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The Clark Howard Podcast
04.01.26 Adjustable Rate Mortgages - A Waning / High Deductible Health Plans
00:26:28
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This episode is brought to you by State Farm. Listening to this podcast. Smart move. Being financially savvy. Smart move. Another smart move. Having State Farm help you create a competitive price when you choose to bundle home and auto bundling. Just another way to save with a personal price plan like a good neighbor, State Farm is there. Prices are based on rating plans that vary by state. Coverage options are selected by the customer. Availability, amount of discounts and savings and eligibility vary by state.
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Foreign.
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It's my pleasure to welcome you here to the Clark Howard Show. You know, our mission is to serve you with advice and information that empowers you so you make terrible financial decisions in your life. Today I'm going to tell you how I've been so wrong encouraging you to save money. Don't do that. Spend, spend, spend all the time. And make sure you pay too much for everything. Actually, you know what? Today is April Fool's Day, so just had to do that today. I want to talk about something that an unusually large number of Americans are doing when they go to buy a home. And it's how they're financing that home. Just laying it out here. You're freaking me out. And later, if you have to buy your own health coverage or you're a small business owner trying to navigate this, it's tempting. What's out there in the market that saves you money up front but is bad, ugly when you get sick, I'm going to tell you what you need to know, who it works for, more important, who it doesn't. But right now, I want to talk about something in the mortgage market, an oldie but batty, that is booming. You know, even as mortgage rates have moderated somewhat, they're not back where they were when they were being artificially manipulated. Lower through the housing bust and the time period after it. And so now we're looking at mortgages that start with a five. Look at a six. Start with a six. People are like, hey, that's too much money I'm having to pay per month. And so they're being advised by the banks to take out arms. An ARM is where you take out a loan that's fixed for a period of time, usually three or five years, but most often five years, occasionally seven. Then after that, the loan blows up on you. And so they're dangled before you because you get an upfront lower mortgage rate, but then you have no idea what they're going to be in the future. So just trying to get into a loan at the lowest possible cost, people are doing the ARM they're typically saving 1 percentage point versus a fixed rate loan. And so yeah, it's looking awesome for that three, five or seven years, right? You know, I would have been paying X number of dollars a month, paying this much more interest, but I don't have to worry about that until the day you do. So what happens if home values kind of stall out over the next many years and you can't refi? What happens? You're at the mercy of whatever that rate resets to based on the index that's in your contract. Who is it okay to do an arm? So often it's the people who aren't doing them. Here's a circumstance where an ARM can work. So let's say you're trying to get the best deal on the loan and right now that's the arm and you have sold a prior home and you've got huge money, you're paying down on the new home you've got day you move in, you've got huge equity, you've got flexibility there. You're not in a position where you financed, you know, 95, 97% of the purchase and you're dependent on values of homes going up over that five or seven year period, let's just call them five or seven year arms, in order for you to have enough equity to have a chance of being able to refi. But again, if those homes don't go up in value, you may be boxed out of doing a refi. So the people who need the flexibility, the lease people who have huge money they can put down a down payment, are the very ones that can benefit the most from doing an ARM because the risk to them is so much lower. Otherwise you don't use an ARM as a way to stretch into a home that really you couldn't afford otherwise.
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Krista okay, Gregory in California says on a Clark stinks. I was watching recently, there was a letter from somebody about how she was able to get out of debt. But one of her things that she mentioned was she paid off her student loan with her heloc. Since the interest is then deductible, but the interest isn't actually deductible, is it? If it's not used for home improvements
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and fixes, you are completely right and I don't remember the circumstances of the particular episode you watched, but when somebody takes student loan and moves it to a heloc, they're putting their house at risk. The deductibility is something that is subject to audit but seldom is. So people do deduct the interest a lot, even if they're not even aware they're not supposed to.
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Allison in Utah says, my husband and I are looking to build a larger home and trying to decide if we should rent our current home or sell. Our current home rate is 2.9% and we still owe about $110,000. Similarly sized homes in the area are renting for around 2,800. Our same floor plan down the street recently sold for around 560,000. The new home would likely be 4.99% rate and the price is 675,000. We would put down at least 20% to avoid PMI and probably more with savings, unless we sell, in which case we would put all equity toward the new home. Is there an obvious better option in this scenario?
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Okay, so first of all, your finances are in great shape. I mean, I'm hearing everything you're saying. This is absolutely wonderful, Alison. I mean, you've got so much equity in that home, you've got so much available cash that even if you keep that home and turn into investment property, you are in a position to avoid PMI and have instant equity in that new home. Right? So a couple of things here. You said the home now, even though you only owe 110, is worth 560,000 or somewhere in that territory, but the rent you can get for it is about 2,800amonth. If you go with a traditional back of the envelope return on investment on a rental property, you would want to be able to get rent more like 5,000amonth to justify tying up money in a property that's worth now around 560. Now you do have the advantage though that that covers some of that, that the remaining mortgage balance is at a crazy low interest rate at 2.9, and that is a very valuable opportunity. And then on the other hand, if you sell the property, the gain you've had over the years, you are allowed to exclude tax free quarter million single individual 500,000 as a couple in your case. So the sale of that property would be completely tax free for you. So 100% of that money would go to your pocket. If you turn into a rental property, eventually you lose the tax free shelter in the sale of the property. So all those things considered, it's not a slam dunk to sell it, but I would encourage you to sell the property Then think about this. You're able to put so much more down on that $675,000 home that the fact that you're going from 2.9 to 4.99% on mortgage becomes less relevant because the mortgage would be so much lower on the new property. The other case though is this is a method of long term wealth turning that original property into a rental property because you will generate decent cash flow even from the very beginning, all through the years on it.
