Get Personal Finance Insights on: Mortgages, debt, inflation, and student loans
I'm very happy to welcome back my friend and former cohost, colleague - Isabel Barrow, Director of Financial Planning at Edelman Financial Engines. Isabel, as you know, is more than 20 years in the field. So, Isabel, it's always good to see you. Welcome back to the show.
Isabel Barrow: You, too, Ric. Thanks for having me.
Ric: So the subject of today's conversation is mortgages and debt. We are seeing rising interest rates, of course, and this is a real challenge for people that are looking to buy homes. The biggest issue, of course, are people who bought a home, you know, four or five, six months ago when it's under construction, it's being built. They're going to deliver the house in the next month or two. And you're now ready to lock in your mortgage. But the mortgage rate is a lot higher than it was when you bought that house a long time ago. So what do you do if you're in that kind of a scenario?
Isabel: You may have to pivot somewhat in thinking about what else you may be able to afford in that budget. You know, maybe not going for the higher end granite or making some decisions that you may not want to make right now, that you may have to think about pivoting somewhat. But in the scheme of things, we are still in a relatively low interest rate environment.
Ric: And therefore people should still go in with the attitude of getting a big, long mortgage.
Isabel: Well, I think certainly for most that does still make sense, as you know, I mean, you've been talking about it for 30 years. It can be a little foreign to people who have gone about their lives thinking that debt is bad, debt is bad, debt is bad. And for the most part, debt is bad. Right. But when it comes to a mortgage, a mortgage is the one thing where you can lock in at a relative terms low fixed rate. A loan that can allow you to utilize your money to do other things where you may presumably be able to earn more over the long-term. I think that given the interest rate environment, we're still in a place where that big, long mortgage makes sense.
Ric: The most important point here is that a big, long mortgage does not mean a big, expensive house. You should get a price of a house that you can afford. Too often people think that just because they can afford a big mortgage means that they ought to go use it to get as expensive a house as possible. That's where I think a lot of people get into trouble.
Isabel: Well, they get into trouble there, certainly. But also you have to know yourself and what kind of a spender you are. What are your spending habits? What are your debt habits? Because I think also it's easy to say, oh, I'm going to get a mortgage and I can afford this house, I can afford this payment. But if you're not thinking ahead as to what potential changes in your life might be coming, like how secure is your job? Are you planning on having a baby? Can you still afford that house if one of the spouses doesn't go back to work? It's not just about the mortgage itself. It's about your entire financial picture and making sure that all these pieces fit in, not just now, but also in the future.
Ways to strategically use debt to your advantage – as you work with your financial planner
Ric: And it's tempting, isn't it, to get a big fat mortgage, or for people who already own their homes and they look at the home equity because home values have risen dramatically in the past couple of years, that they now have a lot of equity in their home that didn't exist in 2020, and they're tempted to pull that cash out of the house and do a home equity loan. Talk about that.
Isabel: You know, I think that can make sense in some circumstances. So when it comes to debt, you have to really think about strategically, what does it mean for you in your financial planning situation if you are not going to actually be able to save the money today in order to have that down payment or save the money today to make the purchase, then what makes you think you're going to be able to have the money in the future to pay off the loan? You know, looking at things through sort of a silo of, okay, well, maybe it's a $400 a month car payment. I can afford that today. But what happens in nine months if your credit card bill is now at 20% and you haven't been able to pay that, you know, is your car going to get repossessed? Are you still going to be able to make those payments? So all of this as it relates to debt and strategically using debt to your advantage, but also making sure that you're managing the risks that that you could face by taking on more debts. That all has to be a conversation you're having with a financial planner.
Isabel: And, Ric, it's not always just the doing it that solves the problem. Right? You can make the payments. You can get a credit card paid off. You can get the car loan paid off. But if your mindset about spending hasn't changed, then if you are someone who is used to being in debt or is running big credit card bills, that's sort of an emotion that's sort of a fundamental problem that is more related to sort of emotional health than it is related to what you can actually accomplish. You have to look at what are the underlying issues that are causing you to overspend and can I fix those? Because if you just fix the credit card problem and then you go out and take a loan against your house to do some other projects, you're just going to build up credit card debt again in the future. So I think that's a problem that people who are comfortable carrying lots of credit card debt can continue to run into is that you tackle one thing at a time, you get that done, but it just runs up debt somewhere else.
