In a rising interest rate environment, I recommend putting as much of your debt as possible in fixed rate loans, more specifically either a 1st or 2nd mortgage. Many other debts carry a variable rate, meaning the rate can move with changes in an index (credit cards, personal lines of credit, business lines of credit, home equity lines of credit, etc.). The most common index is the Prime Lending Rate (currently at 3.50%). If you have debt that is tied to this rate, the interest rate on that debt will increase when the prime rate increases.
The Federal Reserve Board has the ability to change the prime rate when it sees fit. Because increasing this rate helps to fight inflation, the Fed will be increasing the prime rate quickly and often this year (maybe as much as 1.50% by the end of 2022). One of the best ways to protect yourself from increasing rates and payments is to consolidate your debt with a first or second mortgage loan.
“Which product is better for me, a fixed rate first mortgage or a fixed rate second mortgage?”
The answer to this question will depend on your debt structure and the equity in your home. If you have 20% or less equity in your home, a second mortgage will be your only option. If you have more than 20% equity, you will have the option of a first or second mortgage.
If you have a lot of credit card debt or other revolving debt, I recommend paying them off with a mortgage refinance. If your current 1st mortgage rate is good, like under 3.00%, a second mortgage may make sense. If your current first mortgage rate is above 3.5%, look at a first mortgage refinance. In either case, consolidating variable high rate debt into a fixed rate mortgage loan makes sense.
“I‘m on track to pay off my mortgage and I don’t want to refinance or take out a second mortgage and extend that term.”
In this case, I recommend setting a repayment term on new first or second mortgage that matches your goal for paying off the loan. For example, if you’re set to pay off your current first mortgage in 20 years, make sure the repayment term of the new first or second mortgage is 20 years or less. Many of my customers don’t realize that this is an option. In most cases, when you consolidate higher rate debt into a mortgage, your overall monthly debt payments will decrease substantially. Why not use that savings to shorten the term of the new loan or simply pay off the loan sooner? For example, if you consolidate $50,000 in credit debt into a new mortgage (first or second), your monthly payments could drop by $1000 or more. If you add these extra funds to your mortgage payment, you may shorten the time it takes to pay off your mortgage by 5-10 years.
So, in summary, a new mortgage loan (first or second) is a great way to limit your exposure to increasing interest rates, lower you overall blended rate on your debt, and pay your mortgage off sooner.