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Tag: reduce housing costs

YFP 193: Building vs Buying a Home: What to Consider

Posted on by yfpadmin


Building vs Buying a Home: What to Consider

On this episode, sponsored by Live Oak Bank, Nate Hedrick, the Real Estate RPh, joins Tim Ulbrich to discuss considerations for building vs. buying a home, the pros and cons of building, lending considerations when building a home, and common pitfalls when choosing to build a home.

About Today’s Guest

Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he is a clinical pharmacist and program advisor for Medical Mutual. By night and weekend, he works with pharmacists to buy, sell, flip, or rent homes as a licensed real estate agent with Berkshire Hathaway in Cleveland, Ohio. He has helped dozens of pharmacists achieve their goal of owning a house and is the founder of www.RealEstateRPH.com, a real estate blog that covers everything from first-time home buying to real estate investing.

Summary

Nate Hedrick, the Real Estate RPh, digs into some important considerations to keep in mind when planning to build a home versus buying a home, how the process for building a home differs from purchasing a pre-existing home, the main approaches to building, and important questions to ask your builder or developer when building in a development or on raw land.

Nate shares his personal experience with his clients in the real estate market and the various motivations for building a home instead of buying. Those who choose to build a home over buying a pre-existing home may be motivated by both the nature of the current housing market and a desire for a variety of customizations to the home.

Nate outlines the many pros and cons when building a home. Benefits of building a home include the level of customization on design based on the builder, creating the home that you want but can’t find in the market, and that new home feeling. Cons when building include the time it takes to complete the home, usually around 9 months, as well as the financial process differing for building a home from the process for buying a pre-existing home.

The two main approaches to building a home are examined: working with a builder or developer to purchase and build on a lot or buying a plot of raw land. When working with a builder or a developer, clients can expect to have a concierge type experience, whereas buying raw land may require purchasers to perform more tests and do additional research to ensure that the land will be viable for the build. To avoid major issues, buyers should include their real estate agent and builder in the entire process of buying and building on raw land. Similarly, when working with a builder or developer, buyers should include their real estate agent in the process as your agent acts as an advocate throughout the buying and building process.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Nate, great to have you back on the show. How you been doing?

Nate Hedrick: Tim, great. Always good to be here.

Tim Ulbrich: Excited to have you back. We had you on Episode 197, Ways to Reduce Your Monthly Costs, and we have some exciting news coming up. Details will be forthcoming. But we’re going to be launching a YFP real estate podcast. Our goal is weekly content for real estate investors, either current investors, pharmacists that just want to learn more, that have been thinking about it but haven’t pulled the trigger. We have heard loud and clear from the YFP community that they want more information on real estate as an investing path. We’ve brought more content in 2021, at the end of 2020. We’ve got more coming ahead. And more information certainly will come. Nate Hedrick is going to play a big role in that effort. So Nate, exciting times ahead, right?

Nate Hedrick: Yeah. I’m really excited. It’s going to be a pretty cool podcast, and we’re bringing back another YFP past guest. We’ll keep it a surprise for now. So excited about all that.

Tim Ulbrich: I love it. And I think you and I, we’ve talked about this extensively, but we know that many pharmacists have inquired about real estate investing. And we have seen firsthand the value that can come from showing examples, stories, the good, the bad, the ugly. And for pharmacists that are thinking about this or even have begun this journey that can see other examples all across the country and of course connect with those folks. And so we’re excited to bring this community together of pharmacist real estate investors. Stay tuned. We won’t announce the exact date of launch or any of that at this point, but wanted to put that on folks’ radar that we’re going to have some more great content coming for you related to real estate investing. So Nate, we’ve been talking a lot about home buying on this show. But something we have not talked as much about is building a home. And I’m excited to dig into this topic and talk through some important considerations to keep in mind if you’re planning on going that route and how the process may differ from buying a home. And this information that we’re going to draw for this episode of which we will link to in the show notes comes from a post on your blog, The Real Estate RPh blog, and that post is 20 questions to ask if you’re building a home. So we will link to that. And this episode is really meant for folks that have been interested in this topic, are thinking about building a home, on the fence about building versus buying. And so we’re going to dig into topics surrounding that. So from what you have seen, Nate, with your clients and in the real estate market, you know, how prevalent is this? Are folks often thinking about building a home instead of buying a pre-existing home?

Nate Hedrick: Yeah. It really depends on the market, but I’m seeing more people going this direction simply because the inventory has been so low recently. With the way the market’s been — actually, I just heard about a client recently that looked for a house for about 2.5 months and there was just nothing. Anything that was coming along was going $20,000, $30,000, $40,000 over asking. And it just became untenable. So they said, ‘Look, we’re just going to sit back, we’re going to renew our lease for another year, we’re going to go ahead and build.’ So I think sometimes it’s something that’s being forced upon people, but other times, you just have someone that goes in and says, ‘Look, we know what we want in a house. We can’t find that in our market today. We’re going to go out and build it, right? We’re going to find the specific spot that we want it to be, and we’re going to get the exact house that we want. This is how we’re going to do it.’

Tim Ulbrich: Yeah, and I just had a similar conversation a couple weeks ago with a pharmacist down in the Raleigh, North Carolina, area. Same thing, you know, very hot market let alone just what we’re seeing national trends in that area specifically and prices where homes were going relative to asking said, ‘You know what, we’re just going to build the thing,’ which I’m guessing is easier said than done as we’ll talk about but is certainly a consideration. What other motivations might folks have? I mean, is it typically just demand? Is it I can’t find anything, these custom aspects that I want? Like what are you seeing from folks in terms of motivation to build?

Nate Hedrick: Yeah, a lot of times, it just comes down to if you know what you want or if there are specific things that you want in a home and it’s difficult to find in that particular market, then you can go out and build it, right? So if you are — and actually, it’s funny. My wife and I were running into this recently. We’ve been kind of casually looking at other houses, just to see what else it out there, and keep coming back to the fact that like if we were to really move, I don’t know that I’d want to go get this big, gigantic house, right? I’m more interested in the land and putting our kind of style house on it. And there are other people that fall into that same category. So I think there are a lot of different motivations. But if you want that true customizability and that feeling of like the brand new car, right, that’s where that home building usually tends to come in.

Tim Ulbrich: Now Nate, you and I both know — especially you as an agent — that when you say we’re “casually” looking, that’s a done deal, right? I mean —

Nate Hedrick: No, I look at enough real estate to be able to look at it casually I think. Hopefully.

Tim Ulbrich: That’s true. So high level as we start this conversation, and we’ll dig in in more detail about what are some specific considerations when you’re considering building, whether it’s working with an agent or financing, common mistakes that folks make, but high level, pros and cons of building. You know, for folks that are thinking, yeah, maybe it’s us, maybe it’s not us, like what are some things that folks may want to think of when it comes to making this decision.

Nate Hedrick: Yeah, the biggest pro is the full customizability. And this can vary based on the actual builder, right? Some builders are going to give you absolute customization from floor plan to design to fixtures. And even if you don’t get that level, right, there are going to be 10 floor plans to choose from. And within that, you can pick your countertops and your cabinets. Again, it gives you that full range of customizations. If you know exactly what you want or are close, 80% of that you know and you can get the rest of the way, that building allows you to get that full customizability. The real con, though, right — or the couple of cons I guess would be timing. So obviously it takes time to build that house, especially if you’re customizing it from the ground up. You’re looking at the very minimum nine months from that date of contract, usually longer, to really get that home built. So waiting game is there. You’ve also got a different type of lending that goes on. And we can talk about this more. But construction loans are very different than your traditional conventional mortgage. And so there’s other stipulations that go with that, some other fees, and it can make it a little bit more tricky, basically.

Tim Ulbrich: And when you talked about customization, Nate, never have gone through this process. You know, I’m sure some folks look at that and they’re like, that’s incredible. I’ll get to choose every detail. I look at that and say, my gosh, I don’t even know what shirt I’m going to wear on any given day let alone what the knobs are going to look like. So is there a wide range of like if you want to keep it simple, builder may say, ‘Here’s Option A, Option B, Option C.’ And then the details are already contained within that? All the way to every little detail is negotiable along the way.

Nate Hedrick: Yeah, it depends on the builder. A lot of times what I’ll see — for the most part — is they’ll offer 3-5 options for a given set of whatever, right? So they’ll say, ‘Your countertops are coming from this supplier. And you’ve got from marble to granite, and these are the preferred options.’ And you’ve got an allowance for that is how they often do it. So they’ll say, ‘Cabinetry allowance is $14,000, and we’re getting it from x, y, and z cabinet maker.’ So then you can go to that particular site or they’ll a lot of times have handouts that you can look through, and it narrows down your options, right? That’s the most common setup. The other cool thing I’ll see a lot is where high end, especially high-end purchases and high end builders will offer a designer as part of that process where you can sit down with them for x number of hours as part of that fee or the cost of building that house, you get x number of billable hours with that designer to pick and choose all those things. And a lot times, those designers will bring with them ideas and collections where they’ll say, ‘Well, if you’re going to choose these cabinets, these are the drawer pulls I recommend.’ Again, you can totally get into the weeds, but that can make that analysis paralysis much, much easier to manage.

