NerdWallet's Smart Money Podcast - Get Smart on Gambling Money Management, Mortgage Rates and Home Purchases

Episode Date: June 10, 2024

Learn about the psychology of gambling and smart tips for making home buying decisions amid undesirable interest rates. How can you gamble responsibly?  Should you use all your savings to buy a house outright or take on a high-interest mortgage? 00:48 Gambling Responsibly: Hosts Sean Pyles and Sara Rathner discuss the psychology behind gambling, particularly the concept of intermittent reinforcement. They also provide practical advice for responsible gambling, including how you can set and stick to a budget, understand the odds and know when to walk away. If you are struggling with gambling, then you can call the National Problem Gambling Hotline at 1-800-GAMBLER.  8:32 Today’s Money Question: Mortgage Nerd Kate Wood joins Sean and Sara to answer a listener’s question about whether they should buy a house with cash or take on a mortgage. They discuss the implications of high mortgage rates, the importance of maintaining a financial safety net, and alternative mortgage strategies to consider. In their conversation, the Nerds discuss: gambling, mitigating risk, high-interest mortgages, mortgage rates, responsible gambling, intermittent reinforcement, bankroll management, budget setting, buying a house, homeownership, financial safety net, mortgage strategies, home prices, Federal Reserve, inflation management, recession, financial security, financial conundrum, high yield savings, rent vs. buy, 15-year mortgage, 30-year mortgage, home repairs, home maintenance, private mortgage insurance, mortgage down payment, interest rates, economic indicators, behavioral psychology, understanding odds, financial strategy, liquidity, long-term financial goals, home affordability, economic landscape, mortgage options, and financial planning. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Hey, Sarah, are you much of a gambler? Not in the slightest. Me either, but we know that lots of people do like to gamble. So this episode, we're going to help you better understand what's going on in your brain when you gamble and how to take a nerdy approach to gambling. Welcome to NerdWallet's Smart Money Podcast, where we help you make smarter financial decisions one money question at a time. I'm Sarah Rathner.

And I'm Sean Piles. In this episode, Sean and I answer a listener's question about the merits of using all of your cash to buy a house and why you might want to consider less risky routes to getting into the housing market. But before that, we are going to Vegas. More like we went to Vegas, as in we NerdWallet people actually did just go to Las Vegas for a company get-together. And naturally, being in Las Vegas got me thinking about gambling, why people do it, and how to do it responsibly. What we're going to talk about applies whether you're gambling at the

blackjack table, a slot machine, or are one of the millions of Americans that's into online sports betting. So Sean, to start, let's lay some groundwork. Gambling can be fun if you're into it. And it's also risky if you don't set up certain guardrails and understand why gambling can be so appealing. Right. So let's talk about the psychology behind gambling. As we established, I'm not really into gambling. So I've always wondered like what keeps people going back to that slot machine or that card table over and over again, because to me, I just see money that I'm going to lose. So I'm guessing there's more going on than just wanting to make some money and maybe being drawn to all those flashing lights.

Yes, you are correct. So as the child of two behavioral psychologists, I'm going to approach this through the lens of behavior analysis. And in this case, the key term is intermittent reinforcement. And this happens when reinforcers or rewards happen only sometimes when doing the same activity. The way our brains work, we are more likely to repeat an activity when we get that kind of irregular reward. Your brain is like, okay, if I don't win this time, that's fine, because I know there's a chance that if I keep doing it, eventually I will win. And we find that more

enthralling than if you get the reinforcer every time you do the behavior. I'm picturing some sort of scientific experiment with mice and food pellets. Yep, exactly. We are the mice in this situation. Yes. And the food pellet is poker chips, maybe? I don't know. Yeah. Let's go with it. Yeah. So in the context of gambling, slot machines seem like this really obvious example.

You maybe once out of every three or five or seven polls make some food pellets. I mean, money. And what makes it more and more enticing is that you might win the next time or the time after that. So even if you didn't win this time, there's always a successful pull just around the corner, or so it seems. Right. Or if you're playing blackjack, if you don't get the card you want this turn, maybe you will the next turn. I can see how the prospect of winning, even if your odds aren't great, can keep you going back for more. But there is a point where it can become really hard to stop.

