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Interest Rates
Episode 918th November 2022 • Financial Life Planning • Mike Morton, CFP®, RLP®, ChFC®
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The Fed raised the interest rates for the sixth time in nine months prompting many of my clients and listeners to ask “what does this mean for me?”

Matt Robison and I sit down to talk about the ramifications of the doubled federal interest rate on this week’s podcast. In a nutshell, the rate increases impact your financial planning in a few negative and positive ways:

  • Mortgage Rates - Now is not the time to buy a home
  • Home Equity / Construction Loans - You might want to think twice about borrowing for renovation projects
  • Savings - You will FINALLY earn some interest on your cash
  • CD’s - Some brokerage products are offering 3%-4% interest, something we haven’t seen in almost 20 years
  • Stocks - It’s like Black Friday: with the 25% market decline now is the time to buy stocks

Tune in to hear more about the interest rate impact on your financial future.

Learn more about Mike and my services at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Are you ready to create your ideal lifestyle? Let’s Connect.

Transcripts

Matt:

Welcome to real financial planning broadcast on WKXL and available wherever you get your podcasts, I’m Matt Robison and joined by financial advisor Mike Morton, the host of financial life planning. Mike, I love the name of your show, although it feels like there should be a comma or a semicolon or something in there, because financial law is it financial life planning, this feels like an eats shoots and leaves situation.

Mike:

I liked the name financial planning, life planning. And then we just ran it together financial life planning,

Matt:

Financial planning, punctuation in search engine optimal, right, you've got the keywords, it's financial, it's life, and it is planning. Those are the three things that I associate with you, along with just good advice, good advice on all kinds of stuff. All right, we're gonna have a pretty quick, efficient, hard hitting show here today, you wanted to talk about how does the recent rise in interest rates affect me? Not me, like…

Mike:

I didn't want to talk about this. My listeners wanted to hear what the rise in interest rates means for them.

Matt:

There it is. Alright, so we're gonna do this in one quick, efficient episode, Mike, for all our viewers and listeners, how does the rise in interest rates affect them.

Mike:

In a myriad of ways, let me get into them all.

Matt 1:26

One sentence go!

Mike:

It depends on a lot of things, but what it what I want to hit on are depending on where you are, it can mean different things for you. And so there are a few different ways that this could be coming into your life, depending on your situation. So let's run through those, Matt. And the first one that comes to mind is home purchasing. Because you've read the news titles that say mortgage rates highest they've been and the mortgage rate just top 7%, if you're trying to buy a home, mortgage rates are now above 7%, highest they've been in the last 20 years, Matt, since the early 2000s. And so that is a direct effect, the high mortgage rate is a direct effect of these rising interest rates. And so if you're in the situation where you are trying to purchase a home, or switch homes, then this could be really affecting you home sales are certainly slowing down in a lot of areas across the country. Now, as with real estate, you know, this mat real estate is what it's local, it's all depends on your home and where you are. So I certainly know areas where we are mad that the home prices are still just going up and up. And the rates are not having that much of an effect. But countrywide, mortgage rates are up. And so home prices are cooling off the home markets kind of cooling off. So that could be really affecting you and borrowing money and affording a home if that's the stage that you're in.

Matt:

So here's a statistic. If you look strictly at interest rates, a 2% rise in interest rates adds $115 to your monthly payment. For every $100,000 of a 30 year home loan, there are a lot of numbers in what I just said, look, your standard home loan is 30 years, right? So for every $100,000 that you're paying, let's say you're buying a half million dollar home, that means you're adding $565 to your monthly payments. So I'm just going to surmise here for a second, that the major impact is not necessarily let's say you want to apply for and qualify for an FHA home loan, and you need a minimum 20% down, it's not going to affect the down payment unless home prices have also gone up which very well could have happened. What it is going to do is immediately hit you in terms of those monthly payments. And depending on the value of the home that you're purchasing, that could be substantial. In that example, I just laid out, you're talking about $560 a month, you're talking about 6000 plus dollars per year. That's significant.