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Okay, David in California says, it's my understanding that the New York Stock Exchange and Nasdaq have been electronic exchanges for some time now. Why then are there still traders on the floor of the exchange? Are they trading in commodities or other assets with less liquidity?
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So the advantage you have with traditional exchanges, even though most transactions are so simply done and they're electronic and they're instant and all that is they're. The whole architecture of how traditional exchanges work is there are what are known as market makers. So the stock markets work well electronically normally, but there are times of financial panic or whatever where humans involved in the process deal better with freeze ups in markets in a particular stock or in a particular range of stocks in a part of the exchange. So everyday routine, yeah, all electronic. But the advantage that remains by having very experienced traders and having market makers making sure that a stock stays as liquid as possible is part of the underlying architecture that keeps financial markets stable even in a time that would be unstable otherwise. So that's my case for it. And I have an automatic bias because my late father as a young man worked on the floor of the New York Stock Exchange and was a big believer in his lifetime and having humans involved in the process because of the what ifs that can occur. So dad, that's for you. Coming up ahead, I'm going to talk about high deductible health plans and when the pitch for them makes sense and when it's flat out dangerous for you. So we're in a pretty serious push to shove with health care costs in the United States. Our trend lines have been and stay ugly compared to everywhere else on earth. And yes, I'll say that thing I say that upsets some people in medicine. Our life expectancies are really poor in the United States compared to any other developed country and a lot of middle income countries. So we're not getting a lot for the outrageous amount of money we spend on health care in the United States. And there's a lot of arguing among the politicians about coverage, about insurance, ignoring the big problem, which is cost in our system. So they're all looking for a short term magic pill and something they can say in like 10 seconds to people if they're asked a question about health care. The reality is the problem we've got is, is out of control spending by monopoly hospital systems, city by city. If you look at where the money is going for health care in the United States, the core of the problem is how hospital systems, both profit and nonprofit hospital systems, but mostly nonprofit, have strategized to create semi monopolies or monopolies in metro areas. They don't need to monopolize the country, they just need to monopolize the area they're in, own medical practices, own imaging facilities and feed people into this outrageously overpriced system that they've created. So we're all arguing about insurance when the real issue is the politicians lack the guts to do something about the problems the hospitals are causing all around America with poor health outcomes and crazy high costs. And remember, if you are a hospital administrator and you're furious at me right now, clark.com clarksthinx is where you post your rebuttal so people can disagree about all that I said. But look at this new survey finds that a third of Americans are having to borrow money for medical care. They need doing without that medical care or not being able to pay their other bills because how expensive it is. And so going back to the politicians, a lot of them are acting like having catastrophic only health coverage would solve all. The problem is if people can't afford a regular routine bill, how are they going to afford a health plan that the first 20 to 30 thousand dollars of cost comes out of your pocket? Let's be realistic here. The premiums may be lower on one of these catastrophic things, but they're generally not even HSA eligible because in order to be able to have these wonderful accounts called HSAs, a high deductible health plan has to meet certain criteria. And these snake oil things, these high deductible plans, most of them aren't even eligible for HSAs. So I'll be asked by people, so I can't afford normal insurance, is this better than nothing? Here's the answer to that. If you have a lot of assets, let's say you own your own business, it's throwing off a lot of income, all that. You're the person who can handle an ultra high deductible health plan. On the other hand, if you're someone who is doing it because you can't afford anything else, I'm not sure that it's better than nothing. We are in a, we're in a real bind right now with health coverage. So I would say if you want to buy something that would qualify as a high deductible health plan, it's not going to have a 20 or $30,000 deductible. It will be substantially lower and it will make you HSA eligible. Health savings accounts are so phenomenal because you get an upfront tax benefit. The money grows tax free and you can use that money to pay out of pocket medical expenses. So beware, be wary of ultra high deductible health plans. And if you elect me, no, I'm not running for office. But I mean, we need some people in Washington who will actually attack the problem and not come up with half solutions. If we don't deal with the cost side of health care, we're going nowhere.
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Okay. David in Alaska says twice in the last six months I've been surprised by invoices from doctors clinics saying I owe them money from two years ago or longer. They call it an account review. I called, they said it's due to some sort of oversight in previous billing. But when pressed for an explanation, the billing department rep says she can't answer about lapses or errors since she wasn't working there at the time. There's a big warning at the bottom of the notice that it'll be referred to collections if I don't pay. The amount this time is $176.55 for a visit in April of 2024. I'm tempted to pay it just to get it out of the way, but is there a different recourse advised? And I'm going to do something I don't usually do, but I'm going to read the SEC a second question because I feel like the answer you might be able to just sort of do them one after another. Dan in Ohio says, I got a bill from a date of service two years ago from doctors I've never heard of. It's from online care network, which I've not heard of either. Do I need to pay this? So lots of people have been writing in saying they're getting these bills sometimes from doctors they know, sometimes they don't, threatening collections.