Tim Ulbrich: And it always stays on budget, right? I mean, it’s always on budget.

Nate Hedrick: You know, it’s funny, again, these allowances, they offer those but you can pretty quickly break them if you want to.

Tim Ulbrich: I’m sure. I’m sure. Well, it just reminds me like, no judgment here, it’s just human behavior. If I were looking at a home and there were some options involved, like you kind of make one decision that I would suspect has a domino effect on other things that you want to do. So since you talked about the lending piece being different, let’s start there. You mentioned construction loans, which are of course a different animal than conventional home financing, which even within that we’ve also got multiple options we’ve talked about on the show before. Most recently, we had Tony Umholtz from IberiaBank, Episode 191. We talked about 10 common mortgage mistakes but in there talked about some of the financing options. So Nate, talk to us here about lending considerations. You know, what exactly are we dealing with when it comes to construction loans? What’s different? How does this change or not change things like pre-approval and down payments and timing? Walk us through that.

Nate Hedrick: Yeah, it’s fairly complicated, actually. I’ve been meaning to like put together a post and digest this because there’s not a lot of great resources out there that actually walk through this. But the idea is that you’ve got two phases to think about when you’re thinking about a construction loan. And again, a lender is probably going to beat this up and say, ‘Well that’s not what you call it,’ but this is how I explain it, right? So you’ve got — we should have Tony back with me, right?

Tim Ulbrich: Yeah.

Nate Hedrick: But you’ve got this kind of pre-build phase where you’ve got to pay for either the land and the lot, right, the location, and then you’ve got to start paying that contractor, that builder, for some of the materials. So before there’s ever a house there, there’s still costs being incurred. So there’s this construction phase of that loan. And then after, when it’s done, you actually have a mortgage. You have a house that’s paying a 30-year fixed rate mortgage or whatever. And so there’s a number of ways that lenders will break that down. Sometimes they’ll do separate loans. You apply for one, you get the construction loan, you go through that, then you will create basically a mortgage that will pay off that construction loan and then go from there. Sometimes you can do a combined process where the loan will be all in one. They call it a single close often where you’ll close once on that construction loan and it will convert to a 30-year fixed mortgage at the end. It varies by lender, there’s advantages and disadvantages to both. It’s a whole separate podcast episode just to talk about that. But the idea is that you want to make sure you have a conversation. It’s not like going out and getting pre-approved for a $500,000 house. There are considerations in terms of well, is the lot or the land included? Right? Is that included in the finance or do I have to pay for that lot in cash? Again, a number of considerations that come up as you start down that road.

Tim Ulbrich: And so speaking of finding a lot to buy and where folks look and buying land, you know, that to me seems like something that could be both exciting and overwhelming. And I’m used to my typical searches for a home on Redfin and Zillow and things like that. Is it same type of process, you know, in terms of finding a lot to buy, where folks look, what makes a good lot, a bad lot? What are things that folks need to consider here?

Nate Hedrick: Yeah, so there’s two main approaches to this. So one is that you’re going to — that is kind of the more traditional option, which is that a builder or developer has purchased several acres and they develop that into a neighborhood, right?

Tim Ulbrich: OK.

Nate Hedrick: We see this all the time, right? Coming soon, houses starting in the $300,000s, join Orange Village or whatever it is.

Tim Ulbrich: Yes.

Nate Hedrick: You see these. And a lot of times what happens with that is you’re not going out and finding and hunting down a lot. It’s the full concierge package all put together. You go out to the builder, they say, ‘We have 40 lots that we’re preparing to be built upon. You can pick your spot on the street. Here’s our preferred builder or builders.’ A lot of times they’ll have anywhere from one to three builders that they work with on those development lots. And you basically find your lot that way. The other option is to go out and buy raw land. And you can find these on the MLS, you can find them on Craigslist, you can drive around and see some with a sign in the yard. And you can buy raw land and then go out and find your own builder who will come out and custom build on that particular lot. And so the two approaches are very different. One is a much more kind of put together process, going out and actually going to that developer on that particular build lot whereas the other can be much more flexible and a lot of times, you get your truly customizable builds when you’re talking about going out and buying a plot of land and then bringing in a builder to come do that plot.

Tim Ulbrich: And in the first example, Nate, you’ve given, which I drive by those all the time, right? So you see homes for sale. That seems obviously, you know, concierge is probably a good way to think about things kind of customized and put for you together, it’s packaged together, it’s .25 acres or whatever be the lot size. You know it’s ready for water, sewer, all that stuff taken care of. You have comps of that obviously based on the neighborhood. The other one to me is both intriguing/overwhelming. I was just driving by a property yesterday here in Columbus. It was 131 acres for sale. And I’m like, that’s interesting. I don’t know, it’s by the interstate. I was like, there could be something cool you could do with it. And then I stopped right there, right? Because you start to think about like, what is a comp for 131 acres of land like this? And what about being ready for sewage and water and things like that? So any thoughts for folks that are going more that route of I’m just looking for random land that’s out there and putting a home where it may not be as put together for them, if you will. What are those things? I’ve listed a couple, thinking of comps for land, water, sewer, things like that.

Nate HedricK: Yeah, absolutely. So you have a due diligence period on raw land like that where you can start to assess those things, everything from getting like a geotechnical survey, something as simple as a soils test to determine if the soil is appropriate for bearing the structure that you’re talking about. This is a particular problem in certain areas like I think about my in-laws that live in Pittsburgh. So there’s a lot of hills, there’s a lot of old mine shafts, quite honestly — that sounds ridiculous, but that’s a real problem that you contend with as a developer out in Pittsburgh. And so you have to do these site and soil samples to make sure that you’re going to have supportive structures to be able to handle the house that you want to build there. You mentioned hookups, that’s a huge one, right? So if you are out in the country, you might not have access to city water. You might have to put in a septic system and dig a well and again, that well might need to be 100 feet deep, 200 feet deep. Like who knows? Right? If it’s truly, truly raw land, these are all things that you would need to figure out. And so a lot of times what you’ll do is you’ll find a piece of land that you’re interested in and either the seller of that property has done all that work for you and they can say, ‘Here is the site and soils test. Or here’s the survey that we’ve done. There’s already a well. There’s — whatever, you name it.’ Right? They may have done that up front or you can order that yourself. And there are companies that specialize in this. And a lot of times, your agent will actually help you coordinate with those companies. You can often go to your builder because your builder will have the specs needed to make those decisions. And so I often recommend that if you’re going to be doing this, it’s not a buy land, find a builder later. It’s do it all at once because you want that person involved.

Tim Ulbrich: Yes.

Nate Hedrick: You want the architects involved, you want the surveyors involved, the builders involved, all at the same time to make sure you’re not going to run into a problem.

Tim Ulbrich: Now I suspect the question I’m going to ask here is, ‘it depends,’ but I’m going to ask it anyways. One of the other thoughts I have as I look at raw land periodically just out of interest that folks may be wondering if they’re doing the same build a home is resale value. So especially when you get into perhaps unique pieces of land, unique customized properties, I could see an argument on both sides of that, either hey, it’s a unique piece, it stands out, there’s not a lot of other things like it. Or maybe not as many people are in the market for something like that. So is it a ‘it depends’ situation, just every property, every area where when you get into a customized home, customized piece of land, in terms of resale?

Nate Hedrick: Yeah. I’m stealing from Tim Baker, right? It definitely depends. But there is some speculation to draw in too. There’s actually a number of investors out there that will buy raw land for the sheer purpose of saying, “OK, I know that this market is booming and it’s starting to expand. I think it’s coming this direction in the next 10 years, so I’ll go buy this property that I expect to be worth 10 times this, but I have to wait 8 years to get there.” So it can be very speculative in terms of that value. But the other thing that’s nice is that if you are in like a municipality or a city and there’s land there, you can often compare that land value on a cost per acre to other land in the area. So if you — especially like something where we live in Ohio, everything’s flat and easy to kind of figure out. If you’ve got a 1-acre parcel in x city, it’s potentially pretty similar to another 1-acre parcel in that same city. And here’s why. And so you can compare those somewhat easily in certain areas. But in others, it’s almost impossible.

Tim Ulbrich: That makes sense. And you know, you had talked about some key people of the team. And I think you do a great job when you’re talking about home buying or home building in this case and considerations, how important the team is. So we talked about the lending piece and we’ve mentioned the agent piece and the builder piece. But we haven’t talked about that in detail. So let’s start with the agent piece. How does a real estate agent support someone building a home? And how does this differ from those that might be looking to buy a pre-existing home in terms of who they might be looking for?

