Pod Insights The Moneywise Guys 9/2/25 From National Debt to Home Equity: Making Sense of Big Financial Picture About this episode The Moneywise Radio Show and Podcast Tuesday, September 2nd BE MONEYWISE. Moneywise Wealth Management I "The Moneywise Guys" podcast call: 661-847-1000 text in anytime: 661-396-1000 website: www. MoneywiseGuys.com facebook: Moneywise_Wealth_Management LinkedIn: Moneywise_Wealth_Management Guest: Allyn Medeiros, Agape Mortgage website: https://allynmedeiros.com/
Transcript 0:00 Speaker 00 From the Garo Ellis padded radio room off Stockdale Highway, here is Money Wise. Call or text into the show 24/7 at 396-1000.
0:39 Speaker 00 Here is Money Wise. Money, money, money, money.
0:43 Speaker 01 Welcome to the Money Wise Show. We are live from the Garo Ellis padded radio room off Stockdale Highway on ESPN Bakersfield, 1230 AM, 101.1 FM, and always streaming at MoneyWiseGuys.com. You can call or text into the show 24 hours a day at 661-396-1000. Today, we're your hosts. I'm Sharad Waite and...
1:05 Speaker 02 Frank Lee.
1:05 Speaker 01 Frank Lee.
1:06 Speaker 02 Hey.
1:07 Speaker 01 Hey, I'm doing well. How are you doing?
1:09 Speaker 02 Enjoyed the Labor Day weekend.
1:11 Speaker 01 Yeah, it was nice.
1:12 Speaker 02 Yeah.
1:12 Speaker 01 It was really nice to have an extra day off.
1:15 Speaker 02 Oh, totally.
1:16 Speaker 01 And you were free from labor?
1:19 Speaker 02 I wouldn't say free from labor. We had a bunch of family over. We had some celebration going on. So, a lot of labor involving cleaning the house and doing all that, but it was fine.
1:29 Speaker 01 That is labor. That is definitely labor. Well, let's get right to the show. Frank, we've got a few listener messages. Want to remind our listeners, we love this show, really, really does enjoy interaction with you. And so if you've got questions or comments, again, 24 hours a day, shoot us a text, 661-396-1000. Let's go to the first message. You have it there, Frank?
1:52 Speaker 02 Yeah, the email one?
1:53 Speaker 01 Yeah, sure.
1:54 Speaker 02 Okay. Uh, okay, so it's three parts. Uh, so first part of the question. Uh, I shared, how much or what percentage of the annual federal budget goes towards debt payments?
2:09 Speaker 01 Great question, great question. So this is the three-part question and um, I really like these because it was a good reminder for me. It's sometimes it's easy to get, I think, caught up in just headlines or here on social media, you know, TikTok, video or whatever, hearing about the doom and gloom behind our national debt, what that's going to mean to us and what's happening. I'll argue this over and over, Frank, that, you know, very, very few people, myself included, can wrap their heads around the difference between a million and a billion, let alone the difference between a million and a trillion. They're just, you know, you start adding on these zeros and it exponentially gets to this,
2:54 Speaker 01 this, you know, number that's just, you can't even really fathom it. And I'm afraid that's something that's happened and happens regularly with our federal government and with its budget and what it spends, how much debt we have. There's oftentimes a confusion over the debt versus the, the, um, you know, the normal, I guess now it's just become normal, but the, the deficit spending that happens. And oftentimes, you know, we don't, we don't know the difference between the deficit and the actual federal amount of debt. So I think this is a good reminder for us to kind of step back, take a deep breath and recognize that, you know, maybe, maybe things aren't as bad or maybe they're worse
3:39 Speaker 01 than what you realize. That's possible too. It certainly has changed a lot. Covid certainly changed a lot of things. We were, it seemed like starting to make some progress towards shrinking the deficit, which is that, that amount of money that we have to, that we budget each year, that our Congress budgets for us to spend and then how much we actually take in in terms of revenues. In terms of how much of our...
4:09 Speaker 01 Current, what percentage of the, of our current annual federal budget goes towards debt? It's about 13%. So, last year, interest payments comprised of about $880 billion. That's approximately 13% of the total federal spending. I think that that's an important number, but an even more important number is how much of that, how does that compare to the size of our economy? Because you would expect that federal spending would increase as our, as our country grows. As then, as we gain people, as we gain businesses and, and grow that way,
4:54 Speaker 01 you would think that the federal budget would also have to grow. And so I think that the more realistic gauge is how much debt do we have compared to our GDP? And that's just over 3% last year. So about 3% of our GDP is going towards our federal debt payments, like interest payments.
5:14 Speaker 02 Oh, I see.
5:15 Speaker 01 But, you know, total amount of what the federal budget and the federal spending, it's about 13% of our federal spending. So, you know, it's up there, but there's some other questions. I think there's some follow-up questions here.
5:27 Speaker 02 Yep. So, how much debt or what percentage of payments to debt would signal a debt spiral? Meaning, we, we would need to borrow money just to make payments on the debt?
5:41 Speaker 01 This is a trickier question, and this is, this would be great for us to discuss again with Dr. Gerhart, the economist from Cal State. We just had him on last week or week before, and you were on that show.
5:51 Speaker 02 Yeah.
5:51 Speaker 01 We talked about, and I brought this up to him. I've asked him this question before over the years. You know, what, what is the, what's the problem with, you know, with our government continuing to borrow to keep things going? You know, they keep kicking the can down the road. Okay, we've got, you know, we're going to pass this budget. We've got to make up $2 trillion of our federal budget. We'll just borrow it. You know, that's what they've been doing, you know, forever, pretty much. But there was a- A period of time when Bill Clinton was in office, when he was president, that we actually had a budget surplus. So rather than, you know, which means our federal government was passing a budget with extra money to spend that they didn't spend.
6:31 Speaker 02 Yeah.
6:31 Speaker 01 Like, it just seems so foreign that could even happen, but it...
6:34 Speaker 02 Yeah, I didn't know that could happen.