Mike:

Yeah, look, just anybody can equate it to their current life. What if you had an extra $500 payment every month? So it's a lot. And that's exactly what mortgage rates have done. They've shot up, you could get a three, three and a half percent mortgage about nine months ago. And now it's 6%. Obviously, they've topped 7%. So yeah, it's very significant. So that's the first way that the rising interest rates, they trickle through, and now they're hitting them to mortgage rates. And so if you're in a home purchasing situation can be really impactful. And I know clients that have stopped looking for homes, they're like, yeah, no, because they looked at their data. Exactly what you did, Matt. They're looking at their current payments at a 3% in their current home, thinking about changing homes and look, when's the last time anybody changed homes in our demographic Matt? We're still mid career, we're not like retiring and the kids are still at home. So we still need the big house. How many people like that are downsizing and getting that smaller home. Everybody wants like the bigger home, right? And so you get a little bit bigger home, your payments are going to like double, you're getting a bigger home, you're borrowing more and interest rates are way up from your current mortgage, home home purchasing.

Matt:

I've got good news on that score, though. Mostly for you, Mike, which I know the age of your kids snd you know you're not that far away from being an empty nester. So pretty soon you'll be able to downsize your home and after that once the kids are out of the house and you've downsized your home. It's pretty much just disease and death ahead for you. So that's good. Speaking of good news on things ahead. I know you also want to talk about HELOCS we did a whole show on HELOCS check out financial life planning the Mike Morton podcast because it's got that episode smack dab in it, super useful. Please explain to our listeners what a HELOC is. Because if I'm recalling correctly, you fast rope down from a HELOC. If I remember it.

Mike:

That’s exactly right. Yeah, that's to do with helicopters and aid for helicopters. That's exactly right. No home equity line of credit, those that have these know all about, but it's a way of borrowing money on your home. So you've got your mortgage, and then you can also get a home equity line of credit. Now this is a floating rate. Okay, so as interest rate if you have one of these, trust me, you'll know about this already. I'm not telling you anything you don't know, because I just got the letter in the mail Matt. Yesterday, I opened it up, my rate had gone up to 6% on my home equity line of credit. But if you recall from that episode, why I paid off my HELOC? That's what the episode was and I have paid off the money I borrowed because the rate was ticking up. And now it is 6% that any money I have borrowed in my HELOC. So check out that episode. That's another way that interest rates are affecting you. Again, borrowing costs have gone up and so 5%-6% and all the money that you borrowed is now costing you higher in terms of that those interest rates and the interest payments.

Matt:

You know, depending on the amount of money that you have outstanding on loan through a HELOC, you might actually prefer to have SEAL Team sit down from a HELOC to come get you what about the other side of the coin, though? So that's if you've borrowed a lot of money. What if you're saving? I mean, interest rates being higher is good. Maybe?

Mike:

Yeah, so this is exactly you know, what people thought when they first tuned in is where we're going. And I'm getting this question all the time. Now, Matt, finally, you know, those people that actually save money are being rewarded. So for those five years, you say you're getting my money in the checking and savings account and you now get 0% interest on that. Now your bank accounts, the checking and savings accounts are still really paying you almost nothing, all right. But there are places that you can save, that are finally getting you some interest. So if you've got money that's been sitting in the bank, you know, for the last couple of years, I have had clients just sitting in literal cash, money market accounts, or just your checking and savings, because there was nowhere else to put cash. The market, as we know was pretty high, you know, it was pretty high cash pretty safe. And so that's what we have sitting around, I didn't want to be in bonds too much. So we just literally had cash leave in your checking savings account, just leave it as cash. Now, however, you don't want to just leave that money sitting in cash, you can get CDs, brokered CD, short term bonds, there's a number of places that you can get 2%-3%-4% or 5% interest, you know, and so that is great, we're finally getting rewarded for having savings. So definitely be looking into those products if you have cash. And if you're saving, you want to start using some of those things and getting some interest well.

Matt:

Two quick comments on that. First of all, for those who listen to this show either in capital close up or in financial life planning the Morton podcast you may recall the episode we did on ibonds the sneaky little trick, as they would say online one weird trick to earn a lot of frickin money if interest rates are high. Yeah, did you know that the Treasury Department says that the orders for AI bonds with a 9.62% rate there are so many of them right now because so many people are listening to the Morton podcast that they may not process them all by the deadline of October 28, yhe date that we are actually recording this this may actually go on air a couple of weeks after this so it's just me too late look you're listening to this like sorry but it does go to the point that these opportunities are out there. The only other thing I'll say is that you and I happen to have gone to the same college and we took macro-economics from the same professor, great guy, Professor Cooper Berg, and he used to say that the biggest problem with inflation was that it capriciously redistributed money from investors to savers, I still don't understand what that means. I got a degree in economics and a master's degree, which also featured economics because it was a public policy. I don't really understand that. But it did remind me what you're saying a moment ago, just bear in mind that there are now these savings opportunities for you where you can actually earn a fairly decent return a really good return, sight, silver lining to these other costs we're talking about.

