Final Conference Notes

This week let’s get into our final installment of my conference notes. Hopefully some of these have been worthwhile. The content has been varied but our first few notes today are more like what you’d expect from a meeting of financial planners. The last note is a little different but, as with others in recent weeks, helpful with the human side of personal finance.

Social Security and Medicare –

If you’re already drawing Social Security you’re no doubt aware of the 8.7% cost-of-living adjustment this year. That’s old news at this point after a runup in inflation last year. But it’s important to note that this bump helps those waiting to start their benefits as well. And since SSI benefits don’t deflate even if the economy does, this raises the floor that all future inflation adjustments will be based on.

As a reminder, Social Security COLAs are based on changes in the government’s primary measure of inflation from October to October. Inflation peaked last summer at 9% and has been trending lower ever since, down to 4% in May. Assuming this trend continues we could be down to 2-3% by October and a net decline from a year prior, implying no benefit increase for next year. 1-2% per year has been more the norm in the past decade or so, but we’ll find out when the SSA makes its announcement in October.

Regarding the program’s health, current projections are for the Social Security “trust fund” to cover about 80% of benefits by 2035 while still supporting 74% of benefits by 2097. That baseline assumes, as I understand it, a benefit reduction starting in 2035. That’s not etched in stone, of course, just part of a long-range projection with a trajectory that could, at least in theory, be altered at any time by Congress.

This probably sounds obvious, but the younger you are the riskier it is to assume current levels of Social Security benefits during your retirement. Who knows what our elected officials end up doing regarding this issue, so it’s prudent to plan and save appropriately to nurture and eventually hatch your own next egg. Ideally, whatever you receive from Social Security down the road is a bonus, not something you’re relying on to make ends meet.

Here’s a link to the SSA’s website for details on these projections and the variety of proposals lingering in Congress to shore up the system.

https://www.ssa.gov/oact/solvency/index.html

The Medicare Part B monthly base premium is $164.90 per person and gets more expensive as your adjusted gross income rises to $194,000 for joint returns and $97,000 for single filers. Part B and Part D premiums max out at around $637 per person per month for households with over $750,000 of AGI. Base Part B premiums are expected to be about $175 per month for 2024, but the final number won’t be announced until November.

IRA Beneficiaries –

There have been a lot of changes in recent years to how inherited IRAs are treated. Most of the complexity relates to non-spouses who inherit an IRA. For example, before 2019 a popular option for beneficiaries was to “stretch” the account balance over one’s life expectancy. Doing so reduced the tax burden on distributions and, at least hypothetically, allowed the account to grow and pass to the next generation. Then the SECURE Act did away with this by capping the stretch period to ten years from the year following the original account owner’s death. And then at the end of last year the SECURE Act 2.0 added more complexity.

One of the lingering issues following these changes was whether someone inheriting an IRA had flexibility as to which year they took distributions during the ten years mentioned above, or if they had to start immediately. The IRS issued proposed regulations to clarify the “at least as rapidly” rule, so we now understand that if the original account owner was taking required minimum distributions, then so must the beneficiary during the ten-year period. This is a bit of a turnaround but comes on the heels of a Covid-era waiver period for missed beneficiary RMDs. So, if you missed taking an RMD due to this issue, now is a good time to get started.

Interpersonal Neurobiology –

Two financial “life” planners presented their very interesting work on integrating the research of Dr. Dan Seigel into the realm of financial planning. If you haven’t heard of Dr. Seigel, he’s a psychotherapist, author, and either the creator or a chief proponent of the field of Interpersonal Neurobiology.

Frankly, the details of IPNB are beyond me but the gist is a series of tools to increase self-awareness and empathy through regulating our emotions by understanding the signals provided by our body and mind. That’s sort of a mouthful and might sound a little woo-woo, but cultivating more awareness and understanding can be helpful in the fractured and fractious times we’re living through.

How does this inform my work as a financial planner? Essentially, the presenters suggested that we need to be able to master our own preconceived notions and fears about money, risk, and uncertainty, for example, before we can do a better job helping clients in these areas. Empathy is important, as is patience and the ability to link the interpersonal nature of our work to the technical stuff. Easier said than done, but it’s good to see these sorts of conversations happening in the context of a financial planning conference.

