Cash or Mortgage? Navigating Home Equity and Title Agency Shopping

Summary

NerdWallet's Smart Money Podcast: Cash or Mortgage? Navigating Home Equity and Title Agency Shopping

Release Date: December 12, 2024

In this episode of NerdWallet's Smart Money Podcast, hosts Sean Pyles and Sara Raffner, alongside expert Kate Wood, delve into critical aspects of the home buying process. Focusing on title agencies, home equity utilization, and the decision between paying cash or taking a mortgage, the discussion provides valuable insights for prospective homeowners navigating the complex real estate landscape.

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1. Understanding Title Agencies in Home Buying

Listener Question: Mark inquires about the role of title agencies in the home buying process, expressing concern over limited time to evaluate recommended companies. Specifically, he mentions a conflict of interest where a realty company has a financial stake in the title agency, seeking advice on how to shop around effectively.

Key Points Discussed:

• Role of Title Agencies:

  • Verification of Clear Title: Title agencies ensure that the property's title is free from liens or disputes, safeguarding buyers against potential ownership claims.
    • Kate Wood explains at [04:11] "The title agency goes through public records and they just make sure there is nothing fishy with the home's ownership."
  • Escrow Services: They may handle escrow, acting as a neutral third party to manage deposits during the closing process.
  • Title Insurance: Provides protection against future title disputes or defects.

• Cost of Title Services:

  • Variety in Fees: Title fees can range from $75 to $3,000 depending on services and property value.
    • Kate Wood notes at [05:36], "The total cost of both [lender's and owner's title insurance] is usually like 0.5 to 1% of the sale price of the home."

• Shopping for Title Agencies:

  • Prior Preparation: It's advisable to research and shortlist title agencies early in the home buying process to avoid time constraints during closing.
    • Kate Wood advises at [07:00], "Spend some of that time going through these different companies... so you can have some kind of preference."
  • Red Flags: Be vigilant about potential conflicts of interest, such as financial ties between realtors and title companies.
    • Kate Wood highlights at [07:09], "If this is something that you really want to do... that could possibly raise some red flags for you."

• Hosts' Personal Experiences:

  • Both Sean and Cody admit to not shopping around for title agencies due to decision fatigue and the complexity of the home buying process.
    • Cody shares at [09:19], "I just let the realtor lead me around like a confused baby lamb."

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2. Utilizing Home Equity to Purchase a Second Home

Listener Question: Amy seeks advice on using the equity from her first home to finance a new property in Seattle. With significant appreciation in her current home's value, she contemplates a cash-out refinance or a home equity line of credit (HELOC) but is uncertain about the advisability and mechanisms involved.

Key Points Discussed:

• Pros and Cons of Using Home Equity:

  • Opportunities:
    • Wealth Building: Leveraging equity can accelerate real estate investments.
      • Sean Pyles reflects at [12:25], referencing Barbara Cochran's strategy of holding onto properties to maximize asset utilization.
  • Risks:
    • Increased Debt: Accessing equity adds to overall debt, potentially impacting debt-to-income ratios.
      • Kate Wood cautions at [12:25], "Anything involving home equity is inherently risky because we're talking about loans where failure to repay could result in losing the home."
    • Interest Rate Implications: Current higher interest rates may diminish the benefits of a low-rate original mortgage.

• Options for Accessing Home Equity:

  • Cash-Out Refinance:
    • Description: Refinances the original mortgage for a larger amount, providing the difference in cash.
    • Considerations: Loses the favorable 3.75% rate; higher overall loan amount and closing costs (2-6% of the borrowed amount).
      • Kate Wood explains at [13:20], highlighting increased costs and higher interest rates.
  • Home Equity Loan vs. HELOC:
    • Home Equity Loan: Lump-sum with fixed interest rates, ideal for clear, one-time investments.
    • HELOC: Revolving credit with variable rates, suitable for ongoing or unexpected expenses.
      • Kate Wood differentiates at [14:37], emphasizing the structured nature of home equity loans versus the flexibility of HELOCs.

