Adjustable-Rate Debt Is Getting Pricier, How To Prepare Your Clients For The Increases

Ameritrain 1 Apr , 2022 Ameritrain

On March 16th, the Federal Reserve raised its short-term benchmark rate by a quarter percentage point. So now is the time to pay off high-interest debt before it gets more expensive. That includes adjustable-rate debt, such as credit-card balances or auto loans. Financial advisers say consumers should pay down their high-interest debt as quickly as possible, given the Fed’s stance. It will cost them a lot more if they don’t.

Fed rate increases don’t immediately raise the interest borrowers to pay on loans, but they affect them indirectly.

Fed rate increases don’t immediately raise the interest borrowers to pay on loans, but they affect them indirectly. So, as homebuyers prepare their finances before applying for a loan, it makes sense to understand better the implications of the Fed’s decisions and the consequences they may have on their own money.

Here are some tips you can offer your clients on tackling that kind of debt.

Creating a sense of urgency

MLOs need to talk to their clients about using the prospect of additional interest-rate increases and how it can help them create a sense of priority for eliminating debt. It may be strange, but visualizing what it would feel like to have to pay more money and more interest and then combining that with the picture of relief by having their debt eliminated faster may help them get there.

Resolving debt faster means they will have to cut back on some extras in their life. While that may not feel good in the short term, suggest your clients focus on the eventual gratification they will feel when relieved of that “bad” debt. 

Get motivated

Your clients need to reframe paying off the interest of their debt as a return, which can motivate them to pay off the debt with the highest interest rate first. A great way to do this is to count how much money they will get back over the lifetime of the debt they are paying off.

For example, a quarter-percentage-point increase won’t be a big deal for most credit-card borrowers; it will only add about $1 a month to the minimum payments toward the average credit-card debt of roughly $5,500 at the average credit-card rate of about 16.34%. Still, if the borrower only makes minimum payments, they will pay more than $6,000 in interest, and it will take them more than 16 years to pay it off.

Knowing one’s financials

Understanding your financial situation is valuable advice regardless of the situation. Still, once prospective homebuyers have their timeline, they need to list each of their debts and its corresponding interest rate. Creating a spreadsheet or tracking what they owe in an app can help them feel more in control.

Consumers need to pay special attention to credit-card debt, adjustable-rate mortgages, home-equity lines of credit, auto loans, and private student loans, as interest rates tend to rise faster than other types of loans.

Having a plan

The general recommendation is that paying off expensive debt first before tackling lower-rate balances is still prudent. This is because interest on debt may compound faster than growth expected from investments over the same period.

Talk to your clients and ask them to consider their minimum debt payments as fixed expenses, then ask them to get aggressive about paying off the highest-interest loans first, followed by the next. That way, they minimize the total interest paid over time. This may be painful but well worth the effort in the long run.

About Ameritrain

Ameritrain Mortgage Institute provides NMLS approved mortgage education for Mortgage Loan Originators. Services include mortgage training, professional development, learning management, and consulting.

MLOs may choose to take our courses in the way which serves their needs best, whether it is in webinar, live classroom, self-guided online, or instructor-led online form. We are dedicated to giving our students the best experience to receive new or continuing education and certification.