Here's a link to Dr Seigel’s “Wheel of Awareness” if you’d like to check that out. There are some guided explanations of these concepts that are similar to meditation.  

https://drdansiegel.com/wheel-of-awareness/

Have questions? Ask us. We can help.

  • Created on .

Conference Notes: Updates on Aging

Last week I mentioned some takeaways from two speakers at recent conferences I attended and this week I’m continuing that theme. Part of the reason I make time for these conferences is the variety of information we get to hear. It’s a lot about investments, for sure, but we also hear from cybersecurity experts, technologists and futurists, financial therapists and, for nearly four hours, updates on aging in America.

But before we get into that, a few people have asked about this week’s Fed meeting and whether our benevolent central bankers are likely to raise interest rates again. We’ll find out tomorrow, but the emerging consensus is that the Fed may hold off raising rates this month. The simplest summary of why this might be the case comes from JPMorgan and I’m including it and a chart below. The rest of my post follows.

On Wednesday, the Fed should provide more clarity on the trajectory of rates after vacillation in market expectations over the past month, which we illustrate in this week’s chart. As of Friday, the federal funds futures market was pricing in a 28% probability of a hike in June and a 54% chance of a skip in June followed by a hike in July. Since the FOMC last met, expectations have oscillated due to resilient growth, moderating inflation, diminished threats from regional banking turmoil, a solution to the debt ceiling standoff and mixed messages in the public pronouncements of Fed officials.

Given a gradual slowdown in growth and inflation and the fact that we have yet to see the full effect of the cumulative 500bps [100 basis points = 1%, so 500 bps is 5%] of hikes so far, the Fed would be well advised to pause at this point. Nevertheless, another hike is still clearly on the table and, if the Fed doesn’t hike this week, Chairman Powell will likely emphasize that skipping a rate hike now does not necessarily imply that the Fed is done raising rates. However, regardless of the Fed’s decision and messaging this week, we expect to see rate cuts within the next year that should improve the backdrop for investors across a broad range of assets.

Now on to the updates about aging in our country…

Carolyn McClanahan –

Carolyn was a family MD before becoming a financial planner and speaks about related issues from that unique perspective.

She’s an advocate for care planning since a lot of the problems faced by families with aging relatives could be avoided, or at least mitigated, by doing so. Waiting to plan makes just about everything more expensive, so start conversations early and write things down. These documents, even of informal agreements between family members, can help later when everyone is stressed.

Part of this means defining goals for care and understanding that those goals can, and often do, change. For example, how long does mom and/or dad want to stay at home? What resources (financial and familial) are available to support this? Who will take the lead on decisions and care, and are you planning to hire help? If so, get an idea of cost and plan for inflation. Earmark accounts and investments for these purposes.

The following site from Genworth is a good starting place to determine cost in your area.

https://www.genworth.com/aging-and-you/finances/cost-of-care.html

Are there sufficient resources? If not, start thinking about and planning for Medicaid assistance early.

Carolyn also talked about The Dwindles, or “failure to thrive”, that occurs in about 40% of elderly people. This can mean reclusiveness, lack of appetite and low energy, all of which makes caring for the individual more difficult and obviously impacts quality of life. This can be especially true for those widows and widowers living at home alone. Are they engaged with family and others? Who is measuring their quality of life, and do they have an advocate?

Carolyn spent more time talking about homecare and the variety of issues related to deciding to move into a more supportive environment. She offered this search tool from Medicare that shows homes and rehab services in your area.

https://www.medicare.gov/care-compare/?providerType=NursingHome

And this checklist helps with evaluating different types of facilities.

http://www.canhr.org/factsheets/nh_fs/html/fs_evalchecklist.htm

If your loved one has a long-term care policy, start the claims process early so as not to leave money on the table. There may be other benefits available, such as from the VA. Carolyn mentioned how some folks who served in Vietnam, for example, assume they don’t qualify, and nobody calls to find out. Other programs exist, such as SHIP and PACE in some parts of California, and those websites follow.

https://www.aging.ca.gov/Programs_and_Services/

https://www.npaonline.org/pace-you/pacefinder-find-pace-program-your-neighborhood

Andrew Carle –

Professor Andrew Carle, of Georgetown University, gave us a fabulous but at times bleak presentation on the future of aging. It’s a global phenomenon, with Japan and Italy listed as the #1 and #2 countries with the highest percentage of the population over age 65, respectively, but most of his talk was geared toward the US (we’re #36 on that list, by the way).