6:35 Speaker 01 I know, right? It can actually happen. It's just, we've gotten so used to it not happening. Economists don't necessarily all agree on what's the tipping point? What happens, you know, if we get to this debt spiral? Which would be like a death spiral where, oh my gosh, now we don't have enough within our federal budget to make the interest payments, so we're gonna have to borrow money to pay off money that we've borrowed from. Like, this happens on a household basis. You have a, so somebody gets into trouble, a household gets into trouble with consumer debt, say like, credit card debt, high interest, and they're like, "Well, I can't even make this payment." So what do they do sometimes?
7:18 Speaker 01 They go get and open up another credit card to make payments on the other, on the old credit card that they can't afford.
7:24 Speaker 02 Yeah.
7:24 Speaker 01 Can't make those payments. So now you have debt on top of debt. You can see how that can spiral out of control.
7:29 Speaker 02 Oh yeah, definitely.
7:30 Speaker 01 So, in practical terms, analysts warn that should interest payments reach a level of approximately 20 or 30% of the federal revenue, that there are some risks that could come, that could tip it towards a debt spiral. And it could create the scenario where, you know, you know, there's just no, like, not no, a lack of faith in our, in our country's continued ability to pay back debt. And remember, a lot of people that are lending money to our government are foreign.
8:10 Speaker 01 Foreign governments, corporations, individuals, institutional investors are buying our treasuries, for example.
8:17 Speaker 02 All the bonds, yeah.
8:18 Speaker 01 Bonds, and that's how, you know, we're funding things. So, if the world economy starts to turn its back on us and go like...
8:28 Speaker 01 I don't want to lend America money like how I'm how am I going to get paid like they're still got all these interest payments. That's where it could like trigger more and more problems. Just it just we just don't know what that is, you know, that this is a total guess if it's.
8:41 Speaker 02 Yeah.
8:42 Speaker 01 Around thirty percent, which means as I mentioned before, we're about thirteen percent now. So it means there is some room to grow. Or some room still before we get to a theoretical concern, but. It's it's a that's a very, very, very good question. There's a third part.
9:00 Speaker 02 Third one. So what would happen to the economy? If the federal government cuts enough spending to balance the budget and consequently stop adding to the federal debt?
9:14 Speaker 01 That's a that's a that's a hard a hard question because the the reason there's a reason why our federal government has been borrowing.
9:25 Speaker 01 And to to there's a reason why they have the budget the way it is because they have found that it's very difficult to cut spending. We're seeing it right now under the current administration with Doge, you know, best case scenario, it's a few hundred million dollars that might be cut off. Off of the federal budget, you know, by, you know, these mass layoffs and getting rid of of whole departments and, you know, things like that. It's it's a drop in the bucket because two thirds of the spending is stuff that we've the entitlement programs. Medicare and social security.
10:00 Speaker 02 Mandatory spending.
10:01 Speaker 01 Mandatory spending.
10:02 Speaker 02 Yeah.
10:02 Speaker 01 And then you and then the other the other that what's left there is is defense spending. Which is also very difficult and politically challenging to reduce that. And now there's there's, you know, it's a big part of our economy is the defense.
10:17 Speaker 02 Yeah. Have you um have you ever seen Steve Ballmer? Uh, the the ex CEO of Microsoft?
10:24 Speaker 01 Yeah.
10:25 Speaker 02 He like released some like fact fact USA or USA facts, whatever it is.
10:31 Speaker 01 Oh, yeah.
10:31 Speaker 02 Videos about this and I thought it was pretty wide.
10:33 Speaker 01 Yeah, I think I've seen some of the visually done really well, so you can kind of get an. Idea of like
10:39 Speaker 02 You can follow along and see.
10:40 Speaker 01 It's a trillion mean and.
10:41 Speaker 02 Exactly, and it breaks it down into little, little flow charts and, and like, kinda like how we have our cash flows is like that's how it breaks it down.
10:51 Speaker 01 Yeah.
10:51 Speaker 02 Um, but.
10:52 Speaker 01 Yeah.
10:53 Speaker 02 I thought that was a pretty good video. So if anyone is listening and wants to see exactly how that's broken down, you could look it up on, on YouTube. I think it's, I, I think it's USA Facts.
11:03 Speaker 01 That's right. It's like a nonprofit that he has started.
11:06 Speaker 02 Yeah, yeah, yeah. And it's all fact-based. They're just looking at numbers, purely numbers. It's like, hey, this is what they spent, and this is where it's going.
11:13 Speaker 01 Yeah, it's not like, there's no political slant. But, you know, back to the listener question, what would happen if the federal government just cut enough spending to balance the budget? Well, I mean, yeah, I mean, that'd be great, but it just doesn't seem like it's politically feasible. And, and they'd either have to increase revenues, which is increase taxes, or they would have to decrease spending and decrease, I mean, substantially, you know, by twenty or thirty percent. Like, where is that gonna come from?
11:42 Speaker 02 Yeah.
11:42 Speaker 01 So it's like, it's created this monster, this beast that has to be fed.
11:46 Speaker 02 Exactly.
11:47 Speaker 01 And, you know, you, you, the hope is that the overall economy grows at a faster rate, so it can keep up with it. So even though we have these deficits, and we have this debt that's growing, if the economy grows at a faster rate, then it, then it, it could keep that in check.
12:06 Speaker 02 Yeah.
12:06 Speaker 01 It's just not happening.
12:08 Speaker 02 It's just like, for an individual or a couple, you're looking at discretionary spending, and then living expenses, the things that you need to live on.
12:18 Speaker 01 Right.
12:18 Speaker 02 Bills, food, um, house. Uh, if we're wanting to make a huge change, they're gonna have to look into the, some of those mandatory spendings, and that's, that's, you're talking social security, you're talking Medicare, Veterans Care, all those that, that get paid into mandatory spending. So.
12:39 Speaker 01 Yeah, it's a, it's a strain on, on the system, and it has got a lot of people really worried about what, what does this mean? You know, what does this mean for our kids? What does it mean for our grandkids? And you know, it's, we've been for, we were fortunate for, you know, ten, almost twenty year period, we had extremely low interest rates. So our government was able to borrow for very little money. But now as rates have gone back up, now it's much more expensive for our government to borrow.
13:11 Speaker 02 Yeah.