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Right. So we got a couple of things here. One, if a bill is a legitimate bill and you owe it, the fact that they bill you late doesn't eliminate that it's a bill. But the reality is an old bill is very hard to ever collect. And at a certain point varying by state, they don't even have a right to sue you against anymore. It doesn't prevent them from turning it over to a bill collector. But then what you do is you. You exercise your rights to dispute the validity of the debt. Now let's go to your thing, David. If you had insurance, you hopefully would be able to process this through insurance, since it's not ultra old. If you're talking about back in 24, if you don't have insurance and you know the bill to be legit and you can afford to pay it, I would say you just pay it if it is a legit bill. In the case of Dan, though, it's different because these are bills from doctors you don't even know. Now, there can be circumstances where we get billed by doctors we've never heard of. Could be a radiology practice or an anesthesiology practice or something like that. But other than a circumstance like that, if it's like a, you know, a primary care doctor, internal medicine doctor, in your case, Dan, you say, I don't recognize these providers or these bills. And then you have them provide you documentation to your satisfaction if they can, that you owe the bill in the event that it went to collections. And these are bills that you don't recognize as yours. You dispute the validity of the debt with the collector. And then they are putting themselves at risk if they were to put it on your credit report. You also have the right, once you do that, to tell them they can't contact you further about the debt. There is a problem in medicine. A lot of medical providers are better at providing medical care than they generally are at the back office functions. And medical back office billing being messed up is a common problem. Somebody new will come in and they'll go back and they'll do forensic accounting and say, hey, we never billed for all these things. They send out a big drop of bills from could be years ago like we're talking about in Alaska.
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And then these, these practices getting bought up by these bigger companies could get bought up by those people are going back.
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Right. By private equity buying up practices. Right. They pay for part of the cost of buying out the practice from going back and doing forensic billing.
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Gosh. Okay. Gary in North Carolina says, I haven't heard you mention them, but I went to Walgreens to pick up a generic prescription med that was over $200, my cost. I asked the doctor's office to submit the same generic prescription to Mark Cuban's cost plus drugs. My cost was $22, not going through insurance and through this online pharmacy.
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Okay, say the numbers again. 200 from Walgreens, 22 from Mark.
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Pretty significant cost difference. I'm Learning to not always accept the first price you get. I will say Walgreens told me before running the medicine through insurance how much the medicine was going to be. Thanks for everything.
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And that's a really good practice at that Walgreens you went to because they know how likely you would have abandoned the prescription at the counter when they told you it was going to be 200 bucks. So different operators price differently. Mark Cuban has copied what Costco does where they market up prescriptions. A certain percent don't know what Mark's markup is, but Costco marks up no more than 14% on prescriptions. And most pharmacies discount from the brand name price to the generic. So they might say, well, the brand name is 300. We'll sell the generic for 200, even if the generic only cost them $8. So. Or in this case, let's say 20. So that's why you've got to be aware that the price really does matter. And if you use something like Goodrx, you're able to see what it will cost at different places for a medium and know that the pharmacy business is very opaque. I mean, it's very hard to know up front what something's going to cost you. I always go up to the counter. I kind of feel like I don't play lotteries, I don't gamble, but I go up there and it's time to ring up the med night. I have no idea what's going to pop up on the register.
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We've also heard from some people about Amazon Pharmacy.
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That's right, Amazon. I should have mentioned them. Walmart. Because you can't mention Walmart without mentioning Amazon and Amazon.
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And again, the Mark Cuban one is
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Cost Plus Mark Cuban's Cost Plus Drugs.
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Yep.
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So there are massive differences on the same script, one place to another. And your example, Gary, is not unusual, but I'm glad you just didn't pay the 200 and you got it for a tenth the cost. Good for you. And thank you so much for joining us today. We're so glad we had you on our April Fool's edition of our podcast and YouTube show. And I hope you pull a good one off over on somebody. What's the best April Fool's joke anybody ever pulled on you?
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I think my parents told me there was no school one day and it was a lie.
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Oh, that would hurt. I remember in my broadcasting career, one of the funniest things that happened was a competitor station did a fake Clark show that day.
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Oh, wow.
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Because people wouldn't know in a market necessarily what radio station to tune into and they gave all bad advice.
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Oh so wrong.
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Yeah, people thought I'd really been giving the bad advice. I will. Well, anyway, have a great rest of your day and Friday it's going to be Clark Stinks. And look forward to hearing the ways I can improve to serve you better so you can learn ways to save more, spend less, and avoid getting ripped off.
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You're probably driving, working out, or doing chores right now. Quick tip. TikTok isn't just entertainment, it's where I find fast, practical advice for real life. Download TikTok now.