According to Prof. Carle, the three-legged stool of caregiving is collapsing. More households have both spouses working full time so there’s less time to provide care for aging parents. Additionally, roughly 20% of family caregivers are themselves over age 65 and 7% are over 75. And we’re over 4 mil short of professional caregivers. He discussed ways to address this staffing shortage, including pending legislation to incentivize entering the field, expanding legal immigration, and trying to keep older adults healthy and working longer (maybe even as professional/paid caregivers).

Carle’s other proposals included shifting away from seniors aging in place, which is inefficient for the healthcare system, to more facilities-based solutions that are easier to staff at scale. But he admitted that the industry needs to get away from the stigmas associated with “nursing homes” and build facilities people actually want to live in.

He said the assisted living industry is gearing up to offer more choice for seniors who want to congregate. These facilities will offer the same essential services but would be aimed at niche audiences, such as Asian-Americans, university alums, RVers, and even fans of The Grateful Dead and Jimmy Buffett. Some of these properties are quite successful, so more money is moving in this direction. These changes, Carle said, should accelerate as seniors demand better options for continuing care.

But since many seniors will still want to stay at home for as long as possible, the healthcare industry needs to help while not making the professional deficit worse. Along these lines Carle discussed the rise of what he termed “nana technology” to make care more efficient. Some of the ideas currently being researched by a range of companies and universities include:

Services that track medications and remind various contacts when it’s time to take a pill and if it isn’t taken. Apparently, medication-related errors are the primary cause of hospitalizations for those over age 65, so reducing this problem will take a load off the healthcare system.

Various gadgets and web-based services that track those with dementia/Alzheimer’s and alert a variety of people if the wearer gets outside of a predetermined range. Other services, such as Grandcare.com, track the wearer/user in their home and can provide telehealth services on demand.

Also mentioned were custom insoles for shoes that help with balance to avoid falls, and even exoskeletons from companies like Honda in Japan that greatly reduce fall risk. Researchers are also developing “i-textiles” that could serve all of the above functions while being worn like clothing. Apparently MIT is working on a version that will administer CPR if the garment’s sensors are triggered.

So, both of these speakers discussed the challenges of aging but there’s reason for optimism. Planning ahead can help alleviate a lot of stress down the road and various entities are trying to adjust and innovate to serve the aging population. There should be more choice in care options as time goes on and that should help keep quality of life higher for longer.

Have questions? Ask us. We can help.

  • Created on .

A Deal Reached?

Good morning and I hope you enjoyed Memorial Day. Since the late-1860s it’s been a day to remember those who died defending our great country, and sometimes while defending it from itself. Originally known as Decoration Day, the holiday honored Union soldiers who fought and died during the Civil War. It wasn’t until the early 1970s that Congress adopted Memorial Day in its place and the rest, as they say, is history. See, Congress can get stuff done when it wants to…

Fast forward to this past weekend when it was announced that Congressional leaders and the White House had actually hammered out a debt ceiling deal. That’s great news but much work remains in terms of whipping up votes needed to pass the bill. My understanding is that voting will take place this Wednesday evening so that members of Congress have time to read what they’ll be voting on. So we still have to wait a bit for final resolution to the current debt ceiling issue, but so far all this is good news.

What’s in the bill?

I’m attaching a link below to a Wall Street Journal article that does a good job of summarizing the details. To summarize further, it’s being reported as the debt ceiling deal nobody wants, but that gets the job done by kicking the can down the road until January 2025. Federal spending will be cut a bit for a time, with caps/cuts to military and non-military spending, the IRS’s proposed budget, a claw back of unspent Covid relief money, and other spending reductions. Work requirements were also extended for some federal unemployment benefits, and certain senators got the skids greased for their pet projects.

Here's the link I just mentioned.

https://www.wsj.com/articles/whats-in-the-debt-ceiling-deal-461b9822

There’s been lots of talk of specific X-dates for when the true deadline is for all this, and that date has been moving around a lot depending on the source. The most recent estimate is June 5th, but others suggest it could be later. Whenever it is, Congress should have enough time to get the deal passed and then, presumably, it would be signed promptly by the president, and we can all move on.