Nate Hedrick: This, again, kind of depends on if we’re talking about building in that development or building in the middle of nowhere or on raw land. But in both cases, you absolutely want to have an agent on your team. I think it’s obvious a lot of times if I’m going out and buying raw land and getting a builder that it might be helpful to have an agent in that case. But it doesn’t seem as obvious when you’re talking about, again, that concierge model we talked about where you’re going to a site plan, they’ve got a model home, their office is open, they’ve got all these friendly real estate agents there. It often feels like I shouldn’t even need anybody to help represent me. But the reality is you absolutely should. And it costs you almost nothing to do that. The agent being involved is your representative, right? The person that’s selling that property, they are trying to sell that property for as much as they possibly can. So even if you’re going to a development, 50 homes available, everything’s done for you, you absolutely want to have that agent as the core member of your team to help with things like negotiating the contract. I’ll give you a great example. I have a client that I’m working with right now. And our early conversations with the builder, they cited this great, gorgeous rooftop deck, OK? And they said, the rooftop deck, you can add it on for I think it was — I don’t know — maybe $15,000. Let’s just say it was that. And it was this awesome like you could see downtown and you can see the lake from downtown. This place is gorgeous. And they quoted it at $15,000 early on. Well that property started blowing up in popularity. And it got really hot really fast. And so we were in but kind of negotiating the contract still. And so we get to kind of the closing bit of figuring out this contract, and they said, “Oh yeah, and that rooftop deck. It will be $22,000.” We said, “Hold on.” And you know, at the time, the buyers were like, “Well, that’s just what we have to do.” I said, “No, I’ve got some notes here.” So I went back and we looked at it, and we had clear indications from the buyer — or from the builder that it was a $15,000 add-on.

Tim Ulbrich: Yeah.

Nate Hedrick: And so I was able to help negotiate that back down and save them that $7,000. So having an advocate on your team, somebody that knows this stuff inside and out is absolutely essential.

Tim Ulbrich: Yeah. And not only an advocate, but an advocate that takes good notes and is ready to act on your behalf as well.

Nate Hedrick: Helps to have a detail-oriented pharmacist as your agent I suppose. But really, again, that agent is going to also grow the rest of your team from there, right? So if you need inspectors, if you need a lender, if you need a title company, again, most of the time the seller’s going to have the preferred title company that they’re working with or the preferred lender that they’re working with. But you still want someone on your team that can grow that, the rest of that process if you need it.

Tim Ulbrich: And for those listening to this episode, if you’re looking to buy or build a home in 2021, as you likely have heard us talk about on this show before, we’re excited about our partnership with Nate, The Real Estate RPh, for the Real Estate Concierge service that he can help get you connected with an agent that is local to your area but also be alongside for the process, talk to you at the beginning, walk you through along the way, be a second set of eyes, help you think about the beginning to the end, and work with that agent locally as well. So you can learn more at YourFinancialPharmacist.com. You can click on “Buy or Refi a Home,” and then “Find an Agent,” and that will get you Nate. And you guys can schedule a quick discovery call to see if that’s a good fit for what you are looking for. So we talked about the agent, Nate. The builder is one that comes to mind as well. You know, we’ve all heard horror stories of I was working with this builder, they went bankrupt, something happened. I feel like any neighborhood I’ve been in, there’s always been a story of like, oh this stopped here in the neighborhood because this happened. So talk to us about — of course it depends on some level, but considerations when working with and finding a builder.

Nate Hedrick: Yeah, this is exactly why I put together that blog post that you mentioned about the 20 questions to ask if you’re building a home because there are a number of things that I see my clients not even realize they should be asking up front. It starts very, very simply, right? You want to kind of get an idea of how long they’ve been in business, look at the number of homes they’ve built, look at the number of homes they’ve built in your area as well. So you know, if they’re brand new to Cleveland, Ohio, they’ve never built here before and they’re used to working in a different state, they may not be ready for some of the things that come up with building in this particular location. So getting questions about have you built in this municipality before? Have you dealt with the city, the planning committee, the zoning committee, this architect, you name it? All that stuff, you want to make sure there’s some sort of background going into that. So a lot of the questions that I often mention to my clients revolve around proving that that person is experienced enough to handle what we’re dealing with and then also licensed and insured in all those things as well so that if something does go wrong, you’ve got kind of this backup to make sure that you’re not going to lose your money or anything like that. And from there, it really grows to questions about the specifics in terms of are you looking for more energy saving features? Are you looking for more customization? Right? Because certain builders are going to be more customizable than others. Or perhaps maybe they only do certain types of appliances, and you really want the top-of-the-line. So those are all questions that you want to ask as you get into the weeds. But always start with those broader questions about experience and making sure that they’re appropriate for the job.

Tim Ulbrich: Great stuff, Nate. And again, to the community, the conversation we’re having today comes from an article that Nate wrote on the Real Estate RPh blog, “20 Questions to Ask if You’re Building a Home.” We’ll link to that in the show notes. And again, if you’re in the market for buying or building a home in 2021, make sure to head on over to YourFinancialPharmacist.com, click on “Buy or Refi a Home,” and we’ve got additional resources available to you right on that site in addition to an option to find an agent, which Nate can help you throughout that process. So Nate, as always, appreciate your time and your willingness to share your expertise with the YFP community.

Nate Hedrick: Absolutely. Thanks for having me, Tim.

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YFP 191: 10 Common Mortgage Mistakes to Avoid

Posted on by yfpadmin


10 Common Mortgage Mistakes to Avoid

On this episode sponsored by LendKey, Tony Umholtz, a Mortgage Manager for IBERIABANK/First Horizon joins Tim Ulbrich to discuss 10 common mortgage mistakes homebuyers make and steps you can take to avoid them.

About Today’s Guest

Tony graduated Cum Laude from the University of South Florida with a B.S. in Finance from the Muma College of Business. He then went on to complete his MBA. While at USF, Tony was part of the inaugural football team in 1997. He earned both Academic and AP All-American Honors during his collegiate career. After college, Tony had the opportunity to sign contracts with several NFL teams including the Tennessee Titans, New York Giants and the New England Patriots. Being active in the community is also important to Tony. He has served or serves as a board member for several charitable and non-profit organizations including board member for the Salvation Army, FCA Tampa Bay and the USF National Alumni Association. Having orchestrated over $1.1 billion in lending volume during his career, Tony has consistently been ranked as one of the top mortgage loan officers in the industry by the Scotsman’s Guide, Mortgage Executive magazine and Mortgage Originator magazine.

Summary

Tony Umholtz, a mortgage manager for IBERIABANK/First Horizon, digs into 10 common mortgage mistakes to avoid what he sees people make in the home buying process. The first is not fully understanding in advance the common loan types and considerations or differences of each. Tony breaks down what conventional, FHA, VA, and other unique products, like the pharmacist home loan, are and what borrowers need to be aware of. The second falls into the category of credit blunders, like overestimating your credit score, relying on third-party services (which often provide inaccurate credit scores), utilizing no interest credit cards which could negatively impact your credit, and waiting too long to resolve issues you have with it. The third common mistake is not shopping around for a mortgage lender. Tony expresses that it’s important to find the right product and that some internet-based companies may be great for a mortgage refinance but are hard to work with for a home purchase. The fourth mistake is searching for a house before you get pre-approved. Tony shares that a pre-approval letter shows sellers that you’re serious and can also make you aware of any red flags you may have on your credit report. The fifth is underestimating how much cash you need to close. Tony explains that not only do you need money for a downpayment, but you always need to have money saved for an insurance premium (as well as possible flood insurance coverage), taxes, and closing costs.

The sixth is delayed communications with the lender, title agency, and real estate agents which can make or break a transaction. The seventh is making a home buying decision before you’re ready. Tim shares that you can’t make a decision about any part of your financial plan in a silo and have to consider how each will affect another. Number eight is not thoroughly evaluating how home buying fits in with other financial goals you may have and number nine is not thinking about the money you’ll need after you close for items such as furniture, lawn equipment, etc. The last common mortgage mistake to avoid is misunderstanding or misevaluating mortgage discount points. Tony explains that you should always ask for a no-point quote initially. He shares that points are essentially prepaid interest and that by purchasing a point you’re buying down the interest rate. However, he says that you really have to evaluate this decision and that it’s not always the best move to make.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Tony, welcome back on the show.

Tony Umholtz: Tim, thanks for having me.

Tim Ulbrich: Excited for this discussion here in 2021 as we have you back, talking about 10 common mortgage mistakes homebuyers make and steps that folks can take to avoid these mistakes. And many of these come from either personal experience or ones that we know are often being made, so we’re going to go through these one-by-one and certainly lean into your expertise to hopefully give folks a guide of what are some things that they can be aware of going into the lending process, whether that’s a first-time home buy, second time, third time, or refinance and then hopefully put in some steps to prevent those from happening in the future. So Tony, the first one I have here that I know often comes up is that folks may not fully understand in advance the common loan types and the considerations and differences for each. And so before we talk about the pharmacist home loan through IBERIABANK/First Horizon aka “the doctor loan,” give us an overview at a high level of conventional, FHA and VA loans as I suspect those are the main ones our community will already have some familiarity with and perhaps some experience with. You know, generally speaking, how do these work? What’s the difference between them? And what are some important considerations for lendees when pursuing these types of loans?

