HerMoney Podcast Bonus Mailbag #15: Home Buying and Real Estate

Kathryn Tuggle: (01:19)
Yup. Our readers are smart, they’re savvy, they’re thinking things through. All the details that go into every single financial decision. And it’s an honor to get looped in to just a small glimpse of your life in that way.

Jean Chatzky: (01:32)
Absolutely. That by the way, is Kathryn Tuggle, hermoney.com editor, our producer. And on today’s episode, the way we structured this, we are going to roll out several of these mailbag specials and we’re going to do them by themes. So today we’re going to dive into some of the questions that you have submitted around home buying and real estate, one of those things that tends to keep so many of us up at night, but these issues also tend to have easier solutions than we might think. So today we are going to jump into your questions, but before we do, I actually wanted to touch on a piece that Kathryn wrote for hermoney.com. I don’t know if all of you subscribed to our newsletter or check out our website on a regular basis. You wrote a piece about why your mortgage was more, what was the word? Terrifying. Is that what you use than, your marriage?

Kathryn Tuggle: (02:32)
It was why did my mortgage feel so much more serious than my marriage?

Jean Chatzky: (02:36)
More serious. Why is that do you think? I mean, it definitely shook you a little bit.

Kathryn Tuggle: (02:42)
I rarely get shook, all shook up. I thought it might just be the debt because I was very fortunate to graduate college with no debt. So this was my first encounter with having a big chunk of debt that I had to pay off, but it was a great investment. You can’t go wrong with New York real estate. And I did some reporting on the topic because I wanted to dig into the root of my anxiety. And the answer that I liked best was that I hadn’t had any practice home ownership, but that I had had many practice relationships before I got married. So I kind of knew what that was like to cohabitate and to be intimately involved with someone and share my life with someone. But with a mortgage, I just jumped in with both feet, with no knowledge of what that responsibility would be like.

Jean Chatzky: (03:34)
So interesting. How are you feeling now that it’s been several months?

Kathryn Tuggle: (03:38)
I feel great. I feel really good. I feel like it was a great investment. The payments are less than what we’d be paying in rent. So it was overall a very positive move. The other answer that I liked a lot was that maybe it’s not so much this life milestone that’s freaking you out, but it’s the next one on the list.

Jean Chatzky: (04:00)
And what would that be?

Speaker 1: (04:02)
That’s a really good question. I think probably the next one would be having a kid.

Jean Chatzky: (04:07)
I got to say, having done both, having a kid is a lot scarier than buying a house.

Kathryn Tuggle: (04:13)
Exactly. So I think it’s just those adult milestones. And I’m 37 so I grew up in Birmingham, Alabama, and most of my friends were homeowners in their twenties because of the difference in the cost of living. So I am doing this much, much later in life than my nearest and dearest. B.

Jean Chatzky: (04:32)
ut also in a much bigger way because of the cost of New York real estate.

Kathryn Tuggle: (04:36)
That’s true. That’s true. So it’s interesting the milestones that you reach in life. And the differences in the milestones if you live in a city versus out in the country and what that means.

Jean Chatzky: (04:49)
Yeah, absolutely. Well, I’m glad that it’s going well. My husband, Eliot’s theory on big purchases is that it’s a lot less likely that you regret them. I think it’s because you’ve got so much skin in the game, but he says he’s never regretted a house or a car. He’s regretted many suits. He’s regretted many shirts. But when it’s that big and you’ve done that much homework, the chances of buyer’s remorse he thinks are a lot less than I think I agree with that.

Kathryn Tuggle: (05:21)
That’s a good point. You put so much more energy into that decision.

Jean Chatzky: (05:24)
Yeah, absolutely. All right, well let’s help some other folks. What do we have?

Kathryn Tuggle: (05:29)
Our first question comes to us from one of our male listeners, Angus.

Jean Chatzky: (05:33)
We are very happy to have male listeners by the way. We should say that.

Kathryn Tuggle: (05:36)
Yes, he writes Hi Jean. I’m not much of a woman, but I have a question some women may face and I am facing right now.

Jean Chatzky: (05:44)
All of our guys, when they write to us say something like this at the top, they say something like, hi, I’m a guy but I still have a question anyway and we’re happy to entertain those questions.