Here’s an interesting info-graphic from Barron’s on how a technical default might play out.

https://www.barrons.com/visual-stories/debt-military-pay-medicare-default-ff52b0e3?mod=article_inline

And here’s some information about the X-date taken directly from the Wall Street Journal for the sake of simplicity.

What happens on June 5?

If the so-called X-date arrives and Congress hasn’t raised the debt ceiling, the Treasury will have a series of bills it might not be able to pay.

For example, roughly $1 billion in Medicare payments and $1 billion in payments to military contractors are due on June 5, according to projections from the Bipartisan Policy Center. The government pays billions in bills every day.

Treasury has started working with federal agencies to adapt its payment systems in case it has to start delaying payments. The department hasn’t disclosed its exact plans, but one option it has discussed with other agencies would be to delay payments until the Treasury has enough cash for a full day’s bills.

Yellen had previously warned that the U.S. could run out of cash as soon as June 1. In a letter to lawmakers last week, she said the Treasury would be able to pay the roughly $130 billion due on June 1 and June 2, but she warned the department wouldn’t likely be able to make the roughly $96 billion in payments due the week of June 5.

Would the U.S. be in default?

It depends.

The Treasury won’t have to make any debt payments until June 6, when about $136 billion in securities mature, according to the BPC. Normally, the Treasury would simply roll over those debts by selling new debt. That is a routine process, but if it ran into problems and investors weren’t paid back on time, the U.S. would default on its debt.

A payment on the interest on the debt isn’t due until mid-June. Missing an interest payment would also constitute default. A slug of new tax revenue will also come into the Treasury in mid-June, when quarterly tax payments come due, easing its ability to keep paying bills.

If the U.S. stays current on its debt payments but misses other obligations, it is more complicated. Rating firms such as Fitch Ratings and Moody’s have indicated they would say the U.S. has defaulted if it misses payments on principal or interest on the debt.

Still, Fitch said it could downgrade U.S. debt because of any missed payment even if it hasn’t defaulted on debt.

Yellen has said that even if the U.S. stays current on debt payments, it would be in default if it failed to pay any bills.

“We will default on some obligation, and it’s really not an acceptable state of affairs,” she said last week.

Have questions? Ask us. We can help.

  • Created on .

More Conference Notes

In recent posts I’ve called out takeaways from conferences I’ve attended in the past month or so. Here are a couple more and, in the interest of brevity, we’ll look at the last few next week.

On Investing in China –

Andy Rothman is a strategist at Matthews Asia, a mutual fund company based in SF and known for specializing in financial markets of the Pacific Rim. Andy has been working in and on China for decades and talked about attending the first pop concert in the country by a western band, Wham!, in 1985 while stationed in Beijing with the State Department. His experience in the country is long and varied and gives him a unique perspective. Similar to Liz Ann Sonders of Schwab, Andy is someone to make time to pay attention to.

The title of his talk was “Xi Returns to Pragmatism”, a perplexing topic in the context of post-trade war, post-Covid, and post-positive working relationship with the US. Andy spoke highly of China and its people, emphasizing that as with here at home, much of the fiery rhetoric happens within the political class and state-run media, and isn’t necessarily reflected in the daily lives of typical Chinese people.

Andy spoke of how our economies are still highly (and positively) interconnected and how, according to his understanding through interviews with business owners and even higher-ups in the Chinese military, the government has no intentions of overtaking the US as a leading world power but wants to own its neighborhood. And it wants to have a greater voice in world affairs because, essentially, there’s more money in it. Pragmatism rules the day with President Xi, according to Andy Rothman, and not political ideology. And since Xi seems to have real staying power, his pragmatism should matter longer-term to the rest of us.

Andy made the point that, for long-term investors, China presents a huge opportunity. The country’s markets are underpriced after recent declines, but he talked about risks and suggested that much of the financial data coming from China is untrustworthy. Andy emphasized sticking with larger companies and said that stock picking with boots-on-the-ground research is key in sniffing out good opportunities. Obviously this can mean buying a Matthews fund or, perhaps also or instead, an emerging markets index fund to broaden your exposure. The biggest options in this space probably have nearly half of fund assets invested in China and Taiwan, so are simple and cheap ways to access Chinese markets.