Tony Umholtz: Yeah, sure. Great question. And that’s definitely the most common types of loans that are out there and that you’ll hear about. Fannie Mae and Freddie Mac, we call them the GSEs, which is Government-Sponsored Entity, they provide conventional financing. And thank God we have them, right? I mean, they really keep our housing market alive. And then we have of course FHA and VA loans, which are backed by — we call it Ginnie Mae, which is HUD, which is also a government program. And those are the main key loans that are out there. There’s also portfolio products, unique, nichey products such as the pharmacist product that we’ve discussed that banks, individual banks, can hold on their balance sheet as well, which don’t have a traditional investor, government-backed sponsors. But not to get too into the weeds here with that, but high level, I would say is conventional products, the main differentiation on that is they will allow a loan amount up to $548,250 in most markets. There is some markets around the country where that’s a higher number. So it’s just around San Francisco, Los Angeles, there’s going to be higher loan limits in certain counties in higher priced areas. But that’s one of the main pieces with them. And a conventional loan above 80% loan-to-value, PMI is required. And that mortgage insurance is required to deliver the loan to Fannie and Freddie. So that’s why it’s so important that you have this mortgage insurance, lenders require it, and that can be costly, right? That can be very costly. FHA and VA — let’s just kind of pull the two apart here — FHA, the Federal Housing Administration loan, is designed for a little bit more flexible credit. Although conventional loans can get pretty low on credit score too, FHA tends to be better if you have lower credit scores because it will allow lower interest rates, for the most part. FHA loans, though, typically don’t have a loan amount max as high as conventional. So for example, if a market’s $548,250 for conventional, it might only be like $325,000 for FHA. So I usually utilize FHA as a last resort, only when it’s the best loan for the client. And then VA of course is for veterans. And the VA loans are great. They allow 100% financing with no PMI. The only downside with VA is there’s a funding fee that’s rather expensive. So I’ve actually had a few veteran clients that we’ve actually gone conventional because it’s cheaper overall. But I could talk a long time on this subject. But hopefully that clarifies the main points.

Tim Ulbrich: Great overview. And to our listeners that want to learn more on each of those, you can check out Episode 169, Tony and I talked through helpful tips for getting a mortgage, going through different loan products, talked about the pharmacist home loan. And tony, we’re going to segue here and talk about that for a moment as I think your discussion on PMI is a good lead-in. And so as we think about the pharmacist home loan, you know, Tony, common barriers to pharmacists being able to purchase a home that I’ve seen is student loan debt, which of course can impact debt-to-income ratio, as well as their ability to save for a down payment. You know, they’re coming out of school, looking to buy a home, six figures or more of debt, and I think that’s where the pharmacist home loan can have its values. Tell us more about the pharmacist home loan option that IBERIABANK/First Horizon has, including minimum down payment, terms, requirements to qualify, PMI considerations and so on.

Tony Umholtz: Sure. The product we offer to pharmacists, it allows very little down payment and there’s no PMI. So it’s probably the key point to it. If you’re a first-time home buyer, you can actually put 3% down and have no mortgage insurance. And if you’ve owned before, it’s 5% down again, with no mortgage insurance. The minimum credit score is 700. And the one piece to this — and again, I don’t — I always try to avoid interest rates because they’re volatile and the market can move, bond market can move, but I have found over the last 18 months that I can offer better rates on this product than if I had a non-pharmacist customer come and put 20% down. I mean, it’s very strong interest rates. So it’s kind of — that’s been the few lead pieces that I’ve noticed. It’s just very strong 30-year fixed loan rates. And that no PMI is just huge. I mean, in some cases if you’re buying a $500,000 home and you’re putting 3% down, you’re talking about a $400 a month savings just for the PMI. So it’s a pretty substantial number. In regards to student loans, it has a — it doesn’t completely waive them. And I find most of my clients that I work with are under an income-based repayment plan anyway. And that’s what we’ll use in calculating a debt-to-income ratio. But in the case where there isn’t a payment, it uses a factor that’s lower than a traditional conventional loan or an FHA loan. So it enables more buying power.

Tim Ulbrich: Very good. And we covered the pharmacist home loan in a fair amount of detail, Episode 139, Ins and Outs of the Pharmacist Home Loan. Also, if you go to YourFinancialPharmacist.com, click at the top “Buy or Refi a Home,” you’ll see more information there to the IBERIABANK/First Horizon product as well as to the real estate concierge, Nate Hedrick, for those that are looking for an agent as well. And we’re excited about the partnership that we have with IBERIABANK/First Horizon because it’s nationwide. And we’ve got a nationwide community here in the YFP community. I have had the chance to work with Tony now for the better part of a year, love what he’s doing, his passion to educate and help folks on this decision and understand how it fits in with the rest of the financial plan. So that’s No. 1, not fully understanding in advance the common loan types and considerations and differences for each. No. 2 here, Tony, is credit blunders. And I’m thinking of those that perhaps may overestimate their credit score or perhaps not have a good understanding of how credit scores impact rates, maybe waiting too long to resolve credit issues and so on. What are some of the common mistakes and blunders that you see related to credit?

Tony Umholtz: The credit and the overestimate — you mentioned overestimating credit. I see that a lot. And you know, I think a couple things I’ll just touch on here with credit. One of the things as a lender, I try not to run credit unless we absolutely have to, right? There’s a lot of clients that’ll call and just want some high level information, but credit is so important because it’s such a critical part of the product. If you have a minimum credit score of 700 and you’re under that, it’s good to know why. And some lenders can — and we offer this service as well — we can give you ideas on how to improve it. We actually have score models that tell us what your score could go to by doing certain activities. But anyway, one of the big blunders I see is just totally following like a third-party monitoring service. And I don’t want to name too many names because there’s a lot of them out there, but traditionally, these third party services are going to overinflate your credit score more than what we would see. You know, like us as a — so for example, a creditor can see a score that is maybe 30 points on average lower than what you might see on one of these services. And I’m even — I subscribe to a service. I will say I do. But it gives me good trends as to what I’m doing, but it’s not what a creditor would see. So in my lifetime of lending, the highest credit score I’ve ever seen was 820, and it was an 80-year-old gentleman who had perfect credit his whole life. So it’s one of those things where, you know, a customer will say, “Hey, my score is 850!” Well, that’s what the monitoring service says, but it’s really not going to be that way when we see it. So that’s one thing, a blunder that I see. The other is a misconception on an inquiry as well. A lot of inquiries is not good. But a couple inquiries at one time for a loan is not going to have an effect on you. There’s a window of time where you can do this. That’s another piece. And then the other really important one — and I can’t stress this one enough — is the no interest for a year type cards and promotions that are out there. And it’s very tempting to go to Best Buy and they’ll offer a $5,000 credit limit for $5,000 worth of stereo equipment and maybe a CD or whatever it might be. And you don’t have to pay interest for two years, which is great, right? It sounds great. But what they do, they report that to the credit bureaus, to Experian, Equifax, and Transunion, as a 100% maxed out credit card. And I’ll confess as a young man, I was in my early 20s, I bought furniture for one of — my first house with a store called Rooms To Go, and I did this. And that’s how I learned. And of course, I’ve seen many clients do this since that time. But it actually happened to me personally. I said, “Wait a minute, why did my credit score go from 750 to 660?” And that was one of the things that happened. I did this credit, you know, it was a maxed-out credit card. That’s how it’s reported to the bureaus. So that’s another big blunder, Tim, that I’ve seen.

Tim Ulbrich: Yeah, and credit — great summary, Tony, great insights there as well. Credit, credit optimization, credit security, such an important part of the financial plan. Obviously we’re talking about here related to securing a mortgage, but generally just an important piece to consider. Tim Baker and I talked about this on Episode 162, Credit 101, talking about what is a credit score, breaking that down, six factors that can impact scores. So if you want more information and better understanding your credit, we’ll link to that episode in the show notes. So that’s No. 2 here, credit blunders. No. 3 is not shopping around. And I know, Tony, that rates, especially in a market where I feel access to information has become easier to find, if you will, that rates may be not necessarily what I’m referring to as much here, although that of course is a consideration. And I think in some cases, if you’ve got good communication with a lender and rates are changing that they’ll be in communication with you. So I think that relationship certainly is important. But obviously we know not all offerings are created equal. So here, we’re talking about the pharmacist home loan. Folks may or may not be aware of that. And so looking at a few different institutions, understanding the products that are out there, but what else, Tony? What are some things that folks may notice beyond the offering and perhaps beyond the rate that would be different from one bank from another? I’m thinking about things like application fees, document fees, other things like that that folks should be thinking about as they shop around.

