Is the time right to make major purchases?

How rising interest rates can impact your plans.

Article published: July 05, 2023

In this article...

  • Consider major purchase carefully
  • Pay off high-interest credit cards and loans
  • Waiting for rates to come down could pay off

With interest rates the highest they’ve been in years, is now the right time to make major purchases like a house or a car, or to make renovations on your home? Should you use cash or finance in this environment? Or should you delay the purchase? Here's what wealth planners Lisa Eitzel and Sean O’Bannon have to say. 

Financing a home purchase

Lisa: "We continue to believe in a big, long, 30-year fixed-rate mortgage, even as interest rates have risen. Liquidity and flexibility with your money are two of the key reasons for this. If all your money is tied up in your house, you lose control of this money until you sell the house. We want you to have the flexibility with your money to be ready for other financial needs that will come along in life, such as college, retirement savings or job loss. If you focus on just one goal – having no mortgage – you lose sight of the other events of life that can happen along the way."

Sean: "Some market metrics favor renting over buying at current price levels, but housing has so far proven fairly resilient in the face of massive rate increases. Generally, rates and home prices move inversely, so waiting for lower rates will likely mean you'll pay a higher initial price for the home. And waiting for a correction to buy has been an often-heard but so far unsuccessful strategy since the 2008 downturn. Focus on what you can control. If you have the appetite and finances for home ownership, and its associated expenses, along with a reasonable time frame (seven or more years), I wouldn't let these rate levels be a deal-breaker."

Making renovations

Lisa: "Home improvements certainly protect one of your most valuable assets -- your home. Some improvements are a necessity, while others are discretionary. For example, a new roof is likely a necessity, but a wine cellar is discretionary. With higher material costs and higher interest rates on home equity lines of credit, you may discover that the renovation project you had envisioned is now significantly higher in cost. The key to a successful (and affordable) home renovation is to start with a budget. This will determine the scope of the renovation and avoid "project creep." Some parts of the project may not be "in scope" this time around if the numbers don't add up."

Sean: "While financing costs are one factor to consider in major purchases, so are other factors like materials, labor, life/financial situation and purpose (“need" vs. "want”). Financing is one part of the equation, and there's no guarantee rates will come down within your desired time frame. And if they do, other inputs into the equation like materials, labor and miscellaneous costs may have steadily risen in the meantime. Also consider your overall financial situation at the time. Are there changes ahead? If you're in a particularly strong place that may or may not continue in the future (career change, two incomes may become one after the birth of a child, or one income will become zero after retirement,) getting those necessary home improvements done now, or getting the financing for them, is more important than waiting on something you don't control -- like interest rates."

Buying an automobile

Lisa: "Even before the decision to buy or lease, if you haven't shopped for a new car lately, be prepared for a whole new experience. First, with limited inventory, there may be limited opportunity for price negotiation. Second, because the cost of cars has increased dramatically, the loan structures have also changed. Therefore, you have to think about this car purchase or lease differently. Do you want an all-electric vehicle? Do you want a hybrid? Do you prefer the traditional gas vehicle? Do you want the latest safety technology? There are tax credits for EVs, ever-changing technology and car buying services. All these options are going to affect the price and availability of the car. A discussion with your planner about this purchase is a great place to start."
Sean: "In addition to the normal decision factors when considering a vehicle, such as budget, vehicle utility, safety, operating costs and efficiency, and resale value, one now has to consider internal combustion vs. electric. While some of those answers are subjective, we generally recommend leasing vehicles if you tend to keep them less than four years, drive less than 15,000 miles annually, and would like to stay current on technological developments. If you're planning on using the car past those figures, buying and keeping for the long run can make sense. Of course, the current variable to consider is electric vehicles and perhaps ultimately self-driving cars. Electric vehicle options and pricing are expected to increase and decrease respectively in the coming years, so that may very well be the direction to be leaning. And if you can hold off another year or two on the decision, even better."

Managing debt

Lisa: "We recommend paying off the highest-interest debt first. Typically, this will be credit cards, but you should be aware of rising interest rates on all debt, including Home Equity Lines of Credit, personal loans or student loans that have variable interest rates. Don't assume your HELOC is still at 4%. We are seeing HELOC rates that started at 4% and are now at 8 or 9%. We are also seeing credit card rates rise from 15% to 25-29%. When looking at this debt, this is also an opportunity to assess your spending. How did your credit card debt accumulate and if you pay this off, will it accumulate again? Is this a sign that you are living beyond your means?"
Sean: "Evaluate your expenses and your income. Where is the leak or overspend coming from? Where are the opportunities to improve and free up cash flow to attack the debt? Attack may be an aggressive word, but current interest rates on things like credit cards are indeed aggressive! Most people think credit card rates are in the teens, when in fact they could very well be north of 20% in 2023. Knocking that out is almost certainly going to be the best bang for your buck. Also consider consolidating high-interest debt into a single loan with a lower rate, or contact your creditors about possibly getting lower rates on existing debt. Finally, recognize how you accumulated this debt and take the hard steps to stop it from happening again. Making these initial changes might sting a bit at first, but the end result will be well worth it."

Cash or finance?

Lisa: "Right now, the decision to pay cash or finance a purchase is heavily influenced by our concerns over high interest rates. However, we believe the focus of the decision should be on the overall affordability of the purchase. Interest rates could go up further or they could go down again; we just don't know. We want to be certain that the purchase works into our clients' long-term plan, no matter what the current economic situation is. Major purchases and how or when to pay for them need to be integrated into that long-term financial plan."
Sean: "Play to your strengths. If you have sufficient liquid assets that can be accessed without large tax hits, rates at these levels can make cash payments attractive. Conversely, if you don't have large excess liquid assets but have strong recurring income, such as pensions, rentals, Social Security, etc., take advantage of the opportunity to stretch out the payments and not deplete your necessary liquid assets just to avoid a few extra percentage points of interest. Just make sure to not overburden your monthly cash flow with the added expense. Honestly, if another percentage point change makes or breaks the payment decision, you might want to reconsider the purchase overall at this point."

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