All in, this was a different perspective regarding China than we hear in the news and that’s good. Real risks remain for investors and from a geopolitical perspective, but reality might contradict the mainstream narrative at least somewhat.

CA’s Energy Policy –

Severin Borenstein is a professor and economist at UC Berkeley and an acknowledged expert on CA’s energy infrastructure and policies. He sits on the board of the CA Independent Systems Operator, for example, and was an advisor to the Bay Area Air Quality Management District. You may wonder what a speaker like this is doing at a financial planning conference and so did I. That’s why I attended the talk. It was labeled an “Ask me anything…” sort of discussion, with few slides but a lot of good baseline information about the reality of the state’s energy priorities.

Borenstein painted a rather bleak (at times) picture of a state committed to decarbonizing its economy while suffering through household energy prices that are the highest in the country. The “leading edge and bleeding edge of technology”, he said. Gasoline prices are high but still too low compared to the societal costs of extraction and pollution. And he questioned the state’s ability to maintain a stable market as it attempts to phase out gasoline. (For example, refiners could continue to leave the state if conflicting priorities – “We want your product now but not forever” – make business planning too challenging and this would send prices even higher.) That, he predicts, will be awhile and wouldn’t impact sectors like commercial trucking and the airlines. He discussed how a “mystery tax” of perhaps 40 cents per gallon adds billions of extra cost per year on top of other taxes and surcharges. He thinks this money is simply going to the oil companies and said that the state will soon investigate the cause of the mystery tax. Okay...?

Borenstein went on to discuss natural gas prices and how those are also high, mostly because of additional costs baked into monthly bills. Fire-related infrastructure improvements and policies and programs associated with the “electrify everything” movement might be 2/3rds of your bill. He suggested that Californians often pay 50 cents or more per kWh when most of the rest of the country pays less than half that. This is a form of regressive tax disproportionately impacting lower income households and he discussed how we got to this point via legislative decisions. The details are beyond the scope of this post, but it’s fascinating.

The professor alluded to an eventual reprieve offered by new technologies, but much of that looks to be well off in the future. If anything, costs could rise as the state continues toward decarbonization.

The subtext of all this in a room full of financial planners, most of whom live and pay in CA, was one of frustrated acceptance. I don’t know how else to describe the outlook except, as I mentioned above, rather bleak cost-wise, especially for lower-income households and people living on a fixed income.

Have questions? Ask us. We can help.

  • Created on .

Conference Tidbits

Well, consider that a bullet dodged. You’ve likely heard by now that President Biden signed the “Fiscal Responsibility Act of 2023” into law this past weekend. Among other things the bill suspends limits on federal borrowing until January 2025. We can debate if not having a debt ceiling is fiscally responsible but it’s a big win for the markets and the broader economy at least in the short-term.

I was following these developments while at another conference last week. This time it was the Financial Planning Association’s “NorCal” conference at the Palace Hotel in San Francisco. Attendance was high at this in-person event and the educational content was outstanding, broad in topics, and appropriate for the times.

I still want to bring you some tidbits from the other conference I attended earlier in May, but the debt ceiling debate got in the way. Since that’s in the rearview mirror, over the next few weeks I’ll share takeaways from speaker sessions at both conferences.

Stephanie Kelton – You may recall from early in the pandemic that I wrote a post about The Deficit Myth, a book by Stephanie Kelton, a PhD economist at the forefront of a movement to reset how we think about government debt and deficits. Her book was published as the pandemic started raging and governments around the world were hastily preparing massive spending programs. At the time the book and its ideas seemed to offer cover for limitless government spending. But of course it’s always more complicated than that.

Back then I participated in a study group based on the book and comprised of financial planners. We met virtually with Kelton and others in the Modern Monetary Theory cohort and got a crash course in MMT. Fascinating and timely for sure.

The years since have come to be seen as a real-world test for MMT theories, so it was a great opportunity to hear directly from Dr. Kelton. Essentially, the idea is that the federal government issues its own currency and, because of this, has the power to do so indefinitely at any amount that can be absorbed by the economy. Too much too fast and we have inflation. Too little or with too many constraints and we have an unnecessary recession. CPI rising faster than it had in decades and peaking at over 9% a year ago illustrates the first point and, fortunately, with the debt ceiling deal we won’t have to worry about the second point for a while.