Yeah, and this is where our brains work against us. Intermittent reinforcement in the context of gambling is generally accepted as a main driver of problem gambling behavior. So I want to say if you are struggling with gambling, you can call the National Problem Gambling Hotline at 1-800-GAMBLER. That's 1-800-526-2537. All right. So now that we understand why our brains enjoy gambling, let's talk a little bit about the financial strategy because this is a NerdWallet

podcast after all. So we got to back it up with some money. So this means understanding bankroll management. That's a fancy way to say your gambling budget because you should go into this with a budget. So before you go, before you enter the budget, because you should go into this with a budget. So before you go, before you enter the casino, before you hop on that flight to Vegas or drive to Atlantic City or whatever, know how much you're willing to lose. And think about this like budgeting for a night out of doing anything fun, going to a concert, going out to dinner. How much do you want to spend on that one experience? And set your intentions before you step foot on the casino

floor or you bet on whatever big sports game of the week is happening. When your money is gone, say that you're done gambling. Maybe you set yourself a limit of $100 and you might lose that in an hour. Don't just pull out another $100 because you lost your money faster than you wanted. If you happen to be in Vegas or Atlantic City, I can attest that there is plenty of great people watching at casinos or wherever you are. So maybe go do that instead of spending more money. Yeah, and some pro gamblers recommend showing up with the cash you're willing to gamble

so you won't be tempted to pull any additional money out. And you should also know when to walk away from both wins and losses. I like the idea of walking away after a win to end the night on a high note. And the people who get in trouble are those who can't control their money management and don't know when to walk away. Isn't there that song? No one to hold them, no one to fold them. Listen to that song before you go to the casino and do what it says. Or maybe the Kelly Clarkson song, walk away and just do that when you are out of money.

Yes. When in doubt, leave. Always. Or listen to Kelly Clarkson or both. And also when you are gambling, no matter where you're doing it, know your odds. If you're at a casino, we all heard that cliche, the house always wins. And that is because it's true. You should not expect to win if you're gambling in a casino. Yeah. So while the odds are not in your favor, you can increase them by understanding the game that you're playing. So if you're interested in playing craps, but you haven't done it before, watch some YouTube videos, take some time to learn the game before you roll the dice. And in general, you will have a better chance at winning some games than others.

Like slots tend to have the worst odds. Blackjack is much better. And in general, if you have to be skilled to play, you have a greater chance of winning. All right. And finally, understand and know, why are you doing this in the first place? Why are you gambling? Hopefully it's to have fun. That's the whole point, right? You shouldn't be there to try and win a bunch of money because odds are that's not going to happen. So treat gambling like any other form of entertainment that costs money. Bar hopping, golfing. You might get lucky, you might not.

And if you're having fun, that's great. And if you're not having fun, then you can leave and go find something else to do. Yeah, so bottom line, gamble if you want, have fun, but do not expect to come home richer than you left. All right, and now we're at the part of the show where we remind you to send us your money questions. So listener, you know the drill.

Whatever part of your financial life, or maybe even your personal life if there's a financial angle that you need help with, let us know. And we might just answer your question in a future episode. And we may even invite you on to the podcast to join us for the conversation. So send your questions our way by texting or leaving a voicemail on the nerd hotline at 901-730-6373. That's 901-730-NERD or email us at podcast at nerdwallet.com. And finally, before we get into this episode's money question, let's quickly check in on our nerdy question of the month, which is what are you most excited about financially this summer? Last week, Sarah shared

that she's excited about joining a local private pool so she can lounge poolside with her kiddo. And I talked about how I'm looking forward to my upcoming trip to Chicago to get together with my twin sister for our birthday. And here's a submission from a listener named Sam who emailed us. Hi, nerds. Been looking through your website and podcast for the last year and a half, and this is my first time sending in a word. This summer, I'm excited to have some extra cash in my pocket because my new lease went from $1,200 to $800 a month starting June 1st. My long-term plan with this extra cash is to invest it in the hopes of owning a rock climbing gym. I've also taken a few steps to improve my credit score in the hopes of being able to get

a small business loan in the around five-year future to get the necessary items to do so. Okay, where do you live that your rent is $800 a month? I love it. Wow. I'm very jealous, but I love that you have a very specific, hyper-specific goal for this money that you'll be saving up. That's great. Let us know when you have this rock climbing gym and I will check it out. So listener, what fun plans do you have this summer financially? Whether you're getting ready to sell your first home or you're excited about some creative ways you'll be saving money on summer activities this season, we want to hear it. So that means texting us or leaving a voicemail on the nerd hotline at 901-730-6373 or email us at podcast at nerdwallet.com. All right, now let's turn to this episode's money question.