Mike:

Yeah, so ibonds for a second, and we'll transition to some other some other savings mechanisms, the ibonds are still really good. You just mentioned the 9.6%. By the time you hear that, hear this, that will have changed, they change every six months. And that you mentioned it's interest, actually, the eye bonds are really tied to inflation. That's why it's so high. That's why the interest on those ibonds is so high, it's very much tied to inflation. And so hopefully, as inflation comes down, so will the interest rates on those eye bonds, but they're still really great value. If you've got them in the last 12 months. Congratulations, you got some really good return, hopefully the next 12 months will be very similar type return as well and fully guaranteed by the US government. So ibonds are still really good spot for putting some money.

Matt:

Yeah. And just to add to that, if you are listening to this after October 28, which you surely will be, don't think that this is somehow foreclosed to you this opportunity. The fact that the Treasury Department is having trouble processing all the demand means that they are going to respond and try to make sure that they can process the next wave of demand, it will be there as long as these rates remain high. So get in on it. And I prescribe this… No, I probably should do this as well. But I'm probably not going to remember to or whatever. But you should if you're listening, you should. Okay, what else should people pay attention to?

Mike:

You need to? Matt, you need a financial advisor that will follow up with you and hold you accountable for where your money's going.

Matt:

Unfortunately, I cannot hire Mike Morton, because we try to assiduously maintain the fact that we have no financial interest in this show. We just give advice, which you can listen to, its generalized advice. But it doesn't form actual advice that you should rely on. We have to give that disclaimer because it's like this and the Simpsons get sued.

Mike:

And nor do we have any financial incentives. Since we don't make any money from this financial podcast.

Matt:

We make no money from this. We do this out of altruism. No, I mean, of course, we want people to go talk to you if they have other questions, but we earn absolutely nothing from what I get paid by the radio station. All right, Mike, what else you got?

Mike:

Alright. So if you're a saver, you want to make sure that your money that's sitting in that bank account that has hopefully grown for the last couple of years is no longer just sitting in a checking account. Remember, checking accounts usually aren't paying you any kind of interest. And even if it's an interest bearing checking account to nothing. So now you have the opportunity take that, you know, 10,000, 20,000, 50,000 that you have in there, get it get some interest on that money, you know, have your money work hard for you work smarter for you. So there are online banks have savings accounts, your local banks do too, but online tend to have better interest rates on their savings accounts, maybe 1% or 2%, at the bigger online banks. And so you can definitely take a look there, they're a little bit the online banks are a little faster to respond to the rise in interest rates in terms of their savings accounts. So that's why you can get a little bit more there. But if you're going to have this emergency funds you don't expect to use but you definitely want to have sitting in cash, you can get CDs, certificate of deposits, six months, 12 months, they're going to pay you 3% to 4% with this and so it's tied up you know, you have to leave it there you can if you really need it, you can break that you lose the interest, but you can get your money back out. Otherwise you leave it there six months or 12 months, and they pay you that interest. So CDs are another great choice in terms of where to park your money that you want to have sitting in cash. Are you ready to create your ideal lifestyle? Let's discover what's most important to you and design a plan to have more of that in your life. Go to meet Mike morton.com all one word meet Mike morton.com

Matt:

What's the difference between a CD and a brokered CD.

