll usually adjust about once a year. And while experts predict that rates should drop pretty soon, if they don't, the rate of the HELOC could go up.

But if rates come down, it could also go down. HELOCs do have certain limitations on how much debt you can actually take out against your home.

And they usually have initial draw periods that you have to take out a certain amount when you first get the loan. And also typically come with much greater requirements on credit scores because it is another second lien on your house.

And the third type of equity loan is what's called a cash out refinance.

So with a cash out refinance, you are replacing your current mortgage with a new loan at a higher amount, pulling out the equity that's been built up. And yes, you're likely refinancing that old loan to a higher rate.

But if you're sitting on 4 to maybe 5% on your interest rate, that's still less than 25% interest on the credit cards.

And especially if things are really kind of starting to get out of hand on your consumer debt now, this isn't an ideal option if overall your debt load is pretty low because you really don't want to touch that current low rate. On your home unless it becomes a necessity. But this option is easier to qualify for.

Also, because Fannie Mae and Freddie Mac back these loans, they make it a little bit easier to tap into your home equity outside of like a HELOC or a second mortgage. And just to solidify this a little bit further, let's look at a real life example of how this could make sense.

Now, you might be hesitant to roll high interest credit card debt into a 30 year mortgage at today rates, especially if that bumps your mortgage rate from say 4% to 7%.

But over the first five years of a 30 year loan, a 7% rate on $200,000 will cost about 13,600 in interest per year, compared to about $7,400 at 4% interest. So yes, raising your rate does have an impact, with an additional cost of around $6,200 in interest per year for the first five years.

And your monthly mortgage payment in this scenario would go up about 550. So that's the bad news. But here's the good news.

If you're carrying say around $30,000 in credit card debt at 25% interest, you're paying about $7,500 a year in interest alone, and it's probably growing.

So by consolidating that into your home equity loan at 7%, you'd reduce your overall interest payments between the mortgage and the credit cards by about $1,000 a year. Now, that doesn't seem like a whole lot, right? But I want to give you an example that's real and reasonable. However, here's where this really helps.

So your mortgage payment just increased by about $500 a month. However, the minimum payments on those credit cards that you just paid off at that $30,000 level is probably close to somewhere around $900 a month.

So you just saved yourself $400 a month in cash flow, and that is an extra $4,800 a year and extra cash that you now have access to.

And that is money in your pocket that you could direct to an emergency, fund investments, or even make extra payments on your mortgage to pay down that principal faster. In other words, yes, refinancing to a higher rate on your mortgage increases the interest on your loan.

But by reducing high interest debt on your credit cards, you could save money on the short term interest and you could be gaining a significant amount of cash flow flexibility, which gives you more control over your financial future. Now, one final point. If this is something that might help you, being proactive is going to be essential.

Remember, 9.1% of credit card balances are now delinquent. That's the highest level in 13 years. And that's on top of the 8% delinquency rate for auto loans.

So falling behind on debt payments not only hurts your cash flow, but it impacts your credit, making it harder for you to borrow in the future if you really need it.

Accessing your home's equity before reaching a financial crisis could be a proactive way to consolidate debt, protect your credit and stabilize your finances. Look, debt is not ideal, but for a lot of households in the US right now, it's already there. The key now is finding the best way to manage this debt.

Home equity loans, HELOCs and cash out refinances can be powerful tools to reduce high interest debt and free up cash flow. So if you're in a position to use your home equity, it might be worth considering as a strategic way to manage debt more effectively.

Set yourself up for future financial success. And if you need some help working through all the numbers and the options, give me a call. I'm happy to help.

All right guys, that is a wrap for today's episode.

I hope our dive into mortgage rates, the US Debt crisis, Texas housing demand, and strategies for managing high interest debt has been informative as well as practical for you.

And whether you're navigating today's mortgage landscape or helping your clients make smart decisions with your cash flow, staying sharp on these topics is more crucial now than ever.

Don't forget to tune in early next week when I sit down with Michael Williams, a Washington lobbyist, to discuss the upcoming presidential election and where each candidate stands on housing policies. If you want to get the inside scoop on what's likely to change in our industry, you don't want to miss it.

I really want to thank you guys for being a part of this community and tuning in each week. I appreciate each and every one of you and I look forward to seeing you here back same time next week assuming I get these things out on time.

And as always, be great. Humans just keep grinding because life is what you make it, so make it great. See you later.