“These mortgage rates are nothing. When I bought a house back in 1981 we paid over 16% interest.” Stop me if you’ve heard that one. It either happened to you or someone you know that was buying a home back then. During the pandemic, mortgage interest rates plunged below 3% to record lows. We also know that banks and savings rates paid virtually nothing during this time. My, how times have changed. Rather than discuss the impact that higher rates will have on the housing market, and how it is foolish to assume that house prices will always go up (another blog topic for another day), I want to discuss the positive impact that higher interest rates can have on your money.

First, let’s get a few negatives out of the way. There’s no way around it, if you are looking to buy a home now, you are going to pay a lot more interest on your monthly payment. Actually, I lied. There is a way around higher interest costs on your monthly payment. It’s a little secret that our ancestors used to avoid paying higher interest rates on their home loans. You might say they were well ahead of their time. Want to know the secret? You save like crazy and wait to buy a house after you can afford to pay cash for it. Okay, not the answer you wanted! The same really goes for buying a car or any other item that you choose to finance these days (and in the year 2022, you can finance just about anything).

Here’s the good part. It also works the other way around. When you choose to save money - rather than spend money - you can finally earn a respectable return. This means you don’t have to pour all of your money into the volatile stock market seeking returns on your money - especially if you are the type that can’t stomach the turbulence that we’ve seen in 2022. As of this blog post, there are bank savings accounts paying as high as 3% per year. That’s not bad for your money just sitting around. Want to take it a step further? US Treasuries that you are willing to hold for five year’s time are paying in excess of 4%. However, I am not sure I’d lock my money up that long when I can put it in a savings account for slightly less. The flip side of all of this is that I do not expect rates to stay this high forever. It is very possible that we are at or near peak interest/saving rates. Just because the fed is expected to raise rates a few more times does NOT mean that interest and savings rates will move in tandem with the fed (I’ve already written about this in my client newsletter - email me and I’ll send it to you).

The US Treasury also sells what is known as an I-Bond (the “I” stands for Inflation) that performs better when inflation is on the rise. It doesn’t work as simply as a two-minute Wikipedia read of the subject would imply, but I-Bonds earn interest each month and the interest is compounded semiannually (twice per year). There have been times when the interest earned was in excess of 9%, but these rates have come down recently and are subject to some rules that most people don’t fully understand when they purchase the bonds. Additionally, there is a $10,000 limit per person per year. I-Bonds are by no means bad, and I have bought them for some of my clients over this past year.

One of my favorite options for earning a guaranteed rate of return is something called a Multi-Year Guaranteed Annuity (also known as a MYGA). If you are familiar with a Certificate of Deposit (CD), you can see a lot of similarities between the CD and the MYGA. A MYGA is an annuity that is issued by an insurance company. The insurance company (instead of a bank) guarantees a rate of return for a certain number of years. After that number of years ends, if you do nothing, the contract will continue at a lower rate of return. Of course, a prudent (and not lazy) person would know that after the guaranteed term is over, they would simply move the money into another vehicle or cash out their profits (you’d be surprised at how many lazy people and/or advisors there are out there. Side note: I am not one of them). Also, at the end of this guaranteed period, you can actually take your money and roll it into another MYGA without owing any taxes on any of your gains through what is known in the tax code as a 1035 exchange. Can you defer taxes with your CD? Nope. You get a 1099-INT every year for the interest earned on your CD. Did I mention that MYGAs are paying a lot more right now? I just got a client a 3-year MYGA for 5.1%. Want to go out for 5 years? I’ve got a company paying 5.4% as of November 7, 2022. Yes, you read that right. Want more information? Shoot me an email and I’ll show you how it’s done: dustin@hychefinancial.com