Home Equity Line Of Credit, Loans, Rates, Social Security
March 27, 2022
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For this Suze School, we get a lesson about prime versus discount rates affecting our money.
March 27. 2022. So before I begin Suze School today, I just want to send prayers all the refugees everywhere in the world. And I really hope that none of us ever forget that as bad as we may think we have it no matter what the reason just turns on the TV and be grateful for the freedom that we have here in the United States of America. I just want to say that because it's a really it is. It's a really big heartbreak to turn on the TV today, isn't it? Everybody All right. When it comes to money and finances, which is what the Women & Money Podcast is all about. What makes me so sad is that so many of you are concentrating on that which really doesn't have to be affecting your life right now. Such as the stock market. I'm getting so many emails saying Suze, what should I do? Oh my God. When I write you back you say to me, I'm 30 years of age, I'm 40, I'm 50. And you are freaking out about the stock market now. Stop it. Even if you are in retirement and you're writing me and going but Suze, the markets are going down. I need this money. I need you to all remember what is the number one rule the number one rule of when you are investing in the stock market and the number one rule is that you are not going to touch that money for at least five years or longer. And if you are 25, 30, 35, 40, 50, even 55 you have years since I want you all to be working until you're 70 if you can you have years until you need this money. So, stop complaining and freaking out if the markets are going down, they will come back. They always do maybe it takes time, who cares, but they will come back and when the markets go down, as long as you continue to dollar cost average continue to participate in good quality exchange traded funds, mutual funds or individual stocks. And if you make sure rule number two, by the way, is to be diversified, you will be fine. In fact, you will be better than fine because as the markets go down and you continue to buy, you're really decreasing your cost basis. So, all will be OK. Now I'm just going to give you a very quick example of this. Before I go into what today Suze School is really all about. Let's just say you started to invest January of this year. Say you're young, you just got a job, whatever it may be. And you were listening to me and you decided to buy the Vanguard Total Stock Market index ETF symbol VTI And on January 3rd essentially it hit its high for really the past 52 weeks and let's say you also work for a corporation that offers you a Roth 401K or retirement account and they match your contribution or you're putting money into a Roth IRA and you're doing it every single month and let's say you're putting in $500 a month whatever it may be but that's how you're doing it. So, on January 3rd you purchased Vanguard Total Stock Market ETF, VTI is the symbol at 243 And you did so again on February 3rd but now the markets are going down. You're starting to freak out, but you don't care you're still doing it and you bought it again at 225 and then another month later. March 3rd, March 4th you do it again and now the market has gone down and VTI’s at 218. Now if you're like most people you make the mistake and go oh my God VTI is down from 243 to 218. I'm down 6% on my money. And you start to freak out. What you don't do is you don't actually figure out well how much have you invested in VTI because if you had invested just let's say those three months Your average cost would have been $228 a share because you kept buying it as it went down every month Friday it closed at $228 a share. So, you are essentially even you're even everybody, but you're even more than even because VTI pay about one and a quarter 1.5% dividend. So, you're doing fine. So, all I'm trying to say to all of you is stop it. Just keep investing, the markets will go up, the markets will go down, but eventually they will retrace and go back up again. I don't want you to continue to concentrate on something that is not affecting you right now. It's just not. But what is affecting you right now and it is affecting you big time is not only inflation but the Fed Funds Rate which is truly destroying and has the ability to destroy your financial ability to save and stay above board. So, between inflation and what's happening with the Feds, those are the two things that you need to be paying attention to. But no, you rather pay attention to the stock market, which really isn't that important at this moment in time. So today we are going to Suze School to discuss the prime rate versus the discount rate and why if you have a Home Equity Line of Credit, you better pay it off. Why if you are thinking about buying a car or a new home, you better know what it's going to truly cost you and what kind of mortgage you should not be getting at this point in time. So just maybe this is not the most exciting Suze School I've ever done. But I have to tell you it is one of the most important because I know a lot of you, you listen to these terms, the