What To Do When Rates Drop – Episode 589

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, on this episode of the podcast, we’re going to be talking about mortgage rates. If you’ve followed the financial news, you’ll know that they’ve dropped. They are not what they were. The people are still asking, should they refinance? Kim, the cool thing is you’re not a mortgage broker, so you can shoot us straight and tell us exactly what you think. So paint the picture for us. Absolutely. It is so funny for me to watch and listen to what the press is doing with this. You would think mortgage rates were at 2% for all the commentary that’s around about mortgage rates have dropped. Good heavens. Don’t they have something better to report on?

[00:47] Nevertheless, I’m grateful that they’re in the sixes. I mean, that’s certainly better than the high sevens where they were. As we’ve stated on our podcast before, we have, we, my husband, who’s way more analytical than I am, have used 8% as a dividing line forever. And I can remember when I was, I believe, right out of college, so this would have been late 80s, early 90s, somewhere in there, mortgage rates were like 9% or 10% or even 11% or 12%, and of course, you know, previous to that, there were times when the mortgage rates were in the teens. And there were still people buying homes. And what we forget, and of course, our financial memories, like less than seven years or something, is that everything else was at a higher rate also, so they

[01:36] didn’t seem so out of whack. And without getting into political commentary, it’s, of course, very unfortunate that the rates get played with the way that they do. Nevertheless, if we’re sitting here today and you’re looking at a mortgage that is either a refinance opportunity or a new purchase, you can be thrilled with a 6.5% rate. I actually have a 6.5% rate from a mortgage that we did, I don’t even remember, maybe five, six, seven, eight years ago, and getting a 30-year fixed at anything below 8% is a fabulous loan. And one should put that rate on the table and lock it in for 30 years and be as happy as a clam. Now, of course, if we get into a period that brings you down to maybe 4% again or something, you know, if the rates get that low again, then you can

[02:34] look at refinancing and again locking it in for a 30-year fixed. This is not a time to play with variable interest rates, in my opinion, at all, not when you’re dealing with something like a mortgage, even if you know you’re not going to be in that house for the full 30 years. Having that 30-year fixed at 6-plus percent is a fabulous opportunity for people for either primary residences or second homes or, if you can get it, investment real estate, you know, that’s always trickier when it’s not owner-occupied. You know, you’re mentioning anything below 8, and what’s remarkable about that is you’re talking about locking that in. And for, you know, some of our listeners that are having just got their first

[03:22] mortgages and they’re at 3%, 4%, 5%, they’re like, what? And for us that have, you know, had mortgages for years, we’re like, no, this is really not that bad. But there’s another product out there that you can lock in with your health. So talk about that product. How did these two match up, and why is it that the timing on that is somewhat similar to timing on a good mortgage? Well, it is because of the longevity of our lives, our homes, and what we want to be doing with our money. So setting the typical retirement space aside and just looking at a 30-year period of time, which is really valuable for whatever reason, maybe because there’s usually three of them in our lives, 0 to 30, 30 to 60, 60 to 90, because 30-year mortgages are 30-year mortgages,

[04:21] because life insurance, which is the product that you brought up, should be analyzed over 30 years at a minimum just because of that time frame being a good, solid thing with which to make lifetime decisions about. And this is a challenge. Us human beings, we tend to think very short-term. Our terms are getting even shorter as we go, and our attention spans, of course, getting shorter. Our ability to really look out in the future is very impacted by the pace of our lives, and everything is just swirling around. I mean, I look at my kids who are in their late 20s. So again, approximately 30 years ago, I was in the space of having two young children under the age of a year and eight days, because that’s how old apart

[05:14] they are, and life insurance and mortgages are not only things that can really serve us well over that 30-year period of growing wealth or building wealth, but both of those products, life insurance and mortgages, and I’m talking about whole life, term insurance as well, but a permanent product that’s going to be there when you die, serve us very well during the distribution side of wealth, so just 60 to 90. Not that people should retire at 60, but that third 30-year period, if you will, because of the guarantees that each of those products have. And actually, real estate and life insurance have a lot in common anyway, but one of the things that is very interesting is that both of the rates are considered fairly low right now.

[06:08] So if you can apply and get approved, which is the health issue that you brought up, for life insurance, you’re going to see dividend rates in that mid-5% range at a gross level, and that’s a fairly low interest rate, just like you would look at mortgages and say that mid-6% is fairly low in the big scheme of things. What’s very interesting is that both of these products are actually benefited by inflation. So what I mean by that is let’s pretend that you have a, I don’t know, $5,000 a month mortgage payment, which would be on maybe $600,000 total mortgage, so $5,000 a month, principal and interest. If you are writing a check 30 years from now for that same $5,000, the check is going to save $5,000, but based on just kind of a reasonable

[07:12] interest rate, and I should actually probably do this calculator real quick so that I don’t misquote that, I’ll grab that number in a minute, it’s going to feel like a very different number, even though the piece of paper called a check or the automatic, you know, who knows, we may be sending smoke signals to move money around 30 years from now, but the piece of paper that’s the check is going to feel way, way different than the $5,000. The same is true on a life insurance premium. So let’s say that you commit to that same $5,000 a month. That would be for somebody that had a pretty decent income, but let’s just say you committed to the same $5,000 a month for your life insurance premium, the contribution that’s going