• Considerations Before Proceeding:

  • Financial Stability: Ensure robust emergency funds to manage additional debt obligations.
    • Sean Pyles emphasizes at [16:31], "If this is something that you really want to do, you are actually much better off doing it well before you've reached this stage."
  • Landlord Responsibilities: Managing a rental property entails maintenance duties and potential rental market fluctuations.
    • Kate Wood points out at [19:07], discussing the complexities of being a landlord while handling multiple mortgages.
  • Consultation with Financial Advisors: Seek professional guidance to assess the feasibility and risks associated with leveraging home equity.
    • Sean Pyles recommends at [20:16], "Consult with a certified financial planner, especially one who is experienced in real estate investing."

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3. Deciding Between Buying a Home Outright vs. Taking a Mortgage

Listener Question: Lena is deliberating whether to purchase a home outright using her savings or to finance it with a 15-year mortgage. Concerned about high interest payments on a mortgage and the desire to eliminate ongoing rent, Lena seeks guidance on the best financial approach.

Key Points Discussed:

• Impact of Interest Rates and Home Prices:

  • Current Climate: While interest rates have risen, they remain historically low relative to past decades. However, soaring home prices have significantly affected affordability.
    • Sarah Raffner asserts at [23:07], "Home prices are the actual villain," emphasizing the broader issue over interest rates alone.

• Pros and Cons of Paying Cash:

  • Advantages:
    • No Monthly Mortgage Payments: Eliminates ongoing interest expenses and rent obligations.
    • Competitive Buyer: Cash offers can be more attractive to sellers, potentially expediting the purchase.
      • Kate Wood acknowledges at [26:08], "It's a tremendous amount of money... but it's not only a financial decision, it's also... your home."
  • Disadvantages:
    • Depleted Savings: Removing all savings increases financial vulnerability to unexpected expenses or emergencies.
      • Sara Raffner warns at [26:06], "You don't want every last dollar tied up in that because life happens."

• Pros and Cons of Taking a Mortgage:

  • Advantages:
    • Liquidity Preservation: Maintaining savings ensures funds are available for emergencies, renovations, or other investments.
    • Potential for Mortgage Interest Deduction: Some borrowers benefit from tax deductions on mortgage interest.
    • Flexible Repayment Terms: Options range from 10 to 30 years, catering to different financial strategies.
      • Sarah Raffner elaborates at [24:51], highlighting benefits of keeping savings intact and flexible payments.
  • Disadvantages:
    • Interest Payments: Over time, significant amounts are paid in interest, especially with shorter-term loans.
      • Lena's initial concern is echoed by Sara Raffner at [24:51], acknowledging the apprehension over interest payments.

• Alternative Mortgage Options:

  • 10-Year and 15-Year Mortgages: Offer lower interest rates and faster equity buildup but come with higher monthly payments.
    • Sarah Raffner discusses at [29:37], noting the steep monthly obligations compared to longer-term loans.
  • 30-Year Mortgages: Provide lower monthly payments, offering greater financial flexibility and manageable debt levels.
    • Kate Wood and Sarah Raffner advocate at [30:54], emphasizing the balance between manageable payments and interest costs.

• Hosts' Recommendations:

  • Avoid Depleting Savings: Maintaining an emergency fund is crucial for financial resilience.
    • Sara Raffner strongly advises at [26:06], "Our general advice is like, don't, don't do it, buddy."
  • Assess Financial Health: Evaluate current savings, income stability, and long-term financial goals before making a decision.
    • Sean Pyles stresses at [27:53], highlighting the importance of liquidity for unforeseen events.

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Conclusion

This episode provides a comprehensive exploration of essential housing topics, equipping listeners with the knowledge to make informed decisions. From understanding the pivotal role of title agencies and the nuances of leveraging home equity to the critical evaluation of buying a home outright versus taking a mortgage, the discussion underscores the importance of strategic financial planning and informed choice-making in real estate endeavors.

Notable Quotes:

• Kate Wood at [05:36]: "The total cost of both [lender's and owner's title insurance] is usually like 0.5 to 1% of the sale price of the home."
• Sara Raffner at [24:51]: "Home prices are the actual villain."
• Cody at [09:19]: "I just let the realtor lead me around like a confused baby lamb."
• Sean Pyles at [20:16]: "Consult with a certified financial planner, especially one who is experienced in real estate investing."

