What You Can Do to Protect Your Finances against Interest Rates, Inflation, and Debt

Hey guys, Jim Duffy with Alcova Mortgage, and I want to talk to you about rising interest rates. The federal reserve, just rose interest rates by a quarter point. A lot of people wonder, why did they do this? How does it affect me? And what can I do to protect my family and myself in a rising interest rate environment?

So first things first, why is the federal reserve raising interest rates? It's very simple. It's one of the most powerful tools that the federal reserve has to pump the brakes on the economy and therefore bring inflation down to their target rate of 2%, right. I don't know how long it'll take to get there, but I know they have the tools to do so, that's why.

What does that effect? Well, a lot of people think it effects your mortgage rate, it doesn't. There's no direct correlation between mortgage rates and the federal funds rate. One is short-term rates, mortgage rates or long-term rates. They don't have any direct connection. Indirectly, they affect one another because of the economy. So what does it affect?

Well, it affects everything that you have that is short-term debt. If you have a home equity line of credit, that's short-term debt. That's tied directly to the fed funds rate. So for example, if your home equity line of credit that you took out to do home improvements, or for whatever reason you have it, was at 4 percent. Well, when the federal reserve raises rates by a quarter next month, you'll be at 4.25.

The federal reserve says they're going to raise rates another six plus times, maybe seven, I've heard other economists say more. Let's just say it's six more times. What's that mean? It means sometime next year, your rate on your home equity line of credit, won't be 4%, it'll be somewhere between five and a half and six. That's a big jump.

That's a big jump in payment as well, right? The same holds true for your credit cards. So credit cards is short-term debt. If you carry a credit card balance, well, your rate is going up. So how do we react to this? How do we protect our families in this?

Well, if you're a homeowner right now, and I want to just pick the homeowners right now, first and foremost. I would suggest if we have short term debt, let's talk about using some equity in your home to convert it to long-term debt. In the form of a cash out, refinance, debt consolidation. And the reason why it's very, very simple.

We all make what we make every month, right? We have our income. Our income might be X and our fixed expenses are Y, but some of those expenses are going up including short-term debt. We want to get rid of it.

Let's just say, for example, that your disposable income between X and Y, your income and expenses, your disposable income is $2,000 a month as an example. So as inflation takes hold and your home equity line of credit goes up from 4% to 6%, and your credit card balances go up because your interest rates are rising, and gas at the pump costs a little bit more and your groceries cost more, and everything else that you're buying is costing a little bit more, it eats away at your disposable income.

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We want to protect that. So the $2,000, you've seen it before, it goes very quickly down to 1500 and thousand and 500, and could even go negative where we have to live partially off a credit card. We don't want that.

So let's pivot. Let's take advantage of what we have, which is home equity, and use that to our advantage to as a defensive method for what we know the federal reserve is going to be doing over the next 12 to 18 months minimum, right. And that is take everything short-term, convert it to long-term.

I'll show this on the screen an example of it. That in itself is a defensive method. So even if other things keep creeping up, and they possibly will, you've just increased your disposable income and cashflow. And so as it creeps up, you still have plenty of room there to defend your family, to have money, to save for college for your kids, to invest, to go on a vacation, to keep the lifestyle going that you have and not eat into it at all.

It's just the right time to play defensive for a minute. And if you're a homeowner already, what an advantage. Because we have the tools to be defensive, right? And so let's take a look at a possible cashout refinance playing defense. I can run a scenario for you and a tool to run the scenario of saying, if we consolidate these short-term debts, here's how much cashflow will improve.

And here's what your new payments and lifestyle will look like. We're taking what the federal reserve is doing, what they've telegraph they're going to continue to do, and using home equity to play defense and be ready for it and succeed financially.

So if I can help, let me know. And again, thanks for subscribing to this channel. There's so much wealth of information from all the experts here. I'm glad you're here.