Tony Umholtz: I really think the — and it can be very challenging sometimes with the shopping around because there’s different levels of knowledge out there. And some of the companies are just set up as call centers as they funnel internet leads in. You know, so there’s different knowledge bases that you’re going to speak to sometimes. So I find that that sometimes adds some confusion. But I think it is very important to find the right product. I think that is very much a critical element, so finding the lender that has the right product for you is important. And I never want to — I’m very sensitive to relationships. So I have people call me and say, “Hey, I have used this lender for 10 years and they’ve always been good to me,” and we’re a competitive industry but sometimes if I think something’s better, I’m very quick to tell that person, “This other lender has a better product.” So I think — and I actually have a lot of lenders that love to send me clients that they know we’re better fitted for. The fee part is important because there’s only really one set of fees the lender controls, and that is there’s a lender portion of fees. The rest are third party. So they’re going to be through third parties. It’s going to be the same, really no matter who they use. So that’s one thing I find that confuses a lot of people is consumers will lump in the prepaid expenses, taxes, insurance, title insurance as well, and doc stamps for the state we’re in or the county recording fees. But those are going to be the same costs no matter what. There’s really only one line item of lender fees that are going to be different, that could vary. So that’s one way to look at the lender is just lender fees and interest rate. Really, it’s as simple as that. But the big things I find when you’re looking, when you’re out there — and again, I’m not going to name names of companies — but when you’re looking to buy a home and you have a — there’s a lot of companies that have popped up, especially internet-based companies that are really just feeding off the refinance market. It’s hard to be equipped for purchases because when you go under contract for a purchase, you have a commitment letter date, right? There’s a commitment financing contingency, there’s appraisal contingency, there’s all these contingencies in a contract, and you want to make sure the lender is watching this and can meet these milestones. A lot of lenders that are set up for refinances just aren’t set up for purchases. It’s OK to use one of these lenders if you can wait 90 or 120 days to close your loan for a refinance, but on a purchase, you can’t do that. So service is very important when you’re buying a home. It still can be with refinancing, but you can always just wait longer, you know? It’s one of those things. But I would just say, you really have to be careful with the service aspect when you’re buying because it’s a very competitive housing market right now, and a lot of these sellers have backup offers. I get calls a lot too because people are under contract and something went wrong with their lender, and I have to jump in sometimes. So I see it even as a secondary lender when things go wrong with the original lender. So I would just say the big thing is a comfort level with that person and that organization. The best rate and product is important too but also making sure that you’re in the best fit for you because one other thing I will say is, you know, if you can get a better rate putting 30% down than you could putting 5% but that’s going to use up all of your liquidity and maybe impact other financial planning aspects of your life, well, the 5% is much better, even if the rate’s a little higher. So I think it’s very important to plan, look at your overall plan. That’s why the folks at YFP are so great to work with because they can look at everything and say, “Hey, this is better for you in the long run because of this.” So I hope that’s helpful. I mean, there’s a lot of components to it. There is a lot of things to think about, but I think it’s really finding a comfort level with the group that you want to work with and especially if you’re buying a home.

Tim Ulbrich: Absolutely. So point No. 3 there, not shopping around, I can speak from personal experience working with more of a big box company, obviously having the opportunity to work with you guys, open communication lines, feeling comfortable with the process, getting questions answered, all of that really matters. No. 4 here is looking mistakes — again, we’re talking about here looking beyond the simple Zillow or Redfin search before you get preapproved and know what you can borrow, which is not necessarily, of course, the same thing as what you can afford, right? We talked about this with Nate Hedrick on the podcast a lot, the Real Estate RPh, what you can borrow, what you get approved from the bank, is not necessarily what you can afford. And that connects, Tony, to what you just said about connecting this home buying decision with the rest of the financial plan. So talk to us here briefly about the importance of the preapproval process.

Tony Umholtz: The preapproval process is critical just to know what you can afford both ways, right? To see if that Redfin search popped up a house that you can’t buy. I’ve also seen it the other way around where, you know, with the rates being so low, clients have said, “Hey, I’m paying $2,900 a month for rent and I can buy more house than I thought I could.” So it’s really just critical in the education process. You know, knowledge is so important. And just knowing what you can and can’t do is important. And the preapproval process will allow us to see if there’s any red flags as well. We’ve had lots of clients that we’ve been able to help get their credit scores up a little bit higher, we’ve had lots of clients that both ways have said, “Hey, I don’t want to buy a home this large because I didn’t realize that this is the cost and the taxes are this.” On the other side, I’ve seen it the other way too, like I mentioned. It’s very important to get pre-approved before you start walking into houses. And I will say that the realtors are very proactive right now because of the tight inventory. We get a lot of phone calls from the listing agents, even. And of course, we can’t give much information away, but they’re calling us, “Hey, are these clients approved?” I mean, it’s a different market in a lot of parts of the country right now.

Tim Ulbrich: That makes sense given where we’re at and the climate of the market. So No. 5 is underestimating the cash to close. So what I’m referring to here, Tony, speaking from personal experience in our first home purchase a little over a decade ago is I think many folks when they’re looking, you know, look at the sale price of the home, they might say, “OK, I’m going to be able to negotiate this or this,” which might be overconfidence, especially depending on what’s happening in the market. And they’re probably thinking about the down payment, whatever that would be, 5%, 10%, 15%, 20% down. But they might not be thinking about other costs that they’re going to need to consider having cash to come to the close. So tell us about not numbers, per se, but what are some of those other things that folks need to be thinking about when it comes to cash to close beyond just the down payment?

Tony Umholtz: One of the big pieces too outside of the down payment is your insurance premium. And insurance is due upfront, full year premium upfront, even if you paid cash, you have to pay for your insurance premium upfront if you want your home insured. And I find that — and this is flood insurance as well if you’re in a flood zone, that’s due as well — but the insurance component is something you have to take into consideration. The other piece outside the down payment is your tax allocation. So normally, lenders will take anywhere from 3-4 months of your property taxes for the escrow account. And for example, the reason for 3-4 months is there’s always a two-month cushion that’s collected. But there’s also, you know, let’s say we were to close today, right, on a house, Feb. 5, your payment is not going to be due — your first payment’s not due until April 1. So we have to collect February and March to be on pace to pay it for you, so we’re going to collect four months of taxes at closing to kind of cushion things. And then of course you have closing costs as well. So there’s a prepaid element and then we have the closing costs. So in addition to the down payment, you have those elements as well. The other thing to keep in mind too that is some confusion that I see a lot with first-time home buyers especially is when you give a deposit on the home, so let’s say when you give your realtor, your realtor goes to help you with the contract, you have to put $5,000 in escrow or deposit — terminology is about the same but different parts of the country call it something differently. That $5,000 gets credited back to you at closing. OK? So it’s a contribution to the overall transaction. It’s not something that you lose or gets lost in any way. It comes back to you. So if your cash to close let’s just say was $10,000, and you’ve already given $5,000, well, you only are going to bring $5,000 to the closing. So that’s another piece just to — questions that come up.

Tim Ulbrich: Very good. And I think the point here I want to make, especially for folks that are on the home buying process for the first time is making sure you’re appropriately considering what might be the cash needed, down payment, closing costs, you mentioned the insurance, the taxes, and some other things as well. So making sure to plan for that in advance and of course thinking about how that impacts other parts of the financial plan. So we’re halfway through our list of 10 common mortgage mistakes to avoid. We’re going to rapid fire these last five. No. 6 here is delayed communications with the lender, title company and agents. Lots of folks involved, Tony, in this process, lots of moving pieces and parts, and I suspect this is the time to overcommunicate and set communication expectations with the team in advance. So talk to us about from your perspective, you know, what you’re expecting of your — obviously your team but also in terms of folks that are working with your team when it comes to communication.

Tony Umholtz: I mean, communication is critical. And that’s what makes the transactions — makes or breaks them in a lot of ways, the communication. So we really try to communicate — overcommunicate with the client. The title companies can be tricky because some of them are, you know, larger, big box, and they’ll just send blanket emails out and it’s hard to get in touch with someone individually. But I think it’s — you know, one of the things that I think is critical is that we know who the realtor is, and we know who the title company is. And then we know the individual in contact. And it usually goes very smoothly if that’s the case. So just having everyone on board. Normally the realtors are very important for us to know because we have to coordinate, we have to give the appraiser their information typically, just to show the house. But yeah, the title company portion is very important, especially as we get closer to closing because the bank or lender’s closing department is going to communicate with them and balance the figures for closing.

Tim Ulbrich: Very good. Yeah. I think with lots of parties involved, communication — always two-way, but making sure that you’re being proactive in that and of course if there’s questions that are outstanding, making sure you’re reaching out and vice versa to stay on time and on track with closing. I’m going to take No. 7, 8 and 9 because they hit home for me personally. And then we’re going to bring back Tony here to talk about No. 10 related to mortgage discount points. No. 7 is making a home buying decision before you are ready just because “rates are good” or because I’m renting and “throwing money down the drain.” Now we’ve talked about this extensively on Episode 113, Is Your Home an Asset or a Liability? We’ve talked about not only the pressures to buy a home but also the costs of home ownership and comparing renting versus buying. And so I would encourage folks, as we say on the show over and over and over again, to avoid the trap of making any financial decision in a silo. So here, if you’re talking with somebody and rates are good or you see commercials about rates or that’s the center of the conversation or somebody says, “Hey, why are you renting? You’re just throwing money down the drain,” now, you may conclude that it is the right time to buy. But the point I’m making here is to take a step back, what else do we have going on in the financial plan, working with hopefully a financial planner to help you evaluate that decision, look at all pieces of the puzzle, and then proceed with the home buying decision and the budget to buy a home if it makes sense in the context of your plan.