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By addressing listener questions with expert insights and practical advice, NerdWallet's Smart Money Podcast continues to empower individuals to navigate their financial journeys with confidence and clarity.

Transcript

[Cody]

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[Sean Pyles]

Nerd Wallet's Smart Money Podcast. I'm Sean Pyles. Today we are reaching into the special Smart Money archival box. It's acid free and lined in gold. Just kidding. Our archives exist in digital only and we wouldn't waste our hard earned and well saved money on gold lining anyway. Right? If you are a loyal listener, you would know that we would never do that. But this month we are bringing you some of the highlights from 2024, some of our favorite listener conversations, and favorite coverage for a special series that is the best of Smart Money. Today we're looking back at the issue of housing. High prices and high interest rates have kept a lot of folks on the sidelines this year, but we followed all the trends and provided a ton of advice on how to navigate the market. So here's a review of what we all learned and need to know about housing as we head into 2025. Welcome to NerdWallet's Smart Money podcast where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Pyles.

[Cody]

And I'm Sarah Raffner. If you have a money question for the nerds, call or text us on the Nerd hotline at 901-730-6373, that's 901-730-Nerd. Or email us at podcastnerdwallet.com follow us.

[Sean Pyles]

Wherever you get your podcasts and if you like what you hear, please leave us a review and tell a friend this episode. We are taking on a few of your housing related questions in a lightning round and we have housing nerd Kate Wood joining us for this nerdy journey. Kate, welcome back to Smart Money.

[Kate Wood]

Thank you so much for having me back.

[Cody]

All right, let's get into the first question. This one comes from Mark, who sent us an email. Here it is. When buying a house, we carefully selected a realtor, then carefully selected a bank to originate the mortgage. Then when the realtor draws up the offer paperwork, suddenly there's a new company in the mix and the company that will handle escrow and the title transfer. The paperwork will tell you that you don't have to use the title agency the realtor is recommending. But when you're getting ready to sign the paperwork, it's too late to step back and see if the title agency is a good one and if what they're charging is reasonable and competitive. On the last offer I made, I even had to sign a disclosure that the realty company and many of its employees have a significant financial stake in the title company. I'd love for Smart Money to talk about this and how to shop around for a title agency in advance, just like we do for other companies involved in the transaction.

[Sean Pyles]

Buying a house is a complicated process, in part because there are so many people and companies involved. Can you please quickly explain the role of the title agency in the home buying process?

[Sarah Raffner]

Sure.

[Kate Wood]

So in a nutshell, the title agency goes through public records and they just make sure there is nothing fishy with the home's ownership. They're looking to see that the house or the home has a clear title, which means that it is the seller's house to sell. No one else can make a claim to it. So when I was buying my home, actually the Title agency found that there was a former occupant who owed a bunch of back taxes, which was a big yikes. Luckily for me, it turned out that that person had just lived there. They didn't have an ownership stake, they weren't on the title. But if they had been, I could have been dealing with the IRS and a tax lien and it would have been a lot hairier.

[Sean Pyles]

Would not have been fun.

[Kate Wood]

No, no, not at all. And so this is kind of what you're paying for with the title company. The listener mentioned the company handling title and escrow. So title companies sometimes do escrow, which is just being the third party that holds onto your deposit, you know, during closing. But that is not always the case. Title insurance, which they don't mention and which is related, is something else that title companies are often involved with and that covers any title claims or defects, anything that would come out after the initial title search is done. That way you can't have someone crawling out of the woodwork later, you know, claiming they're like a long lost heir of the previous owner and it's really their house. And there are usually two separate title policies. Lenders generally will insist on lenders title insurance in order for the transaction to go through. Buyer's title insurance is more optional, but it's generally recommended.

[Cody]

And how much does a title agency typically charge?