There’s a lot more to MMT and Kelton was quick to remind conference attendees that the theory wasn’t (and still isn’t) meant to be prescriptive. Instead, MMT is a different lens to look at our monetary policy and economy through, she said. For example, the federal government doesn’t need to manage it’s spending as if it were a household, but we continue to pretend it does and this limits our potential.

There’s more about all this in her book. I’m still willing to buy it for you if you’re interested, not as a political statement or anything like that. Instead, this is foundational information to have on hand when listening to and thinking about our debates around the complexities of government spending.

Liz Ann Sonders –

Liz Ann is Schwab’s Chief Investment Strategist and, say what you will about her employer, she’s the bomb! I always try to make time to read Liz Ann’s commentary, and I definitely make time to hear her speak live.

Liz Ann had some interesting thoughts to share during an hour+ conversation with a moderator that served as a breakfast keynote. She’s constructive on where we are in the economy and markets but mentioned, as we’ve discussed in other posts, how we may actually be in recession now although it may not be “called” until later. This could end up being a so-called soft-landing where the economy, on average, experiences a mild recession while some sectors get hit harder.

Liz Ann also talked about how stocks are up so far this year but a relative few are holding up the market. This outperformance is being driven by multiple forces but the upsurge of interest in AI is paramount. The players in this space are often referred to as “tech companies” while, technically speaking, the companies are found in sectors like Communication Services, Consumer Discretionary and, of course, Technology. She talked about how investors often buy the label when buying investment funds and sometimes chase tech and other aspects of the market without realizing they’re not getting the exposure they intended.

On AI specifically, Liz Ann offered the destabilizing force as an example of how change and volatility are likely to be heightened for a while, and the rate of change is faster than we’ve experienced in a long time. This is uncomfortable for most of us but much about AI should prove beneficial. She isn’t overly concerned about the technology’s threat to humanity and hyperbolic stuff like that, but she did mention being taken aback by a recent report from BCA Research suggesting there’s a 50/50 chance that AI wipes out all of humanity. Sobering talk over breakfast, for sure.

Here’s a link to a short CNBC interview with the BCA analyst: https://www.youtube.com/watch?v=9VOuCcEORsM

But the rise of ChatGPT, Bard, and Midjourney as a Terminator movie wasn’t Liz Ann’s main point. She was optimistic (correctly, as it turned out) about the debt ceiling debate, the economy, and markets even while expecting a mild recession and prolonged volatility. And she was optimistic about investing. Liz Ann has long been a proponent of keeping a level head during turbulent times and remembering how the process of investing is like running a marathon and not a sprint. That’s always good advice.

As I mentioned, barring major developments in the coming weeks I’ll plan to share more conference tidbits with you. Those include a couple interesting sessions about aging in America, our healthcare system, and the outlook for assisted living in our country.

Have questions? Ask us. We can help.

  • Created on .

Should You Refinance Your Mortgage?

Should I refinance my mortgage now? That’s a question I’ve heard a few times lately so I’ll address it here too in case it might be helpful. Deciding to refinance can be complicated and too much analysis can lead to paralysis, so let’s walk through some of the steps.

First you’ll want to find your note. This document lays out relevant details like the term of your mortgage, the interest rate, prepayment penalties, if any terms are adjustable, and when payments are due. Logging into your current loan provider’s website is good, but reviewing the note is best.

Once you have a handle on the relevant details, jump online to quickly see what’s available.

Bankrate.com is a great resource for this. As of yesterday, their site listed the national average for a 30-year fixed rate loan at 7.14%. The Wall Street Journal is often the go-to source for this type of data, but Bankrate is free and a little more user friendly.

In general, mortgage refinance rates are a tad higher than rates to buy a home, but both are twice as high as they were a year or two ago. So, in a sense the answer to the “should I refinance now” question is simple: no! You shouldn’t refinance if your current mortgage interest rate is less than 7%. And if you refinanced or bought a home within the past few years or so your rate is likely to be very low already. Actually, you could think of any long-term fixed rate below, say 4%, as being like an asset even though it’s technically a liability.

