A few years ago, countless headlines (and a whole lot of real estate agents) were crowing about how you HAD to BUY NOW because interest rates were DEFINITELY going to rise.
Better get in now now now before it’s too late!
Turns out, it wasn’t too late. Interest rates today, in the summer of 2019, are at their lowest point on 30-year mortgages in almost 3 years.
In an effort to nail down the best interest rates, many people rushed into a massive financial decision to purchase a home before they planned to do so… and as it turns out, there was no reason to rush.
The people making those predictions (and influencing or pushing people into purchases they weren’t ready for) weren’t held accountable for being wrong.
It was you, if you were one of those people who reacted to their prediction, that was left holding the short end of the stick.
Getting a Good Rate Is Important, But It’s Not the Only Factor to Consider
Don’t get me wrong: I’m not saying that an interest rate you get on a home loan is trivial. It’s extremely important and can save — or cost — you tens of thousands of dollars over the life of your mortgage.
What I am saying is that it’s not the only factor to consider, and it’s certainly not something to get stuck on. You need to think about the interest rate on a loan along with factors like:
- What’s your 5-year plan? You need to commit to staying in a home for 5 to 7 years for the best chances of breaking even when you go to sell. Usually, the longer you stay in a home, the better your chances for earning some kind of return. If you know you can’t commit to staying in one home or one location for 5 or more years, the best interest rates around are not enough on their own to make it a good decision to buy now.
- Do you have a down payment? The interest rate you could get on a mortgage doesn’t really matter if you don’t have a big enough down payment to get that loan.
- Can you truly afford to buy a house? Even if you have enough cash to put down… what does that mean? Are you draining bank accounts to do it? Is this your entire savings that you’re scrapping together to make this purchase? And what about your cash flow — can it truly handle a mortgage payment (along with taxes, insurance, and all the ongoing costs of owning a home)?
- What does your financial life look like? Are you on track with other needs and goals? What are your priorities right now? You may have other needs and challenges to address that are more important than buying a house. There is nothing wrong with renting — and the idea that it’s more expensive than buying is not always true.
- Do you even want to buy a house? This is the kicker. Did you even want to purchase a home before you started feeling worried about interest rates rising? FOMO is not a good reason to spend hundreds of thousands of dollars on an illiquid asset that has a shaky history as a good investment.
We’re just scratching the surface here. There are countless other factors that you likely need to consider in the context of a massive decision like buying a home.
We Know Interest Rates Change (But We Don’t Know When They’ll Change Again)
Let’s not just limit this conversation to the best interest rates on loans. You can get yourself into trouble by trying to chase the best interest rates on things like savings accounts, too.
In this case, you’re not looking for the lowest rate — but the highest.
The good news here is that you are less likely to make a downright poor financial decision in trying to find the absolute highest rate on a savings account.
Hopping from bank to bank chasing best interest rates will likely not cost you money (like making a rushed purchase on a house can).
But you will probably create a lot of work for yourself and make yourself crazy by trying to switch savings accounts every time someone comes out with an offer that is 0.01% better than what you currently have.
Why? Because interest rates change. So if you want the best rates, the accounts that offer those will change too.
That much we know… we just don’t know exactly when and by how much.
Not All Accounts Are what They Seem — Read the Fine Print!
Not to mention, you might get roped into an account that you actually didn’t want in the first place. Wealthfront, for example, promises customers a 2.57% interest rate and up to $1,000,000 in FDIC insurance protection if they save cash with the platform… but there could be a problem here.
Wealthfront isn’t a bank. It’s a robo-advisor, and uses partner banks to stash customer cash. If you have more in cash than the usual $250,000 limit for FDIC insurance, Wealthfront takes that money and splits it up among the partner banks.
This might all be fine to you — but you need to know what you’re agreeing to before blindly plunging your way into becoming a new customer of a platform that might not actually meet all your banking needs.
Stop and think about why you’re trying to switch before you go through this process. Is it just to get best interest rates? Remember, interest rate is subject to change at any moment!
The interest rate on savings accounts comes from the bank offering the account. The bank sets rates by the federal funds rate, and that will change depending on what the Federal Reserve does.
If the federal funds rate changes, banks will change their interest rate. You might have noticed that happen recently with Ally Bank, who dropped from a 2.2% rate on their savings account to 1.90%.
In my opinion, the interest rate alone is not a good enough reason to switch banks — primarily because that rate will likely change.
It’s just like the house-buying conversation; there are more considerations than just the rate. For example, does the account provide you with other benefits and features you value and use? Is the institution one you trust and like? How is the customer service?
Question more than just the interest rate, because it’s the other stuff that won’t change. The interest rate will.
Whether It’s the Stock Market or Predicting Best Interest Rates, Market Timing Is a Loser’s Game
Buying into the idea that you can successfully time the market in any way can be so, so dangerous. It just doesn’t work for the people who try it.
No one knows exactly what’s going to happen next with any market (be it housing or the stock market) and when it will happen.
We can learn about market cycles and we can be prepared for volatility — but we can’t know precisely when things will go up or down or sideways.
Reacting emotionally to other people’s predictions leaves you open to making big financial mistakes. So remember that anyone telling you they know what’s about to happen next, simply doesn’t.
Unfortunately, that reality — the fact that no one knows with certainty what will happen next and precisely when — does nothing to stop predictions and forecasts.
Why? The biggest reason why is because there’s no one holding a forecaster accountable to being wrong, so they have little to lose by making their predictions.
Instead, they have a whole lot to gain the one time they get lucky and their prediction aligns with what actually happens. So they keep guessing and, most of the time, they keep being wrong.
This is the noise you need to learn to tune out if you want to stay the course and stick with your sound, strategic financial plan deisgned for your needs, goals, and values.
Don’t lose sight of the big picture in favor of studying one pinpoint directly in front of you. Learn to see the (money) forest for the trees, and make decisions in the context of your complex, unique life.