Kathryn Tuggle: (05:55)
We love you. You don’t have to tell us you’re a guy, we will happily answer your question.

Jean Chatzky: (05:59)
Anyway.

Kathryn Tuggle: (06:00)
Anyway, he goes on to say if I own a home or apartment outright with no mortgage and I come across a bigger and better place for sale that I could afford with a substantial down payment by selling my current home and getting a modest mortgage, how does that work? Will a bank front me the money until my old place sells? Is that a good plan? I feel like a mortgage is a safe and wise investment over time. Thanks so much for your advice.

Jean Chatzky: (06:23)
This is a great question and I think a lot of people deal with this when they’re ready to just go to something bigger and there are two ways to do it. There are actually three ways to do it, but I think there are two ways that make the most sense. The first is that you could structure this as a contingent deal, which would mean that the seller of the house you’re buying would have to sign off, that if you’re unable to sell your place, the deal is scrapped and that may be something that you want for safety. If you think there’s a chance that it’ll take you such a long time to sell your current place that you’ll want to get out of the next deal. So it puts a little bit of time constraint on it and it’s one way to go forward. The other way to go about it is to take out a heloc on your current place. Since you don’t owe anything on your current place, you could borrow from your current property and then just repay the money when you go ahead and you sell the place and move forward with the new one. A heloc is going to be much less expensive and less time consuming than taking out either a bridge loan or a mortgage on this apartment and I think that’s probably the way that you’re going to want to go. Then when you sell your first place, you just take the additional proceeds, you repay the heloc and you put the additional money into that second place, borrowing in the form of a first mortgage the money for the rest. Sounds to me though like you’ve got your head together and if you were wise enough and savvy enough to pay off the mortgage on your first place, I have no doubt that you’ll be able to do that with this one too, so good luck.

Kathryn Tuggle: (08:22)
Yeah, thanks Angus. Our next question comes to us from an anonymous listener in Texas. She writes, I’m a 36 year old Texan and I’m selling the rental house I own in Austin after my renter moves out, I thought about keeping the house, but I live six hours away and I don’t want to have to manage it from afar. Plus the property taxes keep rising in Austin, I expect to make around a hundred thousand dollars from the sale when all is said and done further, my parents have incredibly in generously offered to gift me $18,000 each year for five years from the sale of a home they had that was badly damaged by hurricane Harvey, so after a few years of what feels like living paycheck to paycheck, I’m coming into an unexpected windfall. My husband and I currently live in a small townhome, but we’re starting to think about children and would like to buy a house that will be bigger. My question is this, how should I keep some of this money liquid enough for a future home purchase while making sure that some of it is earning money in investments? I’m able to max out my Roth IRA every year with a contribution of $6,500 so perhaps I can invest in more short term vehicles where I’m able to access gains more immediately as income. Any other angles that I haven’t taken into consideration? Thanks so much for your insight and help.

Jean Chatzky: (09:33)
Well, it sounds like you are embarking on an exciting new adventure. I would figure out essentially how much you think you’re going to need for a down payment on that new place. Probably 20% of whatever it is you think it’ll cost you to buy it because that will prevent you from having to pay private mortgage insurance and I would keep that amount, not just liquid enough, but really liquid. I would put it into a high interest rate savings account. You can go to hermoney.com and you can find a list of the best paying savings accounts. You can also find these on bankrate.com and other websites, but essentially we know that many big bank savings accounts pay 1/10th of 1% interest. There are better savings accounts out there that pay somewhere between 1.5% – 1.75% Interest in and your money should be in one of those. It’s not a fabulous return, but it’s certainly a substantially better return. As far as the rest of the money. I question what it’s for. If it’s for a longterm use, if it’s for retirement or something way down the road, then I think you invest it as you would the money in your Roth IRA. You would invest it as you would for the longterm taking into account the fact that you are a young woman, that you’ve got lots of time until retirement and that you can afford to put a considerable portion of that money into a riskier portfolio, putting a considerable amount of it into stocks. If it’s not for that, if maybe you’re thinking, well, this money could be for fixing up the home after I buy it or this money could be for college or this money could be for something else. You’ve got to look at your time horizon to decide how much risk you want to take with that money, but you are right to think about sheltering some of it from taxes. You didn’t talk about your husband’s retirement accounts. I don’t know if you’re trying to keep these assets separate because they are assets in your name, but if you’re using them to buy a house that you’re going to live in jointly, you’re already co-mingling them in that way. If that is something that feels okay to you, I might look at whether he has the ability to use some of the money to make a retirement contribution in his name each year, too. Does that make sense?