Fed funds rate the Fed Open Market Committee, meeting the Fed that you just let all those things just go in one ear and out the other and it doesn't matter. And the only thing that matters to you is your statements of your 401K. I want you to really understand why this is more important than the balance in your retirement accounts. So once again, I am asking you to sit down while you're listening to this take out paper and pencil and really start to understand the things that affect you every day, little by little that gnaw away at your financial security right now and you're just missing it. Now, maybe many of you don't know. But in 1907 there was a tremendous financial panic. I'm not going to spend a lot of time on that. But because of this financial panic back then in 1913, the Federal Reserve Bank was created in the United States. And I have to say really, out of all the financial institutions that are out there and trust me, there are many of them, the Federal Reserve Bank, in my opinion, whether it's for good or for bad is without a shadow of a doubt, the most powerful institution in the world and yet you don't even really know about them, do you? You have no idea what they're comprised of, who makes them up. And why is it so important? So a very brief history of the Federal Reserve is that most people call the Federal Reserve, by the way, the Fed, and they have 12 regional banks and each one of those banks represents the East Coast, the West Coast, the Midwest represents a specific geographic area because what might be good for New York isn't necessarily good for the West Coast or the Midwest. So, it's 12 regional banks. Now it is the Feds that set monetary policies, which means they set policies that have to do with money everyday flow of money and they do that to control inflation to keep money flowing to make sure that everything keeps running if there's a run on the bank, if something goes wrong, that there is money to pay you back. So the Feds act also as a lender if needed to all of its member institutions that if a member institution, a Member bank, for instance, if they have no place to borrow from, they need money, they can borrow it from the Feds. Now, why would a bank need to borrow money? The reason is that the Fed, among other things, are responsible for something called reserve requirements. And the reserve requirement is how much money you're paying is required to have to make sure that they have enough money to meet sudden withdrawals because you don't want to go to the bank, You don't want to say I want to withdraw $10,000. And yet they don't have the money to give you. Because why everybody is lined up to get their money out of the bank. You see that happening in Russia right now, you saw that starting to happen in 2008. And so here in the United States, I want my money out. I want to know it was okay. There could have been a run on the bank and thank God there wasn't. So, what happens is sometimes a bank will find itself not having enough money in reserve. So, who do they borrow that money from? Just maybe for overnight to make sure that they've met the reserve requirement and they go to the Fed to borrow that money. How much does that bank pay the Fed to borrow that money? That is known as the discount rate. It is the interest rate that the Feds charge our loans that they make to financial institutions for them to meet their reserve requirements. So, you may be wondering, how does this affect me, Suze, I don't care what banks do between each other and the Feds. Oh, yes, you do. Because depending on what the banks have to pay to borrow money to meet their reserve requirements, determines the rate known as the prime rate. The rate that the banks therefore charge their best customers. So if a bank is paying more money for a discount rate for them to borrow money, they are going to charge their best customers the prime rate, which will go up in accordance with what the bank is paying for the discount rate. Now you listening to this podcast today, you do not ever get to borrow at the prime rate. You may think you're a really good customer at the bank. But the prime rate is usually reserved for. It's really best customers. The customers that they know have the ability to pay them back. And those customers usually are corporations because it's easy for a bank to look at the corporate balance sheet and to really know what's going on. So, the prime rate is reserved for corporations. But the prime rate plays a very big part in what you yourself pay for interest rates on a car loan, home loan, credit card, interest rates, all of that. So, the way the interest rate is determined that you pay is that currently, which it is. The prime rate is 3.5% right now depending on your credit score or your FICO score. Your bank will increase the prime rate to you by 1-3% points. If you have a really great FICO score, maybe you can get a loan right now for 4.5% for a 30-year fixed rate mortgage. If you have a really bad FICO score, it could be as high as 6.5%. So, are you understanding what happens with the feds? The discount rates. Therefore, the prime rate absolutely affects you now. So many of you, so many of you have Home