[Kate Wood]

Title fees vary pretty widely because it depends on what's being included. So the home seller is actually usually going to pay for an initial title search and that's pretty minor. That's like 75 to 200. What the buyer is going to be paying for is the title settlement. And that can cover a lot of different things. So as mentioned, that could cover escrow, which comes with a bunch of fees. It could cover notary fees, preparing the deed, real estate attorney fees. For me that was something that was the thing I paid the most when with. And you might or might not see those itemized when you're looking at the bill. So depending on what's included and also the complexity of the search, that all could run to a thousand plus dollars. Title insurance is separate. So again there's lenders, title insurance, owner's title insurance, getting both of them from the same company can sometimes save money. And the total cost of both those policies is usually like 0.5 to 1% of the sale price of the home. So say it's a $300,000 property, that's 1500 to $3000. So all in, you're probably looking at a few thousand Dollars, you know, that's a decent chunk of your closing costs. But again, it's going to vary depending on the cost of the home, the complexity of the title search and what services are included.

[Sean Pyles]

We talk a lot at NerdWallet about the importance of shopping around when making a financial decision. But the home buying process is so lengthy and can be so exhausting that many might not want to shop around for yet another person to do this relative part of the process. Do you think it's worth shopping around for a different title agency? What do people really stand to gain?

[Kate Wood]

Saving some small amount of money, having some small amount of peace of mind. But very few people are shopping for the title agency for all of the reasons that you mentioned. So you know, when you are looking at your loan estimate, you will see all the estimated title costs listed under the section that says services you can shop for. So it is like, yes, you can go out and see who you want to work with. But again, hardly anyone is shopping for these because once you've had an offer accepted, your mortgage application's been submitted, all of your incentive, all that energy is really going toward closing the deal. Just like get to closing and so taking the time to suddenly step back and research a title company or research something like a home inspector, right, these different providers that kind of show up during the closing process, you just don't have the time, right? And you often don't have the energy. So if this is something that you really want to do, you are actually much better off doing it well before you've reached this stage so that you're not holding things up so that you can research. You know, in the case of a title company, you're researching a company that's going to do research. So while you're kind of still in that like daydreaming phase where you're just like spending a lot of time scrolling through houses online, spend some of that time going through these different companies, look into different title companies, look into home inspectors, look into these different service providers so that when it does show up, you kind of know what you're looking for or what you're not looking for. You can have some kind of of preference, right when the different things are being suggested. The one other thing that I would mention that the listener brought up was their example of the real estate agency and the title company having some kinds of financial ties, anything like that, where there is that kind of conflict of interest, if that's coming up during any part of the home buying process that could possibly raise some Red flags for you. It is okay to step back and be like, oh, hold on, maybe let's not go there. Let's hit pause.

[Sean Pyles]

That's fair. But otherwise, for most people, this is going above and beyond the regular shopping around for a mortgage, real estate agent, that type of thing.

[Kate Wood]

Absolutely.

[Sean Pyles]

Okay, well, I think we should all be honest here. You guys are homeowners. I'm a homeowner. Did you shop around for your title agents when you bought your houses?

[Cody]

Nope.

[Kate Wood]

Not at all. As I mentioned, I did have a. You know, I had a positive experience with my title company. Everything worked out for me, but absolutely, absolutely, absolutely not. I don't remember who they were.

[Cody]

Honestly, you have so much decision fatigue that I didn't shop around for one blessed thing. I just let the realtor lead me around like a confused baby lamb.

[Sean Pyles]

But, hey, you got your house, I.

[Cody]

Got my house and I'm happy. And we refinanced later on. It was fine.

[Sean Pyles]

I shopped around a lot for my mortgage. I got five quotes. It was also the pandemic, so plenty of free time on my hands. But the title agent wasn't even on my radar of things to shop around for, in part because I hadn't been through this process before. I didn't know that I would need to consider a title agent. And honestly, when I buy my next house, whenever that happens, if it ever happens, I don't know if I'll shop around for it because decision fatigue is very real. You gotta prioritize the important things, not something that isn't as significant potentially. All right, well, let's move on to our next question in this lightning round, which comes from Amy, who emailed us a voice memo. Here it is.