(12:18)
Yeah, it does.

Jean Chatzky: (12:19)
Okay.

Kathryn Tuggle: (12:20)
Our next question comes to us from Rose. She writes, please help me decide. Should I pay off my mortgage or not? Here’s the scoop. I owe about $150,000 on my existing 30 year mortgage with an interest rate of 3.625% I pay it biweekly and a bit more than what is required. I have the money to pay it off completely and an HYSA paying a whopping 1.9%.

Jean Chatzky: (12:43)
That’s what we were just talking about. That’s a high yield savings account and that, to our previous anonymous writer is what you’re looking for for that cash.

Kathryn Tuggle: (12:53)
Yeah, absolutely. Our editorial assistant, Becca, just put her money into one of these.

Jean Chatzky: (12:58)
There you go.

Kathryn Tuggle: (12:58)
And it was easy peasy.

Jean Chatzky: (13:00)
Oh, I’ve got money in one of those. I just go online. You just set up an account. It takes 15 minutes.

Kathryn Tuggle: (13:05)
She continues, so I’m wondering is it worth it to pay it off? My thinking is that if the housing market goes down, we’ll have an opportunity to buy another property closer to the kids with the cash on hand. Also, our financial advisor offered the opportunity to invest the money. I’m not sure about that, but I don’t like the idea of paying 3.625% interest on the mortgage and only getting 1.9% in the HYSA. Please give me some ideas. I appreciate all that you do. You and your team are amazing.

Jean Chatzky: (13:34)
Thank you so much. Thanks for the letter. Thank you for the compliment. Don’t pay off the mortgage. I mean I get it. I really do get it, Rose, and you sound, because you’re talking about buying another property closer to the kids, like you are close to retirement. So my general rule is mortgage money is so, so, so cheap that you can typically do much better by just investing the money in a diversified portfolio as long as it’s money that you’re investing for the long term. My exception to the rule is that I really do like going into retirement without a mortgage and so if you are getting really close to retirement, then maybe you want to think about putting a little additional money toward that mortgage so that you get out of it at around the same time that you retire. But from a numbers perspective, 3.6 25%, that is such inexpensive money.

Kathryn Tuggle: (14:42)
Better than what we got.

Jean Chatzky: (14:42)
Oh my God, it’s so much better. I just got a mortgage, too and it’s better than what I got. It is not expensive at all and by in a diversified portfolio over the longterm you can do better. So I would keep in your high yield savings account what you need for six months, what you need for a year, if that makes you feel better in terms of emergency funds. And then I would look for other alternatives and by all means talk to your financial advisor about how he or she would invest the money. I know you say, I’m not sure about that. It is perfectly okay to ask for information about what would you do with this money? How much would that cost me? What does it look like? What sort of returns can I expect from these investments in the short term, in the medium term and the longterm? What sort of risk am I taking? Am I comfortable with that? Do you have other clients like me who you’ve put in portfolios like this? What are the underlying costs of these investments? Are we looking at high fee investments? Because if we are, I would look elsewhere. There are plenty of places where you can invest this money that do not have to cost you a lot of money, but make sure that you’re comfortable with it. Whatever you decide that you’re going to do.

Kathryn Tuggle: (16:13)
I think I want to turn that laundry list of questions into my new ring tone. That was great.

Jean Chatzky: (16:19)
Thank you. Thanks. Let’s just take a pause to remind everybody that HerMoney’s brought to you by Fidelity Investments. You don’t have to know all the answers when it comes to your financial future, but an important question to ask yourself is, what do you want from your money? What are your financial goals? No matter where we’re meeting you on your financial journey, Fidelity’s here to help you reach those goals faster. It all starts with financial checkup and an understanding of what you own and what you owe. From there, the folks at Fidelity will work with you to evaluate your investment options and different ways to grow your savings. Discuss your goals, see where you stand, and get help taking the next steps at fidelity.com/demandmore. We are in the middle of our mailbag, special. We’re tackling our questions, your questions around home buying and real estate. Kathryn, what do we have next?