And that really is No. 8 in terms of these mistakes is not thoroughly evaluating how home buying fits in with other financial goals. And so I think as we talk about extensively, you know, if you’re looking at six figures of student loan debt, you’re looking at investing goals, you’ve obviously got other competing priorities for your finances, home buying just being one of those, how does it fit in? And of course, YFP Planning, our fee-only comprehensive financial planning team can help that. You can schedule a free discovery call, learn more, at YFPPlanning.com.

No. 9 mistake here is not thinking about available cash post-close. So we talked about how much money you’re going to need to be able to come to closing. But what about things like a rainy day fund to make sure that if something goes wrong in the home? What about things like furnishing the home? What about things like yard equipment? And so thinking about not only the cash that you’re going to need to bring to closing but also do you have some reserves? Do you have some cushion? What will that look like month-to-month as well as some funds that you have in reserves to be able to handle some of those expenses that will inevitably come after you move in?

And Tony here, No. 10 in our list of 10 common mortgage mistakes I think is misunderstanding or evaluating mortgage discount points, especially as folks are comparing rates among institutions or even within a lender. So talk to us exactly about what are discount points? And ultimately, how folks and tips for folks as they’re evaluating discount points as an option.

Tony Umholtz: I would recommend that you always ask for a no-point quote initially because, you know, some lenders will put that into their pricing. It’s funny, even the Freddie Mac that are posted in the Wall Street Journal, they typically have .6% points in the quote. So you know, I always say that if I put that in there, the rate would be even lower. But that’s really the important element is discount points — let me explain what those are. They are actually — it’s defined as prepaid interest. So you’re basically buying down the interest rate and for a finance person, it’s like you’re buying down the bond rate over time by paying the points at a premium. It sometimes can be a good investment. But most of the time, I don’t recommend it. And the way that you can tell if it’s a good investment is traditionally, on a 30-year fixed, 1 point will typically buy down a .25% in rate, typically. Sometimes ⅜ of a point. Well, over — let’s say it’s .25%. Over four years, you basically pay off the point you paid and then you’re kind of in the money, so as long as you own the home more than four years, you’re in the money. And then a lot of times, depending on your tax bracket and everything, you can write off that point in the year that you pay it. So if it was 2021 and you paid 1% on a $300,000 home let’s say, that would be $3,000. But you know, the spread in rate is important in determining if paying points makes sense. But I find that it typically is not the best way to go unless there’s a big spread. Like I had a — there was a time earlier in the year, especially on jumbo mortgages, larger loans that are above the conventional limit, where we were getting a half point for 1% fee. Well, that made sense all day because you had a two-year payback period on a 30-year fixed. Then you were in the money for a remaining 28 years if you stayed there. So for long-term people who are going to be in the home or own the home long-term, it can make sense sometimes. But to compare lenders, you really just want to ask, like if one lender offers you 2 — this is just throwing out numbers — 2.75% with 1 point and the other one offers you 3% with no points, you can ask the 3%, “Hey, if I was charged 1 point, what could I get? What could my rate be?” And if they came back and said, “It’s 2.625%,” well the offer from the higher rate person is actually better. So that would be one way to compare. But that’s a quick summary of points.

Tim Ulbrich: Yeah, great discussion there of points. I know that comes up a lot, and I think what we’re trying to get to, Tony, is an apples-to-apples comparison the best that we can to evaluate it. And I think you bring up another good point in that discussion, which is the longevity that you may be in the home. And I know that’s an important consideration, one that folks may not be able to predict in advance but to try to objectively evaluate that the best you can because that’s going to impact when you think about rates of the loan, you think about things like points, when you think about down payments and other issues and having to be able to expense a move in the future and closing costs and selling the home, you know, if that runway’s going to be long versus that’s going to be potentially short, that could have a significant impact on many parts of the home buying process. So there you have it, 10 common mortgage mistakes home buyers make and steps that you can take to avoid these mistakes. And to learn more about considerations when getting a home loan and to get more information about the pharmacist home loan offered by Tony and his team at IBERIABANK/First Horizon make sure to check out the post on the YFP site titled, “Five Steps to Getting a Home Loan.” And you can get there by visiting YourFinancialPharmacist.com/home-loan or if you just go to the main page, YourFinancialPharmacist.com, top you’ll see “Buy or Refi a Home,” and that will get you there as well. So Tony, appreciate your expertise as always and appreciate you taking time to come on the show today to talk about this important topic.

Tony Umholtz: Tim, thanks for having me. Really enjoyed it. I always do, and you know, appreciate being a partner with you.

Tim Ulbrich: Thank you very much. And as always, if you liked what you heard on this week’s episode of the Your Financial Pharmacist podcast, please do us a favor and leave us a rating and review on Apple Podcasts or wherever you listen to the show each and every week. That will help other pharmacy professionals find this show. Appreciate you taking the time to join us. Have a great rest of your week.

 

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YFP 190: 7 Ways to Reduce Your Monthly Housing Costs

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7 Ways to Reduce Your Monthly Housing Costs

On this episode, sponsored by Insuring Income, Nate Hedrick, the Real Estate RPh, joins Tim Ulbrich to discuss 7 ways to reduce your monthly housing costs.

About Today’s Guest

Nate Hedrick is a 2013 graduate of Ohio Northern University. By day, he is a clinical pharmacist and program advisor for Medical Mutual. By night and weekend, he works with pharmacists to buy, sell, flip, or rent homes as a licensed real estate agent with Berkshire Hathaway in Cleveland, Ohio. He has helped dozens of pharmacists achieve their goal of owning a house and is the founder of www.RealEstateRPH.com, a real estate blog that covers everything from first-time home buying to real estate investing.

Summary

It’s no secret that housing costs, whether that be your mortgage or rent payment, make up a large chunk of many people’s budgets. For some people, housing can be 30% or more of their income. Nate Hedrick, The Real Estate RPh joins Tim Ulbrich on this episode to share 7 ways to reduce your housing costs. Reducing your housing costs allows you to have more disposable income to fund your other financial goals. It’s a win-win, right?

The first is downsizing your home. Many people think downsizing means moving into a tiny home or to an apartment that’s drastically smaller than where they currently live. If that’s what you want to do, that’s great, however downsizing can simply mean moving into a house that’s a bit smaller to help reduce the costs of taxes, insurance, utilities, and maintenance. The second way to reduce your monthly housing costs is to house hack. While house hacking may not be for everyone, this is a great stepping stone into real estate investing and can allow you to, hopefully, live for free. The third strategy is to get a roommate. Like househacking, this may not be an option for everyone, but having a sibling, friend, or even stranger live with you can allow you to significantly reduce your housing costs.

The fourth is geo-arbitrage, a concept that’s been picking up some steam over the years especially among those in the FIRE community. Essentially, in order to save money on housing costs, healthcare, or the general cost of living (think gas, food, taxes, transportation, etc) and get more for your dollar, you pick up and relocate to a new place. We know that the cost of living can vary greatly between cities but that your income may not increase or decrease accordingly, so this can be a powerful way to save money if it’s an option for you. The fifth strategy is to use Airbnb to increase your income. Although COVID-19 may make it difficult to put this in action at the moment, this is one to definitely consider when state’s start to re-open more in the future. Renting out your home, in-law suite, or room in your home can bring in extra cash and help you pay down your mortgage. The sixth way to reduce housing costs is to re-evaluate your homeowner’s insurance policy. Just like you’d shop around for car or disability insurance, you can do the same with homeowner’s insurance. You can also check in with your current company to see if there are any discounts available for installing certain security measures or for paying yearly vs monthly. The last strategy is to refinance your mortgage. With historically low interest rates, you may be able to significantly reduce your monthly mortgage payment. However, it’s important to keep in mind the total cost of the loan and any additional fees and costs you may incur when refinancing.

Mentioned on the Show

Episode Transcript

Tim Ulbrich: Nate, excited to have you back on the mic. How you been?

Nate Hedrick: Good, Tim. Thanks for having me.

Tim Ulbrich: It’s been I think a hot second since you were last on the show, Episode 178, where we talked about 5 lessons learned during your most recent investment property purchase. But I don’t want to assume that everyone listening knows who you are and what the Real Estate RPh is all about. So give us a brief background of you, your role in pharmacy, and how and why you started the Real Estate RPh.

Nate Hedrick: Absolutely. So I am a full-time pharmacist. I work with an insurance company here in Cleveland, Ohio. But I also moonlight or side hustle as a real estate agent. So I have my real estate license, have had that for four years now. And I work with local pharmacists and other health care professionals to help them buy and sell property here in Cleveland. And then that expanded a couple years ago into Real Estate RPh, which is a website that I run to educate pharmacists about the real estate process, help them find agents all over the country through our concierge service that we’ve partnered up with YFP for. So we do a lot of interesting stuff. And that’s really what my focus is on this year is really growing that network and being able to help more pharmacists around the country.