[Amy]

Hi, Sean and Sarah. My name is Amy, and my partner and I are looking for advice on real estate and investment. In February 2020, I bought my first home. All things considered, it's an older home, but it has worked for me and now for my fiance. The 3.75% interest rate has made it a great living situation for us. And I even get to do some gardening, which I need and love. Fast forward to this fall when I was offered a sort of dream job in Seattle, Washington. Compare that to where I'm living in Albany, Oregon, which thankfully does not have Portland prices. The Seattle jobs pay is technically better, but it doesn't quite make up for the cost of living difference. The dilemma we're facing is what to do with our first home. Ideally, we would want to keep it as a rental home to allow the investment Time to grow. The problem is that we don't have enough in savings to put money down to buy our next home. We're actually renting in Washington until we figure out our next steps. So my question is this. Since I purchased the home, it has grown in value by more than $100,000. It's now worth almost double what I have left on the cost of the loan. Is there a way for me to use the equity in my home towards the down payment on another home in Washington without having to sell? And even if there is a way, is it even advisable? We decided to rent out our old home for the next year. Then we'll reevaluate our situation and hopefully have a better idea of our home buying expenses in 2024, 2020 25. Saving has been challenging for us, and because of this, we're looking at the equity in our old home as possibly the only avenue to afford a new home in Washington. While home buying is a major goal of ours, I also like the idea of keeping our old home as an investment for our future family. So what are our options and which options make the most sense? Do we need to try to decide soon before rates go down and the market is flooded with buyers? All of these are questions that we have. Thank you so much for your help.

[Cody]

All right, Kate, let's start at a high level. What do you think about Amy's investing idea? Is it wise or is it potentially risky?

[Kate Wood]

Anything involving home equity is inherently risky because we're talking about loans where failure to repay could result in losing the home. But if you are on the wealth building side of TikTok, you might be hearing this and thinking using equity from house one to buy house two is something that people do all the time.

[Sean Pyles]

Yeah. That said, it's not totally unheard of. And Amy's situation reminds me of something that I heard Barbara Cochran from Shark Tank say one time. And it's that one of her only regrets in her career is selling properties that she could have held onto. Because you have this asset, you might as well make it work for you. But that said, it is quite risky, as you pointed out, Kate. And if I was in this listener situation, I would want to make sure that I had a really, really beefy emergency fund before I did this enough to cover all of my expenses, including this additional debt for at least six months. Well, now let's turn to the main part of Amy's question. How to tap the equity in their home. What options does Amy have?

[Kate Wood]

Pretty much the standard options for Accessing equity. So one is to do a cash out refinance. So that's where you refinance your original mortgage for a larger sum and then you get the difference between what you owe on the original mortgage and that larger mortgage in cash.

[Sarah Raffner]

The other option would be to take.

[Kate Wood]

Out a second mortgage. And so second mortgage wise, we'd be talking about a home equity line of credit, commonly called a HELOC or a home equity loan. The biggest difference between doing a cash out refi and doing a second mortgage, whether it's a home equity loan or a heloc, is that with a cash out refi, you only have one loan. But interest rates have gone up a lot since 2020, and Amy's going to lose that 3.75% mortgage rate since prevailing rates are higher now. Cash out refi rates also tend to be higher than purchase mortgage rates since cash out carries more risk for the lender. So it's going to be a higher interest rate on a larger loan amount. With a cash out refi, you are going to have refinance closing costs as well. That's usually 2% to 6% of the amount that you're borrowing. So that's that total larger amount. Again, closing costs with a second mortgage, with a home equity loan or a HELOC are usually lower. They're about the same percentage wise, but because you're borrowing a smaller amount of money since you know the cost of your original mortgage isn't included. So 2% to 6% of, you know, say $50,000 is usually a lower sum.

[Cody]

So how else does a cash out refinance compare with a second mortgage?

[Kate Wood]

Well, with a second mortgage, as the name implies, you now have a second loan. So in this case, Amy would be keeping that original mortgage that has the low interest rate, but would now also have another loan on that property. And that loan would probably have a higher interest rate, both because prevailing rates are higher and because lenders consider second mortgages inherently riskier. So again, they tend to have higher rates too. Like I said before, that interest is on a smaller sum of money. So there's some math to consider here in terms of, if we're looking within second mortgages, the differences between a home equity loan and a heloc. A home equity loan is like a one time lump sum payment that usually has a fixed interest rate. It's a pretty much a straightforward loan. The biggest difference is that it's secured by your house. A HELOC is a revolving line of credit, and so that's usually More meant to be used over time. You have a credit limit. You borrow money as you need it, you repay it over time. And HELOCs usually have variable interest rates, so that can kind of fluctuate as the market goes up and down because of the sort of like, oh, pay as you go or take money as you need it. People Most often use HELOCs for big renovations or like a lengthy home repair where it's like, oh, you know, something else comes up and now we have to pay for that too. You know, that kind of thing. Whereas home equity loan, you're saying up front, okay, this is how much I know I want to borrow and I'm borrowing all of it right now.