Kathryn Tuggle: (17:14)
Our next question comes to us from a member of our private HerMoney Facebook group.

Jean Chatzky: (17:18)
Oh, this is a good time to tell people. If you’re not in our private, her money Facebook group, you should be. I love the women in our Facebook group. There are thousands and thousands of them and we’re adding more every day. You just have to ask us and we will let you in. And by the way we are also on Instagram and Twitter and Facebook. And on Instagram and Twitter. We are @hermoneymedia.

Kathryn Tuggle: (17:43)
And the Facebook group just type HerMoney into the search bar and it will yield results for both our main HerMoney page you can like and our group would you can request to join.

Jean Chatzky: (17:52)
Cool, so what would she like to know?

Kathryn Tuggle: (17:55)
The question is my husband and I own our current starter home and are extremely comfortable financially. We’re starting to look into our next forever home where we hope to have and raise our family. We were just preapproved for a mortgage that’s twice as much as we were planning to spend. We’re still going to spend closer to our comfort range, but we’re struggling with prioritizing what we really want and what we don’t. My question is this, when buying a house, how do you determine what price is best for you? How much in relation to your income should you be willing to spend on housing?

Jean Chatzky: (18:25)
Okay. I love this question because money rule, 63 is just because someone will lend it to you doesn’t mean you should borrow it. It’s kind of like, just because you have a coupon doesn’t mean you should go shopping and this is exactly the right way to be thinking about this. You think about what you need because any money that you put into a monthly payment that you have to then make for the next 30 years, if it’s a house or 5 years if it’s a car is money that has an opportunity cost attached to it, you can’t then go 6 months and decide you want to do something else with that money because those assets are spoken for. So I love that you are thinking about it in this way.

Kathryn Tuggle: (19:12)
Isn’t that what tripped people up in 2008?

Jean Chatzky: (19:13)
Yeah. Yeah. They were using their homes as piggy banks. The bank said you can pull out the equity, we will lend it to you and you can go on vacation or you can buy a car or you can do whatever you want to do. And people were doing that and that’s how we got in trouble. I remember first thinking that we might be in trouble before the crisis hit. It was what made me write the book, Pay It Down, and there was a story on the front page of the New York Times by an economics reporter named Louis Uchitel who’s not there anymore. I don’t know if he’s retired or what, but he made the point that Americans, and this was I think 2006, Americans owned less, in terms of a percentage, less of our homes and less of our cars than we had ever owned historically.

Kathryn Tuggle: (20:11)
Wow.

Jean Chatzky: (20:12)
The amount of equity that we were carrying was just shrinking and I thought, wow, this is not good. This is the opposite of the mortgage burning party. We are never going to get there. And that’s what made me start looking into this book about getting out of debt and it proved to be a little early but have the right message. Let me answer this question though. When you think about, in relation to your income, how much you should be willing to spend on housing, there are some guidelines. The housing guideline is about 35% and that should include not just the monthly payment for your rent or your mortgage, but taxes, insurance, maintenance, all the costs of owning this home. Just to finish out the pie chart for anybody who’s wondering where the rest of your money goes, 12.5% to transportation. It’s not just your car, it’s the all in cost of transportation. 12.5% Percent to other debt repayment. That’s your student loans, your credit card bills. 25% to the cost of life. That’s health care, eating, gifts, entertainment. And 15% to saving, and that saving number is sacrosanct. It can include matching dollars that you get from your employer, but you can borrow from any other category to feed any other category except for savings. You’ve got to try to hit that savings number and so if you live someplace where the cost of housing is more expensive, say than that 35% but maybe you don’t own a car because you’re in a city, you can get a little bit of that money from the transportation number. That’s sort of how the rules work, but nobody says that you have to spend up to those levels and if you are thinking that you’d rather save more or you’d rather channel more into other things, I am really, really good with that, so I would think about what’s it going to cost me to buy a forever home that feels like a forever home? What’s it going to cost me to have a place where I am going to be comfortable raising my family, where the schools are good, where maybe there are sidewalks or whatever happens to be important to you and if you can come in well under that number, I think that’s terrific.