We'll be back in just a moment. Stay with us. We're back and answering your real world money questions to help you make smarter decisions about your money. This episode's question comes from Lena, who emailed us their question. Here it is. My husband and I are hoping to buy a house and

stop renting, but the interest on houses is very high. I hate to see how much of the mortgage is going to the interest on the loan. We do have the opportunity to buy a house outright, but it would take all our savings in our high yield savings account. We're getting about $350 a month from interest in our savings. So using that money to buy a house would get rid of that, but we wouldn't have rent. And we could save up very fast to get that money back where it was, probably within a few years. I know it's not ideal to put most of your money in a house, but in our situation, do you think this is better than paying a high monthly mortgage for 15 years? Thank you for your help. Love the podcast, and I hope you all are doing well. To help us answer Lena's question on this episode of the podcast,

we are joined by mortgage nerd Kate Wood. Kate, welcome back to Smart Money. Thanks for having me back. So we'll get to Lena's anxiety-inducing question about using all of their savings to buy a house outright in a moment. But first, I want to talk about interest rates. That's been the big story in the housing market over the past few years. So, Kate, where do they stand now? Well, mortgage rates have been hovering in the 7% range for most of 2024. They're a little bit softer now, but they've been kind of around there. And, you know, yes, that is very high compared to the record lows that we saw in 2020 and 2021, back when, you know, mortgage rates were in the 2% to 3% range. But 7% is not

at all high historically or really in the scheme of things. So Freddie Mac has tracked mortgage rates since 1971. And the long-term average over that time is 7.41%. So I mean, you could say like, okay, but rates were more in the 4% range for kind of all of the 2010s. So this is still really high. But I really feel like we need to let go of the idea that mortgage rates could go to rock bottom again at any minute or that that's where they should be. This was really an anomalous circumstance during the pandemic. And, you know, for what it's worth, interest rates on mortgages are still among some of the lowest interest rates that you're going to get if you're borrowing money. I get where our listener is coming from, though,

because sure, a 7% loan is a lot lower than the rate that you would pay on a credit card. But the scale of the debt is so much different. I mean, hopefully people do not have hundreds of thousands of dollars of credit card debt. But 7% on a mortgage that is for hundreds of thousands of dollars does amount to hundreds of thousands of dollars in interest alone. And another big factor that makes the current interest rates intimidating is that homes have just gotten so much more expensive over the past few years. So I don't want to minimize the impact of interest rates on affordability. But Kate, you are right that compared to historical rates, what we're seeing now is not unheard of. Yeah. I mean, if I could jump in for a second, something that I keep trying to emphasize to people is that, like, yes, mortgage rates are bad, but like rates are just the storyline villain here.

Home prices are the actual villain. Right. Like if you want to look at something over time and how it's changed and is it way out of whack with kind of what should be reality, it's home prices. It's okay. Looking back at mortgage rates, whenever we talk about them, we're also talking about the Federal Reserve and this question of will they or won't they lower interest rates? It's very dramatic. So can you talk a little bit about what's going on over at the Fed right now? Sure. So things are kind of really going to plan for

the Fed, but also kind of not. Right. So on one hand, it looks like they're possibly engineering a soft landing. Right. So slowing down inflation, slowing down the economy without the U.S. dropping into a recession. And that's pretty amazing. Right. But at the same time, they haven't done that enough that they're in an environment where it's like, oh, like, you know what, we can like maybe stop doing what we're doing for a little while, ease up, let cash flow get a little bit stronger, right? Because until very recently, literally the most recent jobs report, the U.S. economy has been really strong this year. It's been, you know, continuing to add jobs and inflation has been resilient. And so that has

really hindered the Fed's ability to move forward because they're really focused on a 2% goal when it comes to the rate of inflation that they're looking to see. At the beginning of the year, everyone was really excited. Like, yes, 2024 is the year we are headed into a rate cutting cycle. And now with pretty much almost every round of economic data that we're getting, that date keeps getting pushed back. Now, with the most recent employment numbers, the tide could be turning, but it's still not outside the realm of possibility that we don't see a rate cut from the Fed this year. I'm guessing that is not the news that many of our listeners wanted to hear. And even if we do get a rate cut,

it might take a while to actually see that trickle down to mortgage rates, right? Absolutely. Even if we were to see a rate cut, we're talking about something like a quarter of a percentage point at a time. So these are very small cuts. And then that's going to take time to filter out to other rates like mortgage interest rates. When we talk about the Fed cutting rates, they're cutting a rate. They're cutting the federal funds rate, which is like an index rate for banks lending to each other overnight. So that influences lots of other rates, but it doesn't directly control them. It's not directly moving them up and down. The other thing with mortgage rates that's really keeping them elevated relative to when they were able to go super low is that not only were they able to go low in 2020,