Tim Ulbrich: Yeah, it’s been fun to see that grow and more and more that are reaching out to you that are in that home buying process. So we will link in the show notes, obviously, to your site. We’ll also have some more information about the real estate concierge service for folks that want to learn more. We’ll come back to that throughout the episode. So today we’re talking all about ways — specifically, 7 ways — to reduce monthly housing costs. And I don’t think it’s any secret, I know from personal experience, that housing costs, whether that’s your mortgage or rent payment, make up a large chunk of many people’s budget. Now, check this out. According to the U.S. Bureau of Labor Statistics, people that fall into the top income quintiles, many pharmacists of course would be included in this, spend around 30-32% of their pre-tax income on housing. 30-32%. That’s a big chunk of your earnings that immediately are being spent on housing each and every month. And when you think about other competing financial priorities, the ones we talk about all the time on the show: student loans, child care, food costs and so — it may feel like there isn’t much money left to put towards other goals. So of course, thinking about strategies for reducing monthly costs I suspect is relevant for many. So Nate, when working with clients looking to buy a home, do you ever give them any insight on how much of their income they should aim to allocate toward those housing costs? And how do you determine that?

Nate Hedrick: Yeah, so you have to be a little bit careful as an agent, right? We are not financial advisors. You know, I don’t want to step outside my shoes a bit. But we always — whenever I’m meeting with a new client, I do make sure we talk early on about the importance of budgeting and making sure that they’re the ones setting the budget. I’ve had numerous clients come to me and said, “Hey, Nate, I got pre-approved for $600,000. What do you think about that?” And I said, “That’s great. What is your budget, though?” It’s a totally different question. So I always make sure that I bring that up, make sure that they understand that they need to set their own budget and then it’s my job to help keep them on budget. So if they come to me and say, “My budget is $300,000. I don’t want to spend a penny over that,” it is very easy for them to fall in love with a house that is $350,000. And it’s my job to make sure that they don’t go that direction, right? Especially if they’ve told me upfront, “This is our number. We want to stick to it.” I’ve seen it time and time again where if you start looking outside of your price range, all of a sudden, your price range goes up. So what I take my own role as is, “Look, I’m not going to tell you how to spend your money, but I’m going to help you stay on goal if that’s what you want me to do.”

Tim Ulbrich: Absolutely. And I can’t overemphasize enough, you know, what you’re pre-approved for and what the budget is likely are two different things. And so really taking some time up front, you know, what are you looking for? How does that fit in with the rest of your financial goals? Obviously biased on our end — working with a financial planner to help do that. And then you go through the home buying process and make sure that that home buying purchase fits in with everything else that you want to do. Nate, when you heard that BLS statistic, you know, 30-32%, of course we recognize we’ve got listeners all over the country. Cost of living here in the great state of Ohio is very different than cost of living up in the Northeast or out West. So we recognize that. But generally speaking, is that statistic, 30-32% of pre-tax income on housing, is that pretty common what you see among pharmacist clients?

Nate Hedrick: Yeah, if not a bit higher, right? I think that’s probably about right, but it tends to be that or more, I would say.

Tim Ulbrich: OK, makes sense. And of course, we have friends, family that are spending much more than 30% of their income on housing, maybe even spending 50% or more. And again, sometimes that’s subject to cost of living in certain parts of the country. So Nate, why is spending this much money on housing something that folks should — you know, I don’t know if avoid is necessarily the right word. Obviously for everyone it’s a personal decision. But that they should at least be aware of the impact that this might have on other parts of their financial plan.

Nate Hedrick: Yeah, absolutely. I think sometimes it’s easy to look at it and say, “Well, I can handle that payment today. It won’t be a problem. But what does that look like in five years? In 10 years? You know, are you going to be working as much? Are both of you going to be working if you have a spouse? There are a lot of things that you want to plan for the future, and getting yourself into the highest possible payment right up front kind of cripples some of the opportunities you have later. So you could easily become house poor, you could — honestly, I’ve seen pharmacists, I’ve talked to pharmacists, who feel like they’re living paycheck to paycheck because that housing cost is so darn much that they have to commit such a large portion of their income to basically staying on track. Up front, if you can make that decision to pare that back a bit, it makes your options that much better down the road.

Tim Ulbrich: Yeah, makes sense. And I think we have a bias and a tendency — I know I do — to tend to look at our future state through the lens of today, right? It’s just natural. So of course things could change, you know, incomes could go up, but also incomes could go down. So do you have margin? You know, what about financial emergencies and being ready for those things, things that we may not be able to anticipate happening at this point in time? So it’s obvious that reducing monthly housing costs, if we’re talking about 30% or more of pre-tax income, can have a huge benefit on your financial plan. We know that when it comes to the financial plan, obviously income and disposable income is what we need to be able to allocate towards our goals. So whether that’s short- or long-term goals. So let’s dig into seven ways that people can reduce their housing costs. No. 1, Nate, we’re going to talk about is downsizing. And I think when people hear that word, they immediately think of living in a tiny home, moving to an apartment that’s drastically smaller than where they currently live. And if that’s what people want to do, great. You know, we’ve talked with several pharmacists that have had very creative housing situations. I think of Rena Crawford that we had on this show talking about her housing situation out in San Diego and her creativity with renovating a van while she was completing residency. And certainly those are exceptions probably to the norm. But what do we mean here when we talk about downsizing? And why can this be such an impactful way to reduce housing costs?

Nate Hedrick: Yeah, I mean, anytime you’re talking about a larger home, more expensive home, it’s not just the house itself, right? You’re talking about more utilities. If you have more square footage, you’ve got more to heat, more electricity, all those different things go into it, more maintenance costs. If you’ve got a larger footprint of house, there’s more stuff that can break. So all of those things start to stack up. It’s not just a bigger house is it. So that’s kind of important. And what I find is that it’s not always about necessarily downsizing but making sure that when you start, you’re not upsizing, right? So downsizing can be a good move if you’re already in a house where you’re like man, this is really crippling our budget. We need to make a decision. But what I see most often is that people who take this ahead of time, before they ever buy their first house and think about OK, I don’t want to have to downsize later, what can I start with now and then work my way up down the future?

Tim Ulbrich: Yeah, that makes sense. And I think your point is a good one, being proactive — and not even just focusing on necessarily things like the square foot and the mortgage, of course, and those things but other things. You know, you mentioned taxes, you mentioned maintenance, you mentioned utilities. What about the lawn care? And really considering everything that’s involved — could be association fees and other things. How do clients that you work with — you know, I know one of the things folks may not necessarily be as obvious is OK, what is it going to cost me all-in per month? You know, of course you’ve got the mortgage and insurance and they’re thinking about those things. But they may not necessarily be thinking as much about utilities and other things. Of course, taxes are readily available information. I mean, is this information that’s typically forthcoming from the seller? Do people have to prod to try to get some utility payments and things like that to be able to best estimate what this is going to be for their budget?

Nate Hedrick: Yeah, I usually recommend to my clients to ask. I’ve seen some sellers — and I’ve done this once — where we actually posted, not our bills exactly, but I had the seller pull their previous utility bills and say, “Look, let’s just put this number out there. That way a potential home buyer can feel good about it, that it’s going to be $300 a month for all this,” or what have you. That’s definitely something that we’re seeing people ask for, and it’s a great way to get a true estimate of what that particular property might be costing someone.

Tim Ulbrich: Awesome. And I think it’s worth mentioning here, of course when we talk about real estate transactions, you know, there’s costs that are involved. So making sure you’re factoring that in. If you’re going to pick up and move, how great — this is a conversation my wife and I have all this — you know, what’s the true net difference, right? So you might look at, hey, we’re going to sell for $350,000 and we’re going to buy for $250,000. But when you really consider the transaction costs, obviously the fees involved, the moving expenses, really trying to evaluate this and understand what the net difference is. So that’s No. 1, looking at downsizing. No. 2 is house hacking, I think a topic that you and I love, love talking about, one that we have both said on this show several times, “Man, if I could do it all over again, I would have house hacked.” So something we talked about Episode 130, I had Craig Curelop on from Bigger Pockets, episode talking about house hacking your way to financial freedom. And that episode I thought was a great overview in his book of the house hacking process. And it’s a real estate investing strategy that we love but also can serve your primary home needs. So Nate, break it down for us. For those that aren’t aware or perhaps a refresher, what exactly is house hacking? And how can it be a powerful way to reduce housing costs?

Nate Hedrick: So house hacking at its core is the idea that you are buying a property in some way, shape, or form that you are going to live in part of it and you are going to have a renter live in another part. And so traditionally with a house hack, you’re looking at like a duplex, a triplex, or a quad, which you can buy as a — the bank looks at it like a single family home. But you can live in one unit and then you can rent out the others. And ideally, with a proper house hack, you’re having that renter basically pay for your mortgage or pay for your mortgage and your taxes in an ideal world. But the idea is that if you can live in part of the house, rent out the other part, you’re going to have far less housing expenses because you’ve got someone else paying for it for you.

Tim Ulbrich: Absolutely. And I think it’s certainly can look very different for the reasons you mentioned. And one of the things I like about Craig’s book on house hacking, he gives a lot of different examples from his personal situation, others that did it, that I think will give folks a variety of ideas about what house hacking may look like for them and how it may or may not fit into their home buying goals. So Nate, have you worked with clients that have done a house hack? And if so, what was their motivation?