Ric: You mentioned the importance of working with a financial adviser. I couldn't agree more because when you're dealing with a planner, they can help you look ahead, look forward. As you said, it's so important not just about the decision you're making today, but the impact of that decision years from now so that you're anticipating the commitment that you're making and whether or not you're going to be able to sustain that and whether it's going to harm you down the road as things in your life change. One fascinating development that we're beginning to witness just now, it's slowly starting to emerge as there's conversation at the federal government to restart the obligation of those with student loans to pay that monthly debt. I mean, we have been on a moratorium since the pandemic began over two years ago. People were told by the federal government; you don't have to pay your student loan payment. Well, that has saved people hundreds of dollars a month. Simultaneously, the government sent stimulus money of tens of thousands of dollars to those same people. So these folks were in this fascinating scenario of 'I don't have to make a payment of hundreds of dollars a month that I used to have to make. And the government is sending me hundreds of dollars a month they weren't sending me in the past'. And what did they do with the newfound money? They started buying more things and they just created a new level of debt. I went and bought a car. I bought a big house. I did whatever it is I did. And now as they're going to have to start repaying their student loan debt, they're realizing, oh, I'm not getting government stimulus money anymore. I've already taken the money I was using for student loans and I've incurred new debt somewhere else. And now my student loan debt is starting all over again. A lot of people are going to be finding themselves in a bit of a mess because they didn't work with a financial planner who could have prevented and protected them from getting into this mess.
Isabel: Well, exactly. And, you know, for our clients, if you had a student loan debt outstanding, we were reaching out and saying, hey, look, we need to take as much money as possible and get those things paid off, right? If you get stimulus check, if you're getting a tax refund, now is the time to tackle those student loans, because what better time than now when you don't have any interest payment? 100% of it is going toward your principal. So we were really kind of aggressively encouraging our clients, those who have student loan debt, to get that paid off in anticipation of the fact that it was it wasn't going to last forever. And you're exactly right. With our clients, we actually have a service that we can utilize called Savvy, that we will help and encourage our clients with student loan debts to utilize that will go through and help them understand what do we pay off and how what grants, what may be available in terms of forgiveness programs, etc.. So don't feel like this is something that is so overwhelming you can't get out of it. But also, if you haven't taken on student loan debt yet and you're thinking about it, this should be a good example for you as to why not to do that or why to keep it as minimal as possible.
The impact of rising interest rates on your financial planning
Ric: One final question for you, Isabel. Given what's going on with interest rates, you know, they're high rising and they're going to be continuing to rise for months to come. Does that alter anything in the financial planning or investment management process?
Isabel: Well, I mean, it certainly does as we think about what big expenses you might have coming up. So, for example, you made a point earlier, earlier in our call that if you put a down payment on a new construction home six months ago and now your prices for products, for the mortgage, for everything has gone up. How might that look six months from now? So if you're thinking about buying a car right now or buying a house, prices are really, really high and the interest rates are only going up. So it may be something that you need to consider. Is now the right time to do that? If we are looking at a rough road ahead of a recession or a continued pullback in the market, what does that mean for your job and for assets that you may have available for these big purchases? So I think that, again, this is an example of why you should talk to your advisor before you make these types of decisions. And it doesn't mean you can't do it, but it may mean you need to plan a little bit differently. It may mean that you need to change course somewhat.
Ric: And helping you do that is exactly what a financial planner does. And that's why I encourage you to call Isabel or one of her colleagues at Edelman Financial Engines. And the best place, Isabel, for people to be able to reach you?
Isabel: The best way to reach us at Edelman Financial Engines is 833-Plan-EFE or PlanEFE.com for access to our website, where you can go and request a meeting or conversation with an advisor.
Ric: That's Isabel Barrow, Executive Director of Financial Planning at Edelman Financial Engines. Thanks for being with us, Isabel.
Isabel: Thanks, Ric.
Ric: Isabel and I actually chatted for over 15 minutes. If you'd like to read, watch or listen to the entire conversation, just visit us at TheTruthAYF.com. Stay with us for more here on The Truth About Your Future.