2021, because the Fed cut the federal funds rate to virtually zero, but also because at that time, the Fed was buying tons, like billions of dollars of mortgage-backed securities. So mortgage-backed securities are sort of like bonds. They're basically bundles of home loans. And when the Fed was buying all of these mortgage backed securities, that gave mortgage lenders the ability to cut their rates particularly low because they knew they had a buyer. Even though they were making these very inexpensive loans, they always knew they were going to be able to package them up, sell them to the Fed. But now the Fed has stopped buying mortgage backed securities and the ones that are maturing,

they're just letting them roll off. So they're owning fewer and fewer of them. And lenders don't have an assured buyer for their loans. So it's harder for a lender to just say, you know what, we could be really competitive if we cut our interest rates. Because if they did that, they might be stuck keeping those loans on their books. So going back to individual home buyers, for many, a difference in interest rates of just a few points can mean the difference between being able to afford a house or not. But if our listener is in a place where they can buy a house outright in cash, I'm wondering if they're maybe getting a little too hung up on the interest rate thing.

What do you think? In a word, yes. Although I think also, too, something that's getting lost here is the decision about where to live isn't just a financial decision. Obviously it's a financial decision in that, you know, this is a tremendous amount of money. It might be the largest transaction you make in your life, but it's not only a financial decision. It's also like a really emotional and really personal one because this is your home. This is where you're going to live, right? It's not just an investment. Yeah. I also think it's worth thinking about how an interest rate is really just the cost of having

a loan. And in the case of having a mortgage, that would mean that this listener would be able to hold on to some of their savings and I don't know, maybe enjoy their life, go on vacation, fund the inevitable repairs that come with owning a home instead of having all of their cash tied up in a house. OK, well, let's address the big question head on. And since we do not give specific personalized financial advice on this show, I'm going to turn the question over to you two, Sarah and Kate. Would you spend all of your savings to buy a house outright instead of maybe getting a 15 year mortgage? And why is the answer a resounding no? So there are kind of like multiple reasons that it's a resounding no. And I would point out like

this isn't about, oh, that we're using cash to make this purchase. This is about the idea that you would be using all of your savings, that you'd be using all of your money. So even if we're talking to folks who are getting a mortgage and they're just considering like, well, in order to afford the house I want, you know, and pay for the down payment, the closing costs, all the other things that come up, I'm going to be spending every single dime of my savings to do that. Our general advice is like, don't, don't do it, buddy. Because there are, like Sean was just saying, there are so many things that come up when you buy a home, whether it's like unexpected repairs or just a billion trips to the home center because you need more painter's tape or like potting soil or just the expenses just mount and mount.

And they might not be, you know, huge dollar amounts, but you need some kind of income to deal with them. So really, whether you're talking about buying a house in cash, which like, you know, if you can do it, that's it makes you a super competitive buyer, right? Or if you are saving up to buy a house with a mortgage, really, our consistent advice is that you don't want every last dollar tied up in that because life happens like things happen. Yeah, I cannot stress enough, not just how expensive it is to buy a home in the first place, but to maintain the home, to furnish the home. If you drain your savings just to get into that home, it's going to sit empty and broken until you rebuild your savings back up. And the listener does mention, well, if we don't have rent anymore, we can build

our savings back up pretty quickly. And I don't know what their full financial picture is, including income and other sources of funding that they have. But for, let's say, the average person, you're not going to be able to build your savings back up as quickly as you might think, because there's always another crisis. And it's not just with your home, but also just your life. There could be a medical crisis or something else that eats into your savings. Keep in mind that typically rent is the most you'll pay for your housing in a month, not including utilities, whereas a mortgage is typically the least you'll pay. Add on to the mortgage, the utilities, the maintenance, the repairs, even just the nice decorative stuff that you want to do. It's constant. The money is constantly bleeding from your account.