Kathryn Tuggle: (22:44)
Amazing. Our last question comes to us from Jen in Portland, Oregon. She writes, my question relates to financial PTSD. My husband is an attorney and I’m an artist. Until about 7 years ago, we were cruising along, doing very well, but then my husband lost a lucrative contract and some of my teaching positions began drying up. As a result, we’ve become very leery of trusting our current income. Thankfully now my husband was blessed are they well paid job almost a year ago and I’m employed part time with enough flexibility to pursue creative projects with earning potential. All of that said, the financial insecurity we’ve gone through has made us hesitant to take steps to improve our financial position and future. A few things we’re considering doing now include number one, improving our house and making it a great nest egg. Number two, building a rental in our basement for passive income in retirement. Number three, selling the house as is in downsizing, then investing the money we make. And number four, my pursuing a secondary degree in order to secure a more well-paid position. We’re in a charming and desirable neighborhood near several colleges, a law school, a medical school, and a dental school, and our home will sell for much more than we paid. We want to keep life simple and so much of this sounds overwhelming. Sorry for so many questions. The biggest one is, how do we brave our fear of trusting our current financial position and enough to create a new future for ourselves?

Jean Chatzky: (24:06)
First of all, I am sorry for what you went through. I’m so glad that things have turned themselves around or more accurately that you have turned them around because these things don’t happen by themselves. You guys took steps to write your financial ship and now you’re reaping the rewards, but I get what it’s like not to be able to trust it. I felt, I think a little bit of what you’re feeling shortly after I got divorced, I found my sea legs by saving more. I found that the only thing that really helped me feel safer and stronger and more independent and that the rock wasn’t going to come out from under me was seeing a growing balance in my savings account and so it’s with that lens that I’ll give you my opinion on your question, although I do think any of these things sound okay. They all sound actually more than okay. They all sound like they could be really great steps in the right direction. Of the four, the one I am leaning against is the first one, improving your house and making it a great nest egg and that’s because sometimes when we improve our homes for ourselves and then live there a certain number of years, we don’t get the value out of it that we put into it. And since it seems like your focus is on making sure that you’ve got a ready source of cash, should you need it in a pinch, I’d shy away from that one, but the other three all sound like a great way to bank some cash. If you build a rental in your basement for passive income that could go on for years and years. You sell the house as is, you downsize, you invest the money. That sounds like a good idea. Although I do have to say it sounds like you really love where you live and I wouldn’t give that up if you don’t have to and it doesn’t sound like you have to. And your pursuing a secondary degree, if that’s something that you want to do. I am the child of a mother who went back and got her master’s degree when I was in middle school and that was a decision that she never looked back on. She always felt great about that, so I guess my order of preference would probably be two, three, four and then one and good luck. I think you’re going to do just fine.

Kathryn Tuggle: (26:44)
Yeah. It sounds like she really loves the home.

Jean Chatzky: (26:46)
Yeah. I know sometimes when people describe a home that they love so much, I don’t want to say sell, right. I mean, if you have to sell or you’re at the point in your life where selling really does make sense and you can find something that you love just as much, okay. But doesn’t quite sound like they’re there yet.

Kathryn Tuggle: (27:06)
And given all the schools in their neighborhood, they would always have a renter.

(27:10)
Yeah, I think so too. I think so too. Anyway, these were fabulous questions. Thank you so much for joining us today on HerMoney. As we have dug through our mailbag, we love hearing what’s on your mind. If you like what you’ve heard, I hope you’ll subscribe to our show at Apple Podcasts. Leave us a review. We love hearing what you think. We also want to thank our sponsor Fidelity. We record this podcast out of CDM Sound Studios. Our music is provided by Track Tribe and our show comes to you through PRX. Thanks Kathryn, so much for doing this.

Kathryn Tuggle: (27:45)
Of course.

Jean Chatzky: (27:45)
Thank you so much for listening and we’ll talk soon.