13:11 Speaker 01 And, you know, and now, you know, it's, doesn't, doesn't sit good with me that thirteen percent of our total federal spending is just going towards interest payments.
13:22 Speaker 02 Yeah.
13:22 Speaker 01 You know, imagine that, I know, I hate comparing it to a household because it's not a household, the government can print its own money. Your house can't do that.
13:30 Speaker 02 Yes.
13:30 Speaker 01 You know, so when, when you got your own printing press, that's a different story. You're, you run under a different set of rules where now you're, you're comparing your money printing press to the other global printing presses.
13:41 Speaker 02 Mm-hmm.
13:42 Speaker 01 And now, you know, now you get into this, you know, global economic, you know, struggle. You don't do that with, with home, with your household spending. But I think it's still worth the mental exercise to think, okay, what if you were spending thirteen percent of your, of your monthly budget was just going towards interest? I'm guessing that's not pretty, that's not, that's not a crazy thing to think about. You know, if somebody's, if somebody has a hundred thousand dollar a year income, that's thirteen thousand dollars a year in interest, you know, that's just over a thousand dollars a month. I'll bet there's, I bet that's pretty common.
14:22 Speaker 02 Yeah.
14:22 Speaker 01 Actually.
14:23 Speaker 02 Yeah.
14:23 Speaker 01 It's not, not, not beyond, you know, but if that now doubles and you're paying two thousand dollars a month that's just going towards interest, that's, that's soul crushing. It'd be very, very devastating to, to deal with. So great, great listener question.
14:41 Speaker 02 Yes.
14:41 Speaker 01 Appreciate that question. We've got a couple more.
14:44 Speaker 02 Yeah, we can go over, let me, sorry, I gotta minimize it.
14:47 Speaker 01 Yeah.
14:48 Speaker 02 Uh, okay, next question. How can a business owner know when it makes sense to write off equipment versus leasing it?
14:59 Speaker 02 Yeah.
14:59 Speaker 01 Good question. Good question. This might have come up. Steven, do you know if this came up on Thursday or Friday also?
15:06 Speaker 00 It came in after Thursday's show.
15:08 Speaker 01 Okay. This is a good question. There's no black or white. There's no cookie cutter approach to this, as Gero would always say. It really depends, as a business owner, whether or not you'd want to finance or pay cash for something versus leasing, really is going to depend on a lot of things, I guess. One, the benefits to buying something, or paying cash, or paying upfront for something, even if you finance it, is that you can deduct most or all of that cost immediately. So it reduces the taxable income right away. So you get that benefit from that.
15:54 Speaker 01 And this is good, for example, if you have strong cash flow now, or you're looking for a large tax deduction in that given year. So you're like, "Okay, I got the money to pay for it. It's not going to affect my other operations, and I have, you know, maybe you're in a higher income. You're making more revenues than you think you will the next year. Okay, take advantage of getting the deduction all upfront in one year." Versus leasing, you have lower upfront costs, so you don't have to come up with all of that cash, that lost of capital, that opportunity cost of giving away that cash.
16:35 Speaker 01 It spreads the payments out over time, so that can help preserve cash for operations or growth if cash is tight.
16:43 Speaker 02 Yeah. It seems like that'd be more beneficial in terms of leasing equipment, is that when you're in that growth phase, it's like, "Okay, we need to be as strategic and methodical as possible when it comes to spending. It's like, we can't just spend willy-nilly, and then we gotta lease what we can, and then keep operations tight."
17:04 Speaker 01 Yes. And, I mean, this is really simplifying a mo- A very complex scenario. There's lots of other things that you want to take into account. Like what are you buying versus leasing? So how long are you going to have that equipment? That makes a difference. For example, it might make sense to buy if you're going to be using that equipment for a long time. Like it's, you know, it's, it's going to be durable. It's going to be there. It's not going to become obsolete very quickly. Cause once you pay it off, now you own it. Whereas with, with you, when you lease it, oftentimes, depending on what that, that contract is, you just walk away from it. You have to either get a new lease, get new equipment. And, and so that's, that becomes very expensive.
17:48 Speaker 01 And of course leasing would be good if the equipment becomes outdated very quickly. Or if you can upgrade at the end of the lease rather than just being stuck with the old gear. It's similar to the, the question of whether a household or whether an individual should lease or buy. Well, it kind of depends. In the long run, if you're just looking at the overall money saved, you're way better off buying. Because you eventually will pay off that loan and you own the car. And you keep the car. As long as you're keeping the car, then it's going to be way cheaper for you to buy. Even if the lease payment is very affordable and there are small lease payments. Yeah, but you're always going to be making a lease payment.
18:32 Speaker 01 As long as you're leasing, you're always making a payment. So you never pay it off. So why would, you know, you know, that's not, that's not good.
18:40 Speaker 02 So should I buy or lease a Toyota?
18:43 Speaker 01 Yeah, I mean, it kind of depends. You know what I've actually done is I have leased and then, but I, I bought Toyotas. And I have leased and then I buy it at the end of the lease. And some, if I want a new car, then I'll sell it. I'll sell the car. And there's always equity.
19:00 Speaker 02 Yep.
19:00 Speaker 01 In it. And so I like leases personally because I, it gives me some flexibility. And I also am okay. I have budgeted in my household budget to get a new car if I wanted a new car. After, you know, three years or four years.
19:16 Speaker 02 Yeah.
19:16 Speaker 01 I, I like having an upgraded. Car and be able to drive and you know, so.
19:21 Speaker 02 Yeah, test out the new, new gadgets and everything.
19:24 Speaker 01 Yeah, yeah, I do. I do like that.
19:27 Speaker 02 And in that sense, yeah, it makes, it makes total sense of, of wanting to lease a car and everything.
19:34 Speaker 01 Yeah.
19:34 Speaker 02 Yeah, I thi- I think in my case, I'd prefer the, the finance. Especially if you know it's going to be a reliable car.
19:43 Speaker 01 Yeah.
19:43 Speaker 02 You know, like Toyota.
19:44 Speaker 01 Right. And then, cause you know, you're just going to keep it and you're going to have it and.
19:48 Speaker 02 Yeah, the show's not sponsored by Toyota.
