In the Interest of Cash, Credit, & High Inflation

Cashback rewards cards, home equity lines of credit, and fixed rate mortgages may benefit families with a financial safety net, outside of insurance, with flexible payment options and the opportunity to retain cash for emergencies or investments.

Utilizing Credit Lines

Credit lines have many benefits and one major risk, overspending. Payments on credit cards can be made anytime during a grace period at 0% interest making them one of the most flexible and versatile payment options available when used responsibly. Cashback reward card holders often use their cards for everyday spending to earn an average of 2% cashback and then make an instant payment from their checking account with every purchase, if funds are available, or on their next pay day if they need a little more flexibility. Credit cards offer a unique level of security against fraud, purchase protection, insurance, and anti-fraud detection as well. That being said, they carry high interest if not paid during their 25-30 day grace period and this is where many people may find themselves getting into financial trouble. Home Equity Lines of Credit are also available as a credit option for those who own their home or owe less on a mortgage than what a home is worth. These lines carry some of the lowest interest rates available because they are tied to a home as an asset. For those who have both a cash back credit card and a Home Equity Line, some of the high interest risk of a credit card can be alleviated by paying the remainder of a card’s statement balance off from the home equity line if more time is needed to complete a payment. By doing so, a person could benefit from a card’s cashback and grace period while capitalizing on a HELOC’s much lower interest rate.

The Fixed Rate Mortgage.

Credit cards and Home Equity Lines in the US generally have variable rates pegged to an index, the prime rate. This means their rate can go up. The biggest advantage of a fixed-rate mortgage loan is that the interest rate is locked in for the term of the loan, or until it’s refinanced. With home finance, there is always an interest payment regardless if one pays cash and forfeits the right to earn interest or they borrow money and pay a mortgage lender the interest. ?If someone could earn the same as they pay, then ultimately it all evens out over the same length of time. However, home mortgages can provide an additional inflation hedge. If inflation rates exceed borrowing rates, for example, inflation is at 9% and an interest rate is at 6%, the lender is effectively paying the BORROWER 3%. If someone refinanced or purchased with a mortgage when rates were around 3% the fixed rate is of even greater benefit with a virtual 6% return. Those with rental properties can actually reap a dual advantage with higher inflation and fixed rate mortgages. Not only may they get to pay off their loans with less valuable dollars, but they may actually benefit from the rising rents that come with inflation at the same time. The point is, even with mortgage rates rising with inflation, the fixed rate on a mortgage can still provide a very attractive lending strategy to free up other capital for investing, even if it means doing a cash-out refi down the line. It is not necessary to pay off your mortgage as soon as possible if there’s a better use of your money elsewhere. In turn, as people hold on to lower rate mortgages for reasons like those just mentioned, inventories may remain tight keeping prices of homes at market highs for some time.

Many profess that cash is king, but that is only for so long as one holds it. The opportunity cost of paying cash is the interest the it could have earned, had it been kept, that no longer exists after it’s spent. When a family can use tools like credit lines and mortgages to not outlay accumulated savings for purchases all at once, it can provide peace of mind, security, and greater opportunity to use savings as an investment when the right time comes.

PROFESSIONAL DISCLAIMER

Articles cannot, and do not, contain financial advice. The finance information is provided for general informational and educational purposes only and is not a substitute for professional advice. Accordingly, before taking any actions based upon such information, I encourage you to consult with the appropriate professionals. I do not provide any kind of finance advice. THE USE OR RELIANCE OF ANY INFORMATION CONTAINED IN POSTED ARTICLES IS SOLELY AT YOUR OWN RISK.

I am currently a Citizens Colleague. Citizens has not approved and is not responsible in any way for opinions shared. Further, I am not compensated in any way for any products or services mentioned in any article to remain integral and impartial.

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