Mike:

Alright, so these just hit the hit the news as well recently brokered CDs come through your brokerage. Okay. So it's a CD product that comes through your broker. So if you have fidelity or Schwab or Vanguard, you know, that brokerage account, typically what you what everybody knows is I can buy stocks, I could buy some individual stocks, I could buy some exchange traded funds, ETF funds, I could buy index funds, or I could buy mutual funds. You know those kinds of things. Well, you can also buy treasuries directly from the government. Those are individual bonds. You can buy individual bond loans from companies, you can buy bond ETFs. But you can also buy brokered CDs, it's another type of product that you can find sometimes, all of these kinds of products, they're a little bit harder to know what they are, you have to be more careful. And sometimes they're only offered to certain clients to get better rates. So we can, you know, in a future episode dive into why that is, but brokered CDs, that's what it is, comes through your brokerage. And there was an article recently that like they were offering 2% to just the bank clients, but through the brokered CDs, you can get four or 5% interest on again, those those six month or 12 month CD. So definitely quite a bit of interest. Finally, right, we've just gotten so used to getting paid nothing for saving. And so now I'm telling you go out there, find something that gives you 2%, 3%, 4%, 5%, you know, and is still very safe. Now, there's other ways of getting even more interest than that. Alright, but these are these are the products that are super safe, where you won't lose your principal. But you will also get that interest.

Matt:

And I could see why that would be attractive in an environment where we've had a fair amount of fluctuation in the stock market. And who knows what's going to happen with all kinds of costs, gas prices, I mean, look, one of the major impacts here is that, you know, we're seeing these rising interest rates, because the Fed is trying to get a handle on inflation. And that may push the economy which did grow in the third quarter it did, but it may push the economy into a recession. And the persistence of high prices means that the whole political climate, which is where I usually focus, my energies has gone, pretty sour, especially for the party that's in power in Washington. Who knows? You might not have to worry about any of this because the whole country may melt down we may have a change in political leadership back to a feckless maniac who has no respect for the rule of law. So I'm sorry to reveal a little bit of my own political preferences here. But I think there is a nonzero possibility that we may all be like in the movie The stand you know, we may be like forming a new Boulder, Colorado or something and going up against, you know, some some insane madman who has the bomb in Las Vegas, Donald Trump, done editorializing.

Mike:

So there's I'm sorry. And there's another there's another way that interest rates are affecting your life brought to you by Matt.

Matt:

It could be driving, it could be deranging you essentially. All right, look, we've got about two minutes left. Any thing else that you want to cover? I know we did a whole episode on what could happen to bond values, you might want to keep an eye on your portfolio. Anything else you want to hit?

Mike:

Yeah, those are the big ones. You know, people ask me a question. Well, I keep reading about interest rates, you know, like, what do I have to do? What do I have to know? And so I think those are the important ones the home purchasing the borrower, hey, I'm gonna borrow a mortgage, or I'm gonna borrow a HELOC, you know, for doing home renovation, just recognize that's a place that’s going to hit your wallet, you know, it's really borrowing costs have gone up. On the flip side saving, you know, if you have cash in the bank, you know, that's been earning nothing, please just take a look at that find a good safe place for putting that where you can get 2, 3, 4 percent, you know, you might remember that from a decade ago used to get actual interest payments, and they would be substantial, like they would actually mean something every month in your account. So go ahead and do that. And I will mentioned this when the stock market since you brought it up, stocks have not done well this year, right down 20-25% gone up a little bit recently. But don't sleep on that and say like, geez, I'm gonna get out of the market I'm getting, I can now get 3% or 4% by just you know, the safe, bonds, interest payments, don't get out of the market and think like, I'll just get the 3% or 4% You know, markets terrible, it's gonna go down after a 25% drop. The next five years, the average is going up over the next five years. So hey, we've you know, things are on sale now. Don't bail out. Now is the wrong time to bail out. So just be aware of that as well. Like you don't want to you think all the risk is now in stock market. It's so risky, because look what it's done. No, no, it was risky nine months ago. Now, that's not nearly as over with that.

Matt:

Right. All right, well keep taking a long term view. And Mike Morton, thanks so much for running through all of it.

Mike:

Thanks, Matt. Thanks for joining us on financial planning for entrepreneurs. If you liked what you heard, please subscribe to and rate the podcast on Apple, iTunes, Google Play Spotify, or wherever you get your podcasts. You can connect with me at LinkedIn for Morton financial advice.com. I'd love to get your feedback. If you have a comment or question, please email me at financial planning pod@gmail.com. Until next time, thanks for tuning in. This recording is for informational purposes only and should not be considered for investment advice or opinions expressed as our of the date of recording such opinions are subject to change we do not guarantee the accuracy or completeness of the data presented here!