19:51 Speaker 01 No, but, no, but I like Toyota.
19:53 Speaker 02 Yeah.
19:54 Speaker 00 You'd be surprised with all the Tacomas parked out front, but.
19:58 Speaker 01 That's right. We do have a few of them. We have a lot of trucks here at the.
20:02 Speaker 02 Yeah, you guys, you guys are perishing me into getting a truck.
20:05 Speaker 01 Yeah, you're thinking about it?
20:06 Speaker 02 Yeah, at first I was like, I don't need a truck. And I see everyone with a truck like, man.
20:10 Speaker 01 Maybe I need a truck.
20:11 Speaker 02 Yeah, should I get a truck?
20:15 Speaker 01 Can we do one more question before we go?
20:16 Speaker 02 Yeah, yeah, yeah, let's do, okay.
20:21 Speaker 02 So this is a long one. Love the show. Sorry for the long message, but I'm sixty-four and still working. I've been in the public sector for about twenty-five years. I was planning to retire or to work until sixty-seven to get my full social security. But honestly, this job is getting harder on my body and I'm thinking about retiring early. I know there's a penalty for taking social security before full retirement age, but I'm not sure how much it would cost me. My pension from the county would help, but I need to know if taking social security at sixty-five instead of sixty-seven would hurt me too much in the long run.
20:52 Speaker 01 Okay, good question, right Frank?
20:55 Speaker 02 Oh, yeah, yeah. Great question.
20:56 Speaker 01 This is like a really good financial planning question.
20:59 Speaker 02 Yes.
20:59 Speaker 01 Cause it, it, similar to the other questions we've got, it's a little nuanced. Obviously, if you're looking at just the pure dollar amount, you're always better off waiting as long as you can to take your social security.
21:11 Speaker 02 Yep.
21:12 Speaker 01 Up until you can get to the maximum benefit, unless you don't think you're going to live beyond your life expectancy. Standard life expectancy is say seventy-eight to eighty years old. If you don't think that you're going to live that long because of health, history. Family genetics, whatever it is. Okay, then you're not going to get the benefit for waiting and delaying those early payments. You're not going to get repaid for that for waiting a long time.
21:41 Speaker 02 Yeah.
21:42 Speaker 01 Or pushing it off.
21:44 Speaker 02 Yeah, you might get a higher social security benefit.
21:48 Speaker 01 Yes.
21:49 Speaker 02 You're having to wait for that.
21:51 Speaker 01 Yeah, so you're missing those two years in this case. You're missing those two years from age sixty five and age sixty six where you're getting a smaller payment. But at least you're getting the payments.
22:01 Speaker 02 Yep.
22:02 Speaker 01 And so you would win, for example, you would win if you took social security early, two years early at sixty five. But then you died two years before your life expectancy. You died at seventy eight instead of eighty. Okay.
22:15 Speaker 02 Yeah.
22:15 Speaker 01 You basically called it in that case. But there's an other hint in this, and that is the work is stressful. It's not a fulfilling job or it's a difficult job that is causing mental stress. And that is, that could, I mean, how do you put a price on that?
22:35 Speaker 02 Yeah.
22:36 Speaker 01 You lose life expectancy. And, but it could be that this is a way for you to extend your life expectancy.
22:45 Speaker 02 Oh, yeah.
22:46 Speaker 01 But it's going to cost you some money.
22:47 Speaker 02 Yeah.
22:48 Speaker 01 Which one do you do?
22:49 Speaker 02 Yeah.
22:49 Speaker 01 You know, where do you go? And either way, you're making it just a guess and you're rolling the dice on it.
22:54 Speaker 02 I think this is a good point to talk to and consult with a financial advisor. Because they can give you the details of what it looks like, how your cash flow is going to look like. When you do retire at sixty five or sixty seven. And to point out, no, there is no penalty for taking social security. You just have that lower benefit amount.
23:14 Speaker 01 That's right.
23:14 Speaker 02 That's, I believe they're getting mixed up with like an IRA, a 401k or an IRA. If you take it out before fifty nine and a half or in that sense. But if you retire at sixty five and start taking social security at sixty five, then you wouldn't be penalized. For that.
23:35 Speaker 01 The reduction is the big part here. The reduction is about 13% from your full benefit if you take it 24 months early. So, we don't know what this listener's income is, but assuming that you had at 67, your social security was $2,000, but you ended up taking it 65, that reduces it about $270. So, you're about $1,700 a month. You're giving up about $270 a month for the rest of your life by taking it two years early.
24:09 Speaker 02 But then again, it could be a benefit for them.
24:12 Speaker 01 Right.
24:13 Speaker 02 For like, mental health or any... I heard, have you heard quitting your job adds more years' life back to you than smoking? If you quit smoking?
24:24 Speaker 01 Oh, really?
24:25 Speaker 02 Yeah. I saw that in an article, I was like, oh, okay.
24:28 Speaker 01 That's interesting. Wouldn't it depend on what the job is?
24:32 Speaker 02 Oh, yeah, yeah, no, exactly. Exactly, like, high stressful jobs. It's like, okay, what happens if someone quits? It's like, yeah, you get more years back to you than if you were a chain smoker.
24:44 Speaker 01 Yeah. And in this listener's case, that would, you know, two years... Okay, so, you know, you're giving up that income, but if you worked an extra two years, would you die two years earlier?
24:57 Speaker 02 Yeah, yeah, I mean, if it's that stressful, it's like, yeah, like, retire.
25:01 Speaker 01 Yeah, yeah, exactly.
25:02 Speaker 02 Focus on yourself, you know?
25:04 Speaker 01 And you can, like you said, if, once you start receiving social security and you've reached that retirement age, there's no penalty to going back to work. You can go back to work and make as much money as you want. It's just, you know, you're gonna have more taxable income, but that's okay.
25:20 Speaker 02 Yeah.
25:21 Speaker 01 You have more income.
25:22 Speaker 02 Yep.
25:22 Speaker 01 And so, a lot of people, and this person might be thinking of this also, okay, maybe I retire two years early, I get a reduced social security benefit, but then I take a little bit of break, and maybe I go do some other side gig. You know, or some other job that isn't so stressful on me, and you only need to make up an extra couple hundred bucks a month. You know, you can have a part-time job doing something that gets you out, gives you some community, you know, improves your health.