[08:05] to build the asset called cash value. Well, that too is going to be benefited by inflation. So much so that I used a present value calculator off the Truth Concepts suite of calculators. You have to use present value to figure out what is that dollar figure going to feel like when we’re impacting it by inflation. It’s 2,060, 2-0-6-0. So while I’m writing a check for $5,000 to the life insurance company or the mortgage company, it feels like $2,000. That’s amazing. You know, most people aren’t using present value, so that’s why they can’t get this. And then, as you mentioned earlier, most people aren’t thinking with a 30-year horizon. They’re trying to win the next Dogecoin in like three months

[09:03] or run the pump on GameStop or whatever else it would be, and they’re burning and crashing. So I actually want to pull a couple of parallels, and I’m going to put you on the spot a little bit. So 30 years ago, did you know that you wanted to do something with finance? Oh, yes. 30 years ago, I was in my mid-20s, and I had already been helping people with their personal finance. And while I’ve had challenges and lost money and had amazing years and extremely frustrating years like any business does, I’ve loved every minute of it. OK. So you knew the big bucket chem finance helper. And then, did you know the individual products or have those products changed over the years? So in the 30-year time frame,

[10:04] I want to think about this exactly. So from 90 to 95, I worked with a whole bunch of products all over the board because I was learning. But by 95 and 96, I had narrowed it down to essentially what I’m working with today in an arena that has not changed, which is the whole life insurance space from a mutual company like Guardian or MassMutual or New York Life or New York Life or Northwestern Mutual or those types of companies. And looking at real estate, either primary residences or investment real estate. OK. Did you have clarity personally that you wanted to have wealth and to be able to use that wealth? And wealth is relative, so we’re going to tie wealth with freedom, flexibility. Did you have clarity that’s something you wanted?

[11:03] Well, it is interesting because from basically 88 to 90, which was right after college for me, I was in a position in a bank that put me in front of fairly wealthy families, people that use the trust company at the bank, people that were doing commercial loans so they had businesses or they had large investment real estate deals like apartment buildings or hotels or that kind of thing. And because I got exposed to that at a fairly young age, even though I came from a family of teachers, grew up on a farm, had a very simple upbringing, because of that exposure to wealth, I saw the freedom, the flexibility, the opportunities that created for those families. And so yes, without a shadow of a doubt,

[11:50] my desires rose to accommodate that vision for my life. And of course, it’s taken different turns and looked different all along the way. But the vision has always been there. Because with money freedom comes time freedom. And that enables us to do so much good in the world, whether we’re helping people with what I consider my day job that I love, which is helping people with their money, or maybe an extra project on the weekends where I’m helping somebody in the community or doing something on our farm that’s beneficial or what have you that’s not per se earning an income at all. OK. One last question, curve ball. I think I know the answer. Did you know that you wanted to have an alpaca farm

[12:36] 30 years ago? No, but I did recall very specifically when I got a chance to move back into a rural community that I wanted animals, like with a big A, because I’d had a cat when I lived in a city. And that was fun. I loved my cat, but it didn’t really count. So now we have four cats. And we must have barn cats, right? So milk cows were no longer an option. I can tell you that was way too big of a commitment. And we didn’t want beef cattle because they are also a very big commitment. Alpacas are light, easy to care for, fluffy and cute. I mean, how can you go wrong, right? The cute factor skews the whole equation. It’s like there’s so much cuter. It’s like, oh, I’ll put up with this. So I ask those questions because of this.

[13:33] 30 years ago, you knew you wanted wealth and flexibility. 30 years ago, you knew you wanted to help people. 30 years ago, you had clarity on products. And there’s a few products that have changed. For our listeners that are thinking about a mortgage and they’re saying, oh, the rate’s too high. Oh, the rate’s too low. Their time horizon’s too small. And for listeners that are sitting there and freaking out about the market, well, they haven’t had 30 years like you. So they’re, again, their vision is too small. And so one, using a calculator, like truth concepts with the present value, looking at the real numbers, like I thought it was an interesting conversation to be able to extract out of you and say, okay,

[14:20] there are some things that will stay the same. There are some things that change. One, have a person that you can have financial conversations with. So let’s go back to 30 years ago. What does Kim today give one line or one paragraph to Kim 30 years ago? And that’s how I wanna wrap this. Well, I’m gonna beg for two because one is directly related to the real estate, which is if you have an opportunity to buy a home today and maybe it’s not investment, maybe it’s more primary residence space, don’t turn away from it because you think that the values are high because the product that you’re selling, the primary home maybe that you’re selling is also high. And so that’s so important to remember that.

[15:15] And then the second that I wanna say that I have just learned so thoroughly is don’t lose principle. We take on risk thinking that we’re gonna get this amazing reward and we forget that taking on risk means a chance of loss. And I have seen so much money lost over 30 years that was unnecessarily risked and I don’t want people to experience that. That is some solid 30 year wisdom. Kim, thanks for sharing that today. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit ProsperityThinkers.com.