That part of the answer seems obvious, but what if you need to refinance? Maybe you have an adjustable loan that has been resetting higher as rates have risen and you’d prefer to lock it in. Or maybe you need extra cash and see your home’s equity as the answer.

Assuming one or both are true, here’s some thoughts on evaluating your options.

Expectations are all over the place in terms of whether rates rise from here, stay about the same, or go down. There are so many variables that, frankly, it’s simplest to just go with what we know today.

We know that rates are high compared to recent history but, according to government-sponsored-entity Freddie Mac, the 30-yr mortgage rate has averaged about 7.5% since the entity was created by Congress and tracking began in the early 1970’s. Rates hit their modern-era highs in 1981 with an average of nearly 17%. And I recall buying our first home in 1999 and borrowing at, coincidentally, the long-term average. Maybe that historical perspective makes today’s rates a little easier to swallow, but probably not by much.

Assuming you’re pushing ahead, an important next step is trying to guesstimate the appraisal value of your home. Sites like Zillow and Redfin are good starting places but focus on recent comparable sales in your area while looking at your “Zestimate”. I suggest being conservative.

Once you’ve looked at current rates and have done some market research on your house, you’ll want to talk with perhaps two different mortgage providers. You can start with your bank or credit union, or even your current lender. I like Rocket Mortgage because their website is straightforward, they’re fast, and they have access to a wide range of loan programs. Then reach out to a local independent mortgage broker for comparison because brokers sometimes have access to more loan programs than a larger lender can.

During these conversations you’re trying to get beyond the hypothetical and understand what you qualify for. This will primarily be based on your house’s value (again, be conservative), your current debt load, your income and, of course, the mortgage person will need to check your credit. Let them because that way you can talk specifics. Just don’t run around all over town having a variety of mortgage companies checking your credit. One or two are fine and won’t impact your credit score much, if at all. At this point you’ll know what your options are, and you’ll have a good idea about costs, both upfront and monthly.

Maybe your financial situation allows for rates and terms that are better than the national average, or it could be the opposite. Either way, pay close attention to the various fees involved with refinancing as some loans can be very expensive. The simplest approach is to evaluate the annual percentage rate, or APR, of a particular loan offer. The APR bakes in lender fees, points, various closing costs, and is usually higher than the interest rate because of this.

For example, Bankrate shows the lowest rate option for a 30yr fixed rate refinance at 5.5% and an APR of 5.74%. How is that possible when average rates are nearly 2% higher? Points. This lender requires you to pay about two percentage points of the loan value as an upfront fee to “buy down” the interest rate. Another lender offers a rate of 5.99% and an APR of 6.174%. Paying points buys this down too and the jump in APR includes additional closing costs of around $6,000. I’m generally against paying points unless you can easily afford it and you plan to own the home for a long time (at least to the breakeven point that your mortgage person can help calculate). So try to look for programs that don’t require points, or maybe a fraction of a point would be okay; just try to keep a lid on costs.

I suggest being skeptical about the lowest APRs because they sometimes aren’t even possible for your situation. The overpromised/underdelivered feeling can be a real pain when it comes to refinancing. In my experience it most often occurs when using overly optimistic assumptions about your home’s appraised value and working with an indulgent (or willfully naive) broker. Again, be conservative and try to understand what value range you need for a given loan program. A good mortgage broker should help here, especially since they often need the loan to close in order to get paid.

Ultimately, deciding to refinance is a tough decision that’s often made simpler by your circumstances. But once you’ve decided, carefully evaluate which loan program is right for you and your family. Look at APRs while reminding yourself that the lowest may not be the best. Think about complexity. I’ve left out discussion of adjustable mortgages and other options because they’re usually not a good idea. Keep your refinance process and all your debts, for that matter, as straightforward and inexpensive as possible.

Have questions? Ask us. We can help.

  • Created on .

Contact

  • Phone:
    (707) 800-6050
  • E-Mail:
    This email address is being protected from spambots. You need JavaScript enabled to view it.
  • Let's Begin:

Ridgeview Financial Planning is a California registered investment advisor. Disclaimer | Privacy Policy | ADV
Copyright © Ridgeview Financial Planning | Powered by AdvisorFlex