25:52 Speaker 02 Yep.
25:53 Speaker 01 You know, there's lots of options there.
25:54 Speaker 02 Yep, exactly.
25:56 Speaker 01 Great question, right? Yep. Good stuff. All right, want to take a break? We come back, Alan Maderos is going to join us. We're going to talk about mortgage, interest rates and much more. We'll be right back.
26:05 Speaker 00 Are you an employee with a company sponsored retirement plan? Do you fully understand how you're invested? And whether or not you are maximizing your retirement plan's options? For more information on a free assessment, contact MoneyWise's 401K specialist, Justin Leland at 661-847-1000. That's 661-847-1000.
26:31 Speaker 01 Welcome to the Money Wise Show. We're your hosts today. I'm Sharon, that's Frank. Joining us is Alan Maderos. He is our lending and mortgage expert that we have on occasionally on the show. Alan, welcome back to the show.
26:45 Speaker 03 Hello, gentlemen. Welcome to September.
26:47 Speaker 01 Welcome to September.
26:50 Speaker 03 You know, the funny thing is, is that I have to talk to the producer of this show because that's actually a sad song. I mean, these people are losing their jobs, you know? And like, Allentown is not this booming, thriving economy, so.
27:04 Speaker 01 Yeah. It's as if you're moving back to Allentown, though. Like, he's going back. It's been, it's been.
27:08 Speaker 03 It's a positive.
27:09 Speaker 01 Yeah. It's gone through hard times. Allentown's gone through hard times, but it's my town. I'm moving back. You've been doing this for a long time, Alan. As long as I've known you.
27:19 Speaker 03 Couple of moons.
27:20 Speaker 01 Yeah. Is it, does it feel like, do you feel like you're like an old timer?
27:25 Speaker 03 No. I feel like things are constantly changing, so it's good that I'm, you know, continuing to learn.
27:33 Speaker 01 Yeah.
27:33 Speaker 03 But you know, the beautiful thing about this is the generational business that I've been able to.
27:38 Speaker 01 I was going to say, it's not, we get the same thing here at Money Wise. You know, we're working with now grandkids of our, of our, of our old clients who were grandparents at the time, you know? And now they've passed and now we're working with their kids or their kids' kids. And the other thing that you get with longevity is you get to go through multiple business cycles, economic cycles. And in your world, it would be the real estate cycle or the, or the bond, the interest rate cycle. That you know that come and go and the crises that come and go. And then you know, you're still there. And so then people come to you and go like, I don't know, should I buy? Is it, you know, should I do what's gonna happen? It's like you got a little bit more perspective.
28:20 Speaker 03 Sure.
28:21 Speaker 01 It's kind of nice.
28:21 Speaker 03 Yeah, it is. It's nice. And I think that part of this is just being consistent. I mean, if anything, there's enough change in this world, having something that's consistent actually feels like home. Does that make sense?
28:33 Speaker 01 Yeah, but you can be consistently making bad choices and that's not good. Right? But you have to, but being, being in the ballpark in terms of what you're, what you're thinking is gonna happen at the future. And being consistent with that.
28:47 Speaker 03 Sure.
28:47 Speaker 01 That'll work.
28:48 Speaker 03 Yeah.
28:49 Speaker 01 Just don't be consistently bad.
28:50 Speaker 03 No, I try not to be.
28:51 Speaker 01 No, it's actually, it'd be probably hard to do that in the mortgage in like the lending world, at least in this town. Don't you think it would like spread after a while? It'd be like, don't get a loan from that person.
29:04 Speaker 03 Yeah, we are, we are a big little town.
29:07 Speaker 01 Yeah.
29:08 Speaker 03 In that sense, yeah, people know people that know people.
29:10 Speaker 01 Yeah.
29:10 Speaker 03 You know, be really blessed. I think just having a community, I remember my mother-in-law moved to Bakersfield.
29:17 Speaker 03 We would run into people all the time at Costco or Target.
29:19 Speaker 01 Yeah.
29:20 Speaker 03 And she said, you know, everybody. I was like, well, no, I really don't. They just shop at the same place as we do.
29:25 Speaker 01 That's right.
29:26 Speaker 03 But yeah, people know people and, and the benefit of that is, is that if you do develop a good reputation. And help people, just generally help people. There's fruit from that.
29:40 Speaker 01 Yeah, for sure.
29:41 Speaker 03 So I've had my fair share of losses and pain. When everything crashed in 2008, I lost everything. There was nobody who wanted to help me out.
29:49 Speaker 01 Yeah.
29:49 Speaker 03 Right? But from there, you learned that you could get up from the ashes and develop again and start, but. There's grace in that. I'm not saying that it's the right way to go, but there were outside of our norm situations that the whole world literally was impacted in the crisis starting in 2008. So, yeah, but I mean, super proud of you guys. Holy smokes. You guys have been through, you know, changes and iterations of business development and growth and the show's been on over 20 years now, right?
30:23 Speaker 01 Yeah, over 20 years.
30:24 Speaker 03 And then with this new move coming to Woolworths, you're taking an historic building and making it a more historic place.
30:33 Speaker 01 Thank you.
30:33 Speaker 03 It's awesome. Really excited for you guys.
30:36 Speaker 01 Oh, thank you. We appreciate that. It has been, it has been satisfying to, similar to when you're working with somebody who's buying their first house.
30:43 Speaker 03 Sure.
30:44 Speaker 01 This is like our first house. Even though we've been in business for over 20 years, we've been leasing for all of this time and, and, you know, waiting for the right opportunity in the right place where we could, we could own was, was a big deal. And then to be able to have a place like the historic Woolworths building is even greater. You know, we're really excited, really excited for the move. The, which brings us to, speaking of moving, where are interest rates moving?
31:16 Speaker 03 They have come down. Now, I do want to put this little asterisk on there.
31:22 Speaker 01 Yeah. Come down from when? From where?
31:25 Speaker 03 They have come down. However, there's still some jitteriness in the market. So, on the 22nd of August, there was a speech given by Jerome Powell, our Fed Chair, from Jackson Hole. And I guess it's an annual retreat they go to, but it's a symposium where they have other financial people talking.