[Cody]

So Amy could use something like a HELOC for a down payment on another house. And I mean, this sounds like, I don't know, it could be potentially a savvy financial move, but again, also risky. And this is not something I've ever done myself, so it's a total mystery to me other than the stuff I see on TikTok. But what questions should Amy and their partner work out before they make this decision? Like, what's their budget for housing? Do they want to be landlords? All those types of questions.

[Kate Wood]

So there's definitely a lot for them to consider because, you know, I just went through a whole bunch of stuff. But that was just, how can you access the home equity? And that might actually be the easier part of the equation here compared to using it. So, you know, I was mentioning renovation, and usually with a cash out refinance or a second mortgage, because your home securing the loan, because there's that foreclosure risk. At Nerd Wallet, we do tend to recommend using liquidity from home equity to accomplish goals that put you in a stronger financial position. And so things like, you know, a home renovation, something where you're working to increase your home's property value rather than something like, you know, going on like a bucket list vacation.

[Sean Pyles]

Right. And buying another house could be a move that puts Amy and their partner in a stronger financial position.

[Kate Wood]

Oh, I mean, potentially, yes, absolutely. Right. Buying a second home, having that first home as an investment property could totally put you in a stronger financial position. But using your equity to buy the second home is like a whole other deal. That's kind of where my hesitation is coming from here. So even if you're keeping the first home as an investment property and the second home is going to be your primary residence to a lender, when you're going to get that loan to buy Your new home, that is still a mortgage for a second home.

[Sarah Raffner]

Right.

[Kate Wood]

So that's more risk for the lender. That's a higher interest rate even though it is going to be your primary residence. This is not a distinction. They're not going to split hairs with you on this. This is a, this is a second home.

[Sarah Raffner]

So you are going to be held.

[Kate Wood]

To higher lending standards. You're going to need a higher credit score. Both people, assuming both people are going to be on the mortgage, both people are going to need really strong financials. The lender might require a larger down payment. So, you know, having cash on hand from accessing equity could definitely help with that. And you know, because they'll already own the first home. Right. That they're keeping that home, which also might now have two mortgages on it potentially. Right. Or one very large mortgage if they do a cash out refinance. You're now carrying a lot of debt. And so in order to offset what might now be a fairly steep debt to income ratio, Amy might need to be able to show the lender that, you know, they can get significant rental income from that first home in order to offset that debt. So ideally that would be something like a signed lease, which they might have because it kind of sounds like they were renting it out now. Could also be a rental appraisal of comparable properties in the area. You know, like this is kind of what, what rentals are going for. This is what we're going to be able to get, hopefully.

[Sean Pyles]

That's a really good point about carrying a lot of debt. Amy and their partner could potentially have three mortgages if they go this route. And even one mortgage can feel like a lot to stay on top of. But beyond that, they would also be a landlord, which is its own set of responsibilities.

[Kate Wood]

Absolutely. There are so many sort of do you want to be a landlord questions, you know, do you want people calling you in the middle of the night because something's gone wrong? Do you want to be driving back to Oregon to deal with a maintenance issue or do you want to be paying someone in Oregon to be the person who answers that phone, who deals with those maintenance issues, who does all that for you and then that's eating into the income that you're getting from that property.

[Cody]

So not to answer for you, Kate, and put words in your mouth, but reading between the lines here, it seems like you are a little wary of this idea.