Equity Lines of Credit and a Home Equity Line of Credit is where you have a home. And over the past two years, the value of that home has absolutely skyrocketed. And you all thought that you were all so clever and you would take out Home Equity Lines of Credit. Again, a line of credit based on the equity in your home and you would use that line of credit to buy another home to invest somehow and you were doing it at 0.5%, Interest rates were essentially at zero. Prime was almost all the way down there, 0.5% one, it was so lucrative to borrow money. But when you are borrowing money and the interest rate that you are being charged on that money is not fixed when the discount rate starts to go up and therefore the prime rate goes up and therefore the interest rates on your variable loans start to go up. It starts to really affect you back to Home Equity Lines of Credit. Home Equity Lines of Credit in most cases have variable interest rates that absolutely reset every single month. So, it is possible that you could see next month, your Home Equity Line of Credit goes from 3%, possibly 25%. And if these rates continue up, you could be at 6, 7, 8% or so and that is a really high interest rate. So it is important that if you are listening to this podcast right now, you have to keep an eye on what's happening to the discount rate when the feds meet because if the feds continue to increase the discount rate, which they are saying they are going to and they very well may do it by 0.5% in May and continue to do that. And you have Home Equity Line of Credit, you have a high interest rates on credit cards, you have all kinds of loans out there that are variable and adjustable rate mortgage, possibly you are going to find yourself paying more and more for that loan. You add that to the fact that inflation with what you are paying for gasoline, food, your electrical bills, your gas bills, all these things that are going up little by little possibly your rent, your insurance premiums, you very possibly are going to find yourself in a situation where your monthly expenses have increased significantly. So for those of you who are retired and you have just been making it on may be a small pension, Maybe your Social Security, you need to look right here and right now, how do you cut expenses for those of you who are working and you're getting a paycheck. You need to start cutting expenses right here and right now maybe it's easy for you, maybe you're doing okay, you're meeting your monthly bills. But if all of this continues, what are you going to do? You know, I remember way back in 2007, when all of the economy started to crash, real estate started to go down so on and so forth. I remember on the Suze Orman Show asking those of you who are married or living with somebody and you have two paychecks coming in to just try and experiment and live on one paycheck and save the other for those of you who are living just on your own paycheck. Is it just possible that you could live on half a paycheck and save the other? I know all of you are like Suze, we can't do that. And why is the reason that many of you can't do that? You need to answer that question for yourselves. But I'll never forget walking down 57th street in New York. And this woman came running out of the store. I guess she saw me and through the window said Suze, Suze. I listened to your show and I live by myself and I started to save half my paycheck. I didn't know how I was going to do that, but I cut out going out to eat, I cut out going to this and that I cut down on haircuts, I cut everything out and I was able to save half my paycheck and thank God I did Suze because even though I still have a job they cut my hours in half. But I was okay because during the time you were saying that I saved enough money to get me through. So, I just want to thank you Suze. And I know a lot of you think that can never happen to you. You have a good job, everything is fine. But what is not fine is how much it is costing you and maybe you're paying attention to it, Maybe you're not. But how much it is actually costing you little by little to really live, pay for things today and do things. Alright back to why do the feds increase the discount rate? Because this is important for all of you to understand when inflation starts to run rampant like it is, the feds increase the discount rate because then it is more expensive as I said for member banks to borrow when it's more expensive for them to borrow, they start to have less money to lend to you, they have less money for you to borrow from them. And when they start to raise their interest rates, you stop borrowing as much money as well. When you stop borrowing as much money, you aren't buying homes, you aren't buying cars, you aren't buying that which you were buying before because now it's gotten too expensive for you to do. So, when you stop buying homes, I want you to think about this. That also affects how much money you are spending on that Home, Home Depot, Lowe's, all of those places that you would go and spend all this money, furniture stores, all kinds of places you're not spending as much money anymore. And in general, that normally brings down