31:47 Speaker 01 Central bankers from around the world.
31:49 Speaker 03 Yeah. And apparently Jackson Hole's pretty nice.
31:52 Speaker 01 Oh, yeah. I've been. It's awesome. I haven't been to the, you know, obviously when the symposium's gone.
31:56 Speaker 03 Sure. Yeah, I hear it's beautiful. So it's not like he was, you know, hanging out in Los Angeles or something. Not to say there's a take on Los Angeles being not beautiful, but it's not the same as Jackson Hole, right? From this conversation, you know, came out some, some talk and the talk was is that perhaps we're a little too restrictive on our monetary policy at this time. Maybe we should shift some of our banking assets to maybe adjust the Fed funds rate. Well, on this, the markets just took off.
32:27 Speaker 01 Oh, yeah.
32:27 Speaker 03 My goodness, didn't the Dow and this S and P close at some of the highest?
32:31 Speaker 01 Yes.
32:32 Speaker 03 Ever?
32:32 Speaker 01 Uh, yeah, I think globally markets took off. It was just enough of, of an indication that the Fed's going to lower rates that they just went, yeah.
32:41 Speaker 03 And interest rates followed suits. We, we gained a benefit of about 0.375% lowering overall interest rates.
32:47 Speaker 01 Nice, like on a 30 year?
32:48 Speaker 03 Yes, on a 30 year. So conventional loans were almost touching 7%. Now they're in the mid sixes.
32:55 Speaker 01 Nice.
32:55 Speaker 03 And the government insured loans excludes FHA and VA and USC are all below 6% now.
33:01 Speaker 01 Oh, my gosh.
33:02 Speaker 03 So every little bit counts, right? The reason why I bring this up is because now is the time, not when they actually make a policy decision to either keep the rate the same or cut the Fed funds rate. The market moved on the news, the suspicion that it's going to happen. So there's some arguments that would say there's a 90% chance that there will be a Fed funds rate cut coming on the 17th.
33:29 Speaker 01 Mm hmm.
33:30 Speaker 03 Right, 90% chance.
33:31 Speaker 01 Yeah.
33:31 Speaker 03 So the markets are reacting already on that.
33:33 Speaker 01 Yeah.
33:33 Speaker 03 Right.
33:34 Speaker 01 Which will happen sometimes that will, the, the, the rumor will move at more so than the actual news that comes about. And so we saw, like, you probably saw this in the mortgage lending world, that rates went down, but now we've had a little bit of time to digest Jerome Powell's words. And have they, they, have they stayed down?
33:58 Speaker 03 They've, they've stayed down.
33:59 Speaker 01 Oh, good.
33:59 Speaker 03 So far, they've been pretty stable.
34:01 Speaker 01 Nice.
34:01 Speaker 03 Um, the one thing I do want to bring up though is, is what, what will really happen if they do, do a Fed funds rate reduction?
34:08 Speaker 01 Do do.
34:09 Speaker 03 Do do.
34:11 Speaker 03 I did say do do thanks. That was very mature.
34:14 Speaker 01 It's appropriate with the talking about the Fed.
34:16 Speaker 03 So if the Fed funds rate is cut, it will have an impact on the borrowing rates between banks. It also will have a direct impact on auto loans, student loans, credit cards, and then home equity lines of credit. So there will be a net benefit across the board. And the reality is, is the reason why you would do a Fed funds rate reduction is to stimulate spending.
34:39 Speaker 01 That's right.
34:40 Speaker 03 So when they were raising the Fed funds rate, they're trying to tell you, hey, hey, hey, hey.
34:44 Speaker 01 Slow down.
34:45 Speaker 03 You're spending too much money.
34:46 Speaker 01 Right.
34:47 Speaker 03 So.
34:48 Speaker 01 Which is how they were trying to combat inflation, because that's how you, that's how you.
34:52 Speaker 03 That's one of the tools they have.
34:53 Speaker 01 Tools, yeah.
34:53 Speaker 03 Right.
34:54 Speaker 01 Increased interest rates.
34:55 Speaker 03 But see, what the biggest indicator of weakness has been is employment.
35:01 Speaker 01 Yeah.
35:01 Speaker 03 Right. So one of the leading indicators of any type of change in why they would change Fed stance is stable employment. That's one of the, the charges, if you will, requirements of the Fed
35:12 Speaker 01 Yeah.
35:12 Speaker 03 is maintaining as high employment as they can.
35:15 Speaker 01 That's right.
35:16 Speaker 03 You know, keeping stability in the financial markets and then providing, you know, benchmarks for lending
35:22 Speaker 01 Yeah.
35:22 Speaker 03 in those arenas. So, yeah, it's, it's, it's all quite nerdy on my side.
35:29 Speaker 01 But it, because the, the Fed rate has such a wide impact on, because it first starts with how much it costs banks to loan each other, it all eventually trickles down to what you, what you pay for your mortgage rate.
35:43 Speaker 03 For sure.
35:43 Speaker 01 And so, um, maybe a message here from a listener, you, this, you can help us with this, Alan. It says, I'm looking to get a loan to renovate my house. I'm a homeowner, and I was wondering what's better, refinance or equity loan? Thank you, guys. Heard you for the first time on the radio and enjoy the show. I'm looking to fix my roof and get a wood floor put down.
36:07 Speaker 03 Ooh.
36:07 Speaker 01 So this is a good question.
36:08 Speaker 03 Those are very good questions.
36:09 Speaker 01 Do you do a refi and take some equity out? Do you just get an, uh, uh, he didn't ask this, but I'm assuming like, do you get a HELOC? A, a equity line, or do you just refi?
36:20 Speaker 03 So it depends, but I will tell you what I would recommend based off of just the information that's given in that message. One is, if you evaluate your existing mortgage, if the interest rate is below five and a half percent, then I would say you should lean towards a home equity line.
36:37 Speaker 01 Right, like, don't mess with that first.
36:39 Speaker 03 Correct, because you have a lower interest rate than current market.
36:42 Speaker 01 Yeah.