I also don't want to give the impression that it's never a good idea to buy a house with cash. If you have enough cash to buy a house and plenty of other cash sitting in a savings account that is liquid and accessible, first of all, congratulations. I'm a little bit jealous of you. In that case, you might be fine. But with this listener situation, they're discussing draining all of their savings to buy a house, which is extremely risky. If you don't have any cash in your savings, you're basically asking the housing gods to flood your basement or drop a tree limb on your house or something. It's just always a smart idea to keep a decent amount of savings liquid for the inevitable repairs that do pop up when you own a home. Absolutely. I mean, the other thing to think about, too. So, you know, say someone in this situation were to move forward with buying a home and getting that

15 year mortgage, you know, given the amount of income or savings that they're talking about, of being able to buy the home outright, they could make a very substantial down payment, right? They could even go above 20%. They can make like a 25% down payment. At that point, you're not dealing with private mortgage insurance. You are probably, assuming your other financials are solid, you're potentially getting the best rate that any lender is going to give you. And when you're paying down that mortgage, you can keep paying extra toward the principal to pay it down even faster and start cutting months and even years off that loan. But at the same time, because you did not put every single dollar that you have into that house, you can be dealing with anything that happens. You can be dealing with a non-negotiable, like must pay for this now emergency, like a

plumbing catastrophe, or thinking about longer term goals, like making sure your retirement is fully funded, right? But you've got that money to use and to do things with. So Kate, our listener is focused on two options that you mentioned just now when it comes to paying for their home. Option one is buying a house outright. And option two is getting a 15 year mortgage. But these are not the only ways to buy a house. So can you talk through some of the other options that our listener has for financing a home? Mortgage-wise, there are other options. So if their priority is strictly, I want the lowest interest rate that I can get in this current environment, and I want to pay off this home as rapidly as possible, they could potentially talk to a lender and get a mortgage term that is as short

as 10 years. Now, that is going to come with, again, assuming your other financials are very solid, probably the lowest rate that a lender will be willing to give you because that's not a lot of time for them to have that funding tied up in the loan. But at the same time, remember that the monthly payments then are going to be extremely steep because you're paying off a larger price over a much shorter term, right? When Sarah was talking about the difference between rent payments and mortgage payments and how much those would be, that's really with like a 30-year traditional mortgage. Because when you're spreading out your cost over decades, it's going to be a lower cost per month. Well, let's talk about that traditional 30-year mortgage.

How does that fit into the other options? A 30-year mortgage is actually still a pretty good option. Like, yes, your interest rate will be higher than if you had a shorter-term loan, but your required monthly payments are, again, going to be significantly lower because you're spreading out the cost over such a long period of time.

And, you know, that can actually allow for someone in this situation where it sounds like there's potentially a good amount of income, a good period of time. And, you know, that can actually allow for someone in this situation where it sounds like there's potentially a good amount of income, a good amount of assets, a fair amount of flexibility. So if you're having a month where like, I really didn't spend that much, I'm feeling good about everything. You could just pay down a big chunk of your principal and just immediately be like, I'm knocking out part of this mortgage. I'm taking down the amount that I owe. But, you know, if you have a spot where you're like, I kind of need the money for something else, whether it's like something dire and crucial, or it's like, you know what, I really want to take an awesome trip,

and it would be great if I could just like buy these tickets outright instead of putting them on my credit card, then you can do that. And you are still making your required monthly mortgage payment, which is nice and low and super, super manageable. So because the required monthly payment on that 30-year loan is going to be a lot lower than what you get with a 15 or a 10-year loan, you're going to have that sort of like extra cash on hand and it could help you feel more flush. All right. Well, Lena, if you're out there, I hope we have given you some things to think about as you make your decision when it comes to whether or not to buy a home or to keep renting. So Kate, thank you so

much for joining us on Smart Money. Of course, thank you for having me. And that's all we have for this episode. Remember, listener, that we are here for you and your money questions. So send them our way. You can call or text us on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. You can also email us your questions at podcast at nerdwallet.com. Visit nerdwallet.com slash podcast for more info on this episode. And remember to subscribe, rate, and review us wherever you're getting this podcast. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. This episode was produced by Tess Vigeland, who also helped with editing. Sarah Brink mixed our audio. And a big thank you to NerdWallet's

editors for all their help. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.