What does the Fed actually do? And should you care?

The Fed lowered rates last week.  What does that mean and should you care?

The Fed's job is to 1) keep people employed and 2) keep inflation in check.

They do that by raising or lowering interest rates. 

If they raise rates, they cool down the economy. Overheated economies get too far over their skis which leads to recessions.

If they lower rates, they heat up the economy.  Cold economies (aka recessions) need a little kindling.

But it's like driving a cruise ship.  The effects don't trickle through the economy for 12-18 months.

Last week they lowered rates.  But not because of a cold economy.  They lowered them because the effects of raising rates last year have trickled through and they decided it was too much. We weren't as far over our skis as they thought.

So what does that mean for you?

The bad news is you'll earn less interest in your savings account. Whomp whomp. The good news is you can potentially refinance your mortgage at a lower rate.  Woohoo!

The really good news is that refinancing locks you into the lower rates.

Click here to see to compare mortgage rates and see if you could take advantage. Then talk to your financial planner to see if it makes sense for you.

(And if you don't have one, then contact us. We'd be happy to help.)

DISCLAIMER: This publication is for educational purposes only and should not be considered financial, tax or legal advice. These statements have been simplified for illustration purposes. Consult your financial planner or tax advisor for help with your specific situation.


Which Mortgage Should You Get?

Wanna buy a house?  Then you'll have to borrow some money.

But which mortgage is best for you? 

For your forever home, get a 30-year fixed-rate mortgage.

For a temporary home, get an adjustable-rate mortgage (aka ARM).

An ARM will have a lower interest rate and lower payments than a fixed-rate mortgage, which is what you want if you're definitely selling within 10 years.

Lower interest and lower payments sounds good.  So why not get an ARM for your forever home? 

Because the interest rate on an ARM "resets" after a short-time period.  For instance, a 10/1 ARM locks in that low-interest rate for 10 years.   After that, it adjusts every year based on interest rates at that time. 

Currently, interest rates are at all time historic lows and can only go up from here.  So whether your ARM resets or you refinance, you can bet you'll pay a much (much?) higher interest rate in 10 years.

If you find your forever home, lock yourself into a nice, long 30-year fixed-rate mortgage.  You'll take full advantage of these once-in-a-lifetime low-interest rates.

Talk to your financial planner before taking out a loan.  This stuff is more complicated than I'm making it and only your financial planner will be an objective third party (your mortgage guy earns a commission on your loan, which could be a conflict-of-interest).  

Don't have a financial planner?  Then check us out.  We're the only financial planning firm exclusively for young families.

DISCLAIMER: This publication is for educational purposes only and should not be considered financial, tax or legal advice. These statements have been simplified for illustration purposes. Consult your financial planner or tax advisor for help with your specific situation.

Should You Pay Down Your Mortgage?

No.

There's only one reason to pay down your mortgage - you can afford that luxury.

Interest rates are still at historical lows. A 30-year fixed is at 4.125%. When you bake in the mortgage interest deduction, the rate is closer to 2.5%.

So when you pay down your mortgage, you are locking in a 2.5% rate of return.

Where will that money come from? From under your mattress or from your long-term money?

If you're doing it right, your long-term money should earn 7-10% (depending on if you're invested conservatively or aggressively).

What sounds better to you? A 2.5% return or a 10% return?

Now if you're so rich that your college and retirement (and vacation home?) buckets are already filled and you really don't need that extra 7.5%, then by all means chip away at the right side of your balance sheet.

But if you're like the rest of us, you probably can't afford to throw 7.5% out the window.

Of course there are exceptions to the rule, so talk to your financial advisor. But start with the premise that you want a nice, looong, low-interest mortgage that you don't pay down a penny faster than you have to.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Is Your Home a Good Investment?

We're talking about your primary residence.  Where you watch your kids grow up.  Where you have your friends over for dinner.  Where you watch America's Got Talent every Tuesday.

Is THAT a good investment?

And we're not talking about the pride of ownership.  Or the fulfillment of providing for your family.  Or the sentiment of all the memories you've built inside those walls.

We're talking cold, hard cash.  Dollars and cents.   Is your home a good financial investment?

To answer that we need 3 things:

1.       The increase in your home value

2.       Inflation

3.       Comparison to other investments

Let's look at the last 30 years.  Below is a chart mapping average home prices from 1988 to today for the Bay Area (Go Giants!) and the country:

image001.png

If you bought a house in the Bay Area in 1988 for $79,000, it'd be worth $390,000 today!  Not too shabby!   That's nearly a 500% total return!   That's an annualized return of 5.4%!

If you bought a house in Anytown, USA for $86,000, it'd be worth $248,000 today!   You tripled your investment!  Yay!!!

But what about inflation?  Whomp whomp.

Inflation has been roughly 3% per year since 1988.  When you factor in that a dollar today is worth much less than a dollar in 1988, the picture's not so rosy.

image002.png

If you bought a house for $101,000 in the Bay Area 30 years ago, it'd be worth $233,000 today in 1988 dollars.   That's a whopping 2.8% annualized return.  Boo!

If you bought in Anytown, USA for $111,000, it's now worth $150,000 today in 1988 dollars.  That's a 1.0% annualized return.   As the leader of the free world would say - SAD!

Finally, let's compare what the inflation-adjusted returns of the S&P 500 has done over that time frame.

Since 1988, the stock market has returned 7.6% annually (vs. 2.8% for a Bay Area home or 1.0% in Anytown).  That's adjusted for inflation and assumes you reinvest dividends.

If you forget inflation, it's annualized return is 10.4% (vs. 5.4% for a Bay Area home or 3.6% in Anytown).

So there are a LOT of reasons to buy a house - pride, fulfillment, memories - but making money isn't one of them.