36:42 Speaker 03 And the second reason is, is that, I don't know about other banks, but we have a specific product that is a fixed second mortgage with amortization up to thirty years with no prepayment penalty. But the benefit of it is, is that if you qualify for this, there's no physical appraisal of your home.
37:00 Speaker 01 Nice.
37:00 Speaker 03 Which means that no one's going to be inspecting your roof or looking at your interior to further disqualify the property.
37:07 Speaker 01 Hmm.
37:07 Speaker 03 So if you have to go through a full refinance, they may require a physical appraisal where they come out and say, you know what, your roof is damaged, we won't do the loan unless you fix your roof. You're like, well, this is the cart before the horse. I'm getting the money out to fix my roof.
37:19 Speaker 01 Right.
37:20 Speaker 03 Do you see? So you, you kind of have to look at that strategically as well.
37:23 Speaker 01 Yeah.
37:24 Speaker 03 Now, if interest rates start to, start moving downwards and you took out a home equity line of credit, there's a strong chance you can bundle them together into one loan in the future. But you'd want to make sure that there's enough savings. If it just really comes down to payment, you're still better off, I believe, getting a home equity line, but getting a fixed rate for the longest term and then paying additional if you have additional principal ability.
37:50 Speaker 01 What's the advantage, or why would somebody ever want to get a fixed rate amortized? Amortized?
37:59 Speaker 03 Do do.
38:00 Speaker 01 Yeah, yeah. Uh, home equity loan versus your traditional revolving line, like a line of credit equity loan?
38:07 Speaker 03 Well, it has to do the adjustable period. So unfortunately, an adjustable rate mortgage, you're subject to what the waves are doing, right? So if the market goes up, your rate will go up. If the market goes down, you may have a floor, but it's adjustable. And a lot of times those equity lines have an interest-only payment tied to it. So unless you are diligent in paying principal, you're not paying any principal.
38:32 Speaker 01 Yeah.
38:32 Speaker 03 Because the minimum payment just keeps the balance the same.
38:35 Speaker 01 Yeah, yeah.
38:36 Speaker 03 So.
38:37 Speaker 01 Would anybody want to do that?
38:38 Speaker 03 Well, flexibility. For example, I personally have a very large equity line on my house that I opened six years ago. And I did so because if I needed ready cash, say I wanted to invest or buy something, I wouldn't have to apply, I'd just take the money from the line. So it gives you that option. However, if you have a very specified purpose for the money, in this case, it sounds like the listener does, then it probably would be the best thing to take a look at a fixed second.
39:06 Speaker 01 Yeah, yeah, that's, have those, have the fixed second mortgages been around for a while?
39:13 Speaker 03 They have become more popular within the last two years. But they were available, but not as readily available.
39:20 Speaker 01 Yeah, what's nice about the no prepayment is, you know, yeah, it's amortized over 30 years, but you could pay it off quicker.
39:29 Speaker 03 Correct, but here's the thing too, so the way these lines work is, let's just say you open a $100,000 line, but you only needed 50.
39:35 Speaker 01 Yeah.
39:36 Speaker 03 Okay, you can send 50,000 back to the line and they'll re-amortize the balance of 50,000, but you'll have access to that 50,000 for up to five years without having to refinance again.
39:46 Speaker 01 Oh, yeah.
39:46 Speaker 03 So it is a good benefit to have a larger line, but not use everything.
39:51 Speaker 01 Yeah.
39:52 Speaker 03 But then you don't have to, you know, do anything special to get more funds out.
39:56 Speaker 01 Good stuff. When we come back, I want to take a break. When we come back, I want to ask you about this, it's kind of along the same lines, there's oftentimes questions about what somebody should do to their home to improve it, to improve the value of it. How much do you get back, you know, for the dollar that goes into it? We can even use this as an example. What if you replace the roof and you replace the flooring? You know, dollar for dollar, what do you, do you get that back, you know, on the thing? Or what is, I know, don't answer, we'll give it a, we're going to cover this when we come back from the break. We're Money Wise.
40:24 Speaker 00 Don't forget, Money Wise is more than a radio show. We're an independently owned, local wealth management firm with 60-plus years of collective experience. Our financial advisors are here to help you, Kern County. Together, let's be smart, be safe, be money wise.
40:46 Speaker 01 Thanks for tuning in for the Money Wise Show. We're your hosts today. I'm Sharad Waite, that's Frank Lee. We're joined by Alan Maderos. He is our lending expert here in town. Alan, we were just talking before the break about the benefits of this listener was going to put some money into the roof and the flooring, which seems like, you know, those are good legitimate expenses for a HELOC or an equity line or refi. It's painful when you hear somebody, you probably see this too, and you go, oh, yeah, we can get you a mortgage, you know, we could refi and do some cash out here. What are you gonna do? Oh, I've got this jet ski I've been dying for. Brand new jet ski.
41:27 Speaker 03 And we'll go to the one little lake we have.
41:30 Speaker 01 Oh, we got a couple. Nothing wrong with jet skis, but like if you're struggling and you gotta borrow to buy a jet ski, you probably don't want to.
41:41 Speaker 00 It reminds me of Kenny Bowers.
41:42 Speaker 01 When he had to sell his jet ski eastbound and down. I just started watching that again. Started from season one. I was like, oh, my gosh, this is so irreverent. It's so bad. Don't let your kids watch that show. It's so bad. But what is, give us, our listeners, some ideas of what the return on the dollar is if you're gonna be selling your home. You know, what are do's and don'ts?
42:13 Speaker 03 So generally speaking, what will improve the saleability of your home is going to be kitchens and baths. You spend so much time there, right? And people, when they walk in, if your kitchen is something that really shines and your bathrooms are very nice, the rest of the house can actually be improved pretty quickly with coats of paint and new flooring, right? You're gonna get the best return for that. And curb appeal, just clean up clutter, make sure that the house appears well. That is going to improve your saleability. The standard items that you replace are not necessarily going to improve the saleability. So if your roof needs to be replaced or repaired, you're not gonna get any money out of that.
42:52 Speaker 01 They're already expected. The roof to work.
42:54 Speaker 03 But you're going to get the security in knowing that that roof is going to be in good position and last for a lot longer.