[Kate Wood]

I'm not trying to be discouraging. I just want to be realistic that this isn't, you know, just like an oh, easy money kind of thing. Right. No matter what you might have seen from like a finance bro on TikTok. Again, we're talking about maybe having two homes with three mortgages, a lot of money borrowed. We're also talking about a lot of interest. And so, you know, even though your first home was an inexpensive home, once you're borrowing against it, that inexpensive home is now more costly. Right. Because you've got a larger loan and you're paying more interest. So really kind of doing that short term math and that long term math, figuring out what's going to work for you.

[Sean Pyles]

Yeah. And like you said, Kate, this is not an easy route to go. And this could be a moment where Amy would want to consult with a certified financial planner, especially one who is experienced in real estate investing. This would help them get another person's perspective on what opportunities and risks are part of going this way. And we'll show them whether it's really feasible with where they are right now or if they might be better off going a different route. Well, Kate, thank you so much for coming on and talking with us.

[Kate Wood]

No, thank you for having me. Always a pleasure.

[Sean Pyles]

We are back in a moment with more smart money. Stay with us. Today's episode is supported by Range Rover Sport. You know, some vehicles are built for performance, some for luxury and some for adventure. But the Range Rover Sport, it's built for all three. It's the Swiss army knife of cars, except way more comfortable and without the tiny scissors. With its powerful design and sporting luxury, it isn't just a vehicle. It's your statement of intent. It's built to deliver smooth, composed handling with adaptive dynamics which reduces unwanted body movements. So even the twistiest roads feel like a breeze. And for those days when the road is more dirt than asphalt, adaptive road crews can control has your back adjusting seamlessly to changing terrain. On top of all that, the Range Rover Sports dynamic air suspension gives you maximum agility, control and support. So if you're ready to elevate your drive and leave the drama for your destination, head to land RoverUSA.com build your perfect range Rover Sport and get ready to lead every journey in style. @Land RoverUSA.com we're back and answering your.

[Cody]

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.

[Sean Pyles]

To help us answer Lena's question, we are joined by mortgage nerd Kate Wood.

[Kate Wood]

Thanks for having me back.

[Sean Pyles]

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.

[Sarah Raffner]

I really feel like we need to.

[Kate Wood]

Let go of the idea that mortgage.

[Sarah Raffner]

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 rate on mortgages are still among some of the lowest interest rates that you're going to get if you're borrowing money.

[Sean Pyles]

I get where our listener is coming from though. 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.

[Sarah Raffner]

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.

[Cody]

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?

[Kate Wood]

In a word? Yes. Although I think also too something that's.

[Sarah Raffner]

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.

[Sean Pyles]

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. Okay, 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?

[Sarah Raffner]

Well, so there are kind of like multiple reasons that it's, 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.

[Kate Wood]

Because there are, like Sean was just.

[Sarah Raffner]

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 painters 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 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.

[Cody]

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. And so 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 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.

[Sean Pyles]

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.

[Sarah Raffner]

Absolutely.

[Kate Wood]

I mean, the other thing to think.

[Sarah Raffner]

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, and 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 could make like a 25% down payment. @ that point, you know, 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, you know, plumbing catastrophe or thinking about like 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.

[Cody]

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?

[Sarah Raffner]

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 like, you know, 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. When Sarah was talking about the difference between rent payments and mortgage payments and how much those would be, that's really with a 30 year traditional mortgage. Because when you're spreading out your cost over decades, it's going to be a.

[Kate Wood]

Lower cost per month.

[Sean Pyles]

Well, let's talk about that traditional 30 year mortgage. How does that fit into the other options?

[Sarah Raffner]

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 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 I really didn't spend that much, I'm feeling good about everything.

[Kate Wood]

You could just pay down a big.

[Sarah Raffner]

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 if you have a spot where you're like, I kind of need the money for something else, whether it's 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 buy these tickets outright instead of putting them on my credit.

[Kate Wood]

Card, then you can do that.

[Sarah Raffner]

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.

[Cody]

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.

[Sarah Raffner]

No, of course. Thank you for having me.

[Sean Pyles]

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 901730, NERD. You can also email us your [e-mail] visit nerdwallet.com podcast for more info on this episode. And remember to subscribe, rate and review us wherever you're getting this podcast.

[Cody]

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.

[Sean Pyles]

And with that said, until next time, turn to the nerds.

[Ryan Reynolds]

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