inflation because the less you buy, the less you spend, the less you spend, the more the economy slows down, the more inflation supposedly goes down. So now if that is true you have got to ask yourself a question is now a good time to be buying real estate because if you look at it February and possibly March more applications for first time purchases and mortgages have started to decrease. People are starting to look at the effect that higher interest rates are having on their home purchases at the same time. Home prices are absolutely sky high. So, is this possibly the top of the real estate market? Possibly. Yes, possibly No, but I just want to give you an example even in terms of buying a car, why it's costing you so much more money than it did two years ago Now all of you know that use cars are up approximately 30% in value. Many of you wrote me and told me you bought a used car and you were able to sell it for more a year later than what you paid for it. I don't know what you're driving around in. But that's another story. So, let's just say two years ago, you could buy a used car, maybe even a new car, who knows for $20,000 And you put 10% down or $2,000. So, you decided to finance over three years because you know, I don't want you to finance more than three years, $18,000. But two years ago, you very easily if you had a good Fico score could have gotten a car loan at 0% interest over three years. So, it would have cost you $500 a month. That would have been it. And now your car is paid for today, that same car, that was $20,000 back two years ago, is now up about 30% or $26,000. But at the same time That the car is up 30%. The interest rate that you would have to pay to buy that car today has gone from 0% up to 2.4%. So not only are you paying more for the car, you're paying more to finance the car. So, if you put 10% down and you financed $23,400 at 2.4%, Your payment would be $675 a month. Now you may not think $175 a month is a lot, But that's 35% more per month per month. Are you kidding me people or over three years? That's a difference of $63.00. So do you understand how little by little, what's happening with the discount rate and therefore the prime rate and therefore the interest rate that you are paying is really costing you percentage wise, not just a little more money but a lot. So if you are out there and you have a Home Equity Line of Credit, you better do your best to get rid of that Home Equity Line of Credit right here and right now, if you are going to buy a home, you are not to get an adjustable rate mortgage. Do you hear me? That could possibly be one of the biggest mistakes you ever make. If you especially are going to keep this home for the long run and you don't know if you're going to keep this home for the long run or not, maybe you have a plan to sell this home in three or four years, you don't know what's going to happen in three or four years. Think back to 2007, think back to the people in Tampa Florida Who bought a home for $700,000 and a year later it was going for $175,000. And if they had gotten adjustable rate mortgages, they would have been screwed. Everybody. So, fix it, fix it, fix it. Do not get an adjustable rate mortgage. Do not take out Home Equity Lines of Credit. Put yourself in a situation with what is happening in the world today. You could do something about for those of you who are thinking about, oh, I'll downsize in a year or two. Stop waiting to downsize and do it right here and right now, cut your expenses right here and right now, because the truth of the matter is you can you can take control of your situation, but you can only take control if you are willing to cut back and do the things that you need to do today to protect your tomorrows. And I am not talking about the stock market on any level. Obviously, if you need money, rule number one was what if you can't remember it, start this podcast all over again and listen to it. You can be positive here. But you need to sit down, and you need to look at how are you vulnerable to what's happening with interest rates and then take your vulnerabilities and get rid of them. Just that simple now, I understand that many of you are in situations where you've done everything and maybe there's nothing that you feel you can do about anything. There's always something you can do. Always something you can do. And I don't care if that's you get four jobs versus three, three verses to there's always something but you have to have faith in who you are and that you have the ability to be a warrior and not turn your back on this battlefield. Because there are so many uncertainties of what's happening with Ukraine and everything else. I want you to live a life where no matter what happens, you have your own financial forts, so to speak, where everything is exactly how it should be, and you have a game plan. So understanding the discount rate, the prime rate and what's going on in your life will put you in a situation to make wise decisions so that you can do what live a life that is safe, strong, and secure. Alright. Everybody sees you on Thursday for Ask Suze & KT Anything. Bye bye.
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