43:00 Speaker 01 Right.
43:00 Speaker 03 And then the same thing with plumbing. It's a huge upgrade internally for the property. However, it's not something that's going to increase the sale value. So a lot of people are getting their insurance non-renewed because they have old pipes.
43:17 Speaker 01 Oh, boy.
43:17 Speaker 03 So when you get a plumber to come in and they do a re-pipe on your home, expect to spend between 10 and 30,000 dollars, depending on the size of your property.
43:25 Speaker 01 Wow.
43:26 Speaker 03 So, but that re-pipe, it's supposed to help you for 30 to 50 years now.
43:30 Speaker 01 Mm-hmm.
43:31 Speaker 03 And insurance costs go down, but you kind of have to choose your battles because once you get a leak in copper piping, it's just a matter of time for the other ones to kind of catch up.
43:41 Speaker 01 Yes.
43:41 Speaker 03 So we've got pretty hard water here and it just corrodes over time and you get these little pinhole leaks and you say, why is my wall wet?
43:49 Speaker 01 Right. Why is there water in that light fixture?
43:51 Speaker 03 Yes, exactly right.
43:53 Speaker 01 Uh, talk about hybrid adjustable rate mortgages.
43:55 Speaker 03 Yeah, so surprisingly enough, interest rates for 30-year loans have come down, like I said, about three-eighths of a point, .375, but we have seen a bigger drop in what we call a hybrid ARM loan, which means that it has a fixed period before it moves to adjustable. So our seven-year fix right now is decidedly below 6%. It's in the mid-fives.
44:19 Speaker 01 And that'd be fixed for seven years.
44:21 Speaker 03 Seven years. So within seven years, if you decide to sell, you decide to refinance, you can certainly do so, there's no prepayment penalties. But on the seventh year and one day, they're going to make an adjustment once every six months according to the SOFR, which is replacing LIBOR. It's just an index that Wall Street Journal publishes for an adjustable rate. So it's a fairly safe loan. Most people don't keep their loans much longer than seven years. They typically refinance or do something else, but if you're just looking for that lower payment, then I would look at the seven-year fixed and adjust once every six months after the seventh year. But again, if rates drop enough...
45:03 Speaker 03 It makes sense to refinance into just a standard thirty or even shorten the term. One of the points I brought up today is a potential discussion topic was prepaying your loan to pay down principal faster to build equity. And it's not really that much more work. It's just a disciplined approach to paying more to the principal. And you can beat the amortization schedule and certainly pay a lot less interest over time and own the home free and clear sooner than you expected. And if you don't get to that point, which is a big American dream for a lot of people, then you've at least built more equity.
45:33 Speaker 01 Mm hmm.
45:34 Speaker 03 Right? So stat, I think we talked about this in the last show that I was here. What is the percentage of owned homes free and clear in the United States?
45:42 Speaker 01 Oh, I remember you said this. It was shockingly higher than I thought. It was over fifty percent.
45:47 Speaker 03 No, it wasn't that high.
45:48 Speaker 01 Oh.
45:48 Speaker 03 Around forty-two percent.
45:50 Speaker 01 Still, that's crazy.
45:50 Speaker 03 But still, so in Kern County, I did a string search. There's over eighty-four hundred homes owned free and clear in Kern County.
45:56 Speaker 01 Eighty-four hundred?
45:57 Speaker 03 Yes.
45:58 Speaker 01 Wow. Seems like there'd be more than that. There's forty percent.
46:02 Speaker 03 Yeah, but if you look at nationwide, you're also talking about areas like Alabama, Arkansas, which the median sales price is still below two hundred thousand.
46:12 Speaker 01 Yeah.
46:13 Speaker 03 But you go back data from like, you know, nineteen sixty-five till two thousand. There's a tremendous amount of equity.
46:21 Speaker 01 Yeah.
46:21 Speaker 03 In homes that aren't free and clear.
46:22 Speaker 01 Yeah, yeah. No, I like these tricks that people can do to shorten the amount of money that they're paying for their home over the, over the term of the loan, you know, like, you know, making principal payments. Oftentimes just making, you know, two, breaking it up into two payments a month. Can that even help? If your, if your lender allows that, they'll credit that, right? Not, not all of them will do that.
46:47 Speaker 03 Not all of them, no. Because it's a very specific structure. You basically have to have a payment and a half set aside and you're ahead. So you're always paying ahead, but not every bank allows that.
46:55 Speaker 01 Yeah, it's, you know, it'd be a good question to ask before you refi or get a loan. Hey, can I do this? And it's a nice, nice added benefit. I mean, it still may not be worth doing that if you can get a loan for cheaper.
47:08 Speaker 03 But you can also take your payment, divide it by 12, and just add that as additional principal every month. It's the same exact thing.
47:15 Speaker 01 Oh, yeah, yeah.
47:16 Speaker 03 It's like, why are we going this route where we can take the shortcut?
47:20 Speaker 01 Well, this really makes a lot more sense now that, you know, people are paying 6%, 7% on it. When your mortgage was 2.5%, I mean, why would you want to get rid of that? Like, why would you want to pay that? I mean, there's definitely, there's definitely reasons, legitimate reasons to get rid of that debt, even though it's super low interest rate. But for, you know, if you're in your working period of time, why would, that's like a free money loan. Like, you could have, put that excess cash in a money market account and you're going to do better than paying off that home, you know? But we're in different times now.
47:53 Speaker 03 Different.
47:54 Speaker 01 Well, Alan, thank you so much.
47:55 Speaker 03 Absolutely, gentlemen.
47:56 Speaker 01 Good stuff, as usual. Thank you for bringing good information. Join us tomorrow. Sammy and Justin will be hosting, and we're going to have the Art Council, Arts Council of Kern will be on. Great, great people, great organization. Of course, if you missed this show or any of our previous shows, go subscribe to the Money Wise Guys podcast. It's commercial-free on all podcast platforms like iTunes, Apple Podcasts, or Spotify. And remember these three things as we leave: be smart, be safe, and always be money wise.
48:34 Speaker 04 Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services offered through LPL Financial. LPL Financial and Money Wise Wealth Management are independently owned and operated.
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