Nate Hedrick: Yeah, actually, I’ve got one right now that I’m working with locally here in Cleveland that’s looking to house hack, which is fun. We’ve been doing — running numbers on houses recently and looking for opportunities. And right now, this pharmacist is actually living in a house with a couple of roommates, wants to buy his own place but doesn’t want the housing prices or the housing expenses to jump dramatically, right? If you go from living in a $400 a month room or whatever the cost is there to this big housing payment, it might be a shock to your budget. But if he can transition to only a couple hundred dollars because the house hack is paying for some of that cost, you can get your own place, start building equity, all the advantages of owning a home without this huge uptick in expenses. So I’ve been working with him to try to find that opportunity. And then we’ve got a ton of concierge clients throughout the country that have done this. I think we’ve talked with a couple here and mentioned a couple in the past that have primarily been searching for a house hack when they’re looking for their first house.

Tim Ulbrich: Love it. And speaking of roommates, let’s talk about roommates. No. 3 here on our list of seven ways to reduce your housing costs, No. 3 is get a roommate. Nate, I thought this wasn’t college anymore. So similar to house hacking, getting a roommate obviously could be a way to reduce housing costs. Talk to us about the role that this can play.

Nate Hedrick: Yeah, especially again, I think people overlook this because like you said, once you buy a house, like I can’t — I can’t go backward, I can’t have a roommate now. But it’s a great way — if you’re in a personal situation where it makes sense, it’s a great way to reduce your expenses for both people. And you can take this as simply as, you know, I’m going to have my brother move back and he’s going to pay me a little bit of rent, or is as severe as putting an ad on Craigslist and having a stranger come live with you. You know, we’ve actually gotten a chance to talk to a couple of individuals here that are experts in this, I would argue. Ryan Shaw on Episode 173 knows all about how to deal with roommates and keeping them sane. And then Bryce Platt, one of our concierge clients that actually went out and bought — Episode 160 for those that are looking for it. He actually went out and bought a condo basically that had — was set up to have three other roommates with him. And so that’s part of that process. So it’s not uncommon anymore, and it’s a great way to reduce your overall expenses.

Tim Ulbrich: Yeah, and I think it’s worth, you know, the reminder or maybe the obvious statement of your first housing situation will likely not be your forever situation, right? So whether it’s a roommate directly living with you or in a situation like Bryce, that may work for awhile and then you decide you may move on. But now you’ve got an investment property that perhaps you can hold onto as well. So that’s No. 3, get a roommate. No. 4, perhaps the most interesting, my favorite on the list, but also likely very unpopular to some folks that love where they live. This is geoarbitrage. And Scott Rieckens, author of “Playing with FIRE,” mentioned this on the podcast last week, Episode 188. And I think it’s such an interesting way to reduce your housing costs. And I think this actually stems back to some of Tim Ferriss’ work talking about geoarbitrage. So Nate, what is geoarbitrage? And how can it help someone’s budget?

Nate Hedrick: So it’s a concept that basically you are — and we’re seeing a lot of this grow in the FIRE community, like you mentioned Scott but many others in the FIRE community are embracing this idea that in order to save money on housing costs or the cost of living based on a certain area, you basically you pick up and move to a new place. And we’re seeing this really taking off, especially with the changes in how people are working during the pandemic and hopefully after the pandemic is over. Work from home is just totally different than it’s ever been before. And you can basically do your job from anywhere now. If Option 1 is to live in downtown New York in a tiny apartment for a huge, huge cost, but Option 2 is to do that exact same job in Cleveland, Ohio, here, your costs go down dramatically. And so a lot of people are looking at this like, are there other areas that I can live in that I can either find a better job or keep my same job and work remotely that are going to improve my overall housing costs without dramatically impacting my life?

Tim Ulbrich: Yeah and again, I think this is not a forever situation, right? I know I’ve brought this up to various groups when I’ve been speaking before. You know, often you get that look of like, Tim, are you really suggesting that I pick up and move? You know? And it’s not necessarily for everyone, right? Sometimes there’s family situations, other things, where this is not even a possibility for a variety of reasons. But I think sometimes, this is a way to think a little bit more creatively, especially for those that might be in an area where jobs are also saturated. You know, if you could get to a lower cost of living area and perhaps open up some additional job opportunities, this might be something to consider while also accelerating your financial goals. And I think, again, it really depends on one’s personal situation. But I think what makes this so attractive for pharmacists, Nate, you know this, I know this, our community knows this, we do see incomes change slightly in higher cost of living areas but nowhere near what they should proportionally to the expense of those areas, right?

Nate Hedrick: Right. Absolutely.

Tim Ulbrich: So an ambulatory care pharmacist in Cleveland, Ohio, and an ambulatory care pharmacist in San Diego, that salary difference — while there likely is one from my experience in talking with folks — it does not represent the cost of living differences between those two areas.

Nate Hedrick: Definitely.

Tim Ulbrich: And so you know, I think that because of the nature of how that is treated with pharmacy jobs, this concept might also be attractive. And check this out for a minute, Nate. We pulled some data from RentCafe. The average rent for a 700 square foot –703 square feet, to be exact — in Manhattan is around $3,800. But the average rent for a slightly larger place, 883 square feet, in Little Rock, Arkansas — shoutout to our community in Arkansas — is $830.

Nate Hedrick: There you go.

Tim Ulbrich: Of course, Manhattan and Little Rock are not the same thing. Very different cities, right, in terms of what people are looking for and so on. But it just highlights, you know, what does that mean for monthly cash flow, what are your options. And you know, when I see $3,800 a month for 700 square feet, you and I both know what $3,800 a month can buy in Ohio, right?

Nate Hedrick: Seriously. Yeah, it’s crazy.

Tim Ulbrich: It could go a long way. So again, you know, obviously leaving family, friends, your job can be tough. Certainly not for everyone, but I think it’s one thing to consider and for — you mentioned the reasons of mobility now with some jobs having some more remote capabilities. So that’s No. 4, geoarbitrage. No. 5 is Airbnb. Nate, this is one that I think really pushes people to be creative in how they are cutting expenses or bringing in additional income. And we had Hillary Blackburn on Episode 121, where she talked about creating another stream of income as an Airbnb host and specifically talked about how her and her husband rent out their Nashville home for about $600 a night. So talk to us about how folks can use Airbnb or a similar model, of course, we’re just mentioning Airbnb, and use their home to bring in some additional money.

Nate Hedrick: Yeah, I think it’s gotten a little trickier during COVID having somebody in your house or what have you. But still, the idea there is really solid. If you can use the space that you already have — and maybe this is an extra bedroom or maybe it’s a whole extra in-law suite or a pool house or you name it, right — if you’ve got a way to rent out some of that portion of that property that you already have, and it’s a desirable area especially, you can pull in a lot of extra income to offset some of those housing costs. And again, like you talked about Nashville being $600 a night, if you’re in an area that people want to travel to, especially as things start to open back up, I really think that there’s opportunity there for you to get some serious income for that place.

Tim Ulbrich: Yeah, and again, this is one that may make sense for some, not for others. We’ve got an Airbnb calculator on the site. You can see, you know, roughly what you may be earning as an Airbnb host. That’s YourFinancialPharmacist.com/airbnbcalculator. We’ll link to that in the show notes. So that’s No. 5 on our list of seven ways to reduce housing costs. No. 6, Nate, re-evaluate your homeowners insurance policy. I just did this, so this one is top of mind for me. But I think this is something, you know, we haven’t talked a whole lot about on the show but certainly could be a way that folks may be able to shave off money off of their monthly budget, especially if their policies may have creeped over time. And because of escrow and other factors, they may not be aware or as closely aware as they could be of that. So talk to us about re-evaluating your homeowners insurance policy.

Nate Hedrick: Home insurance policy, if you have a mortgage, right, it’s really one of the only things that you can change. Your taxes are consistent, right? The county’s going to set those. The mortgage and the lender payment is set by the lender. HOA fees, that’s all fixed costs. But the home insurance policy, kind of the other piece that usually gets wrapped into that, is somewhat flexible. And it’s not — it’s not as common to mess with the home insurance policy as someone might shop around for like car insurance or disability insurance or life insurance.

Tim Ulbrich: Right.

Nate Hedrick: But realize that you can actually make quite a bit of difference with your home insurance policy. And it can change dramatically based on a number of factors. So if you change your deductible, for example. If you go from a $500 deductible on a home insurance claim to $1,000, you might save 25% on your home insurance policy in some cases. The other thing I’ll see a lot with home insurance is that if you are what’s called escrowing your home insurance or your housing insurance, a lot of times that bank will say, OK, well, we’re going to pay — and escrowing, just briefly, is that you actually pay the bank, you pay the mortgage lender to handle paying your insurance company for you. So usually you’re giving them money every single month as part of your normal housing payment. They’re taking a portion of that, setting it aside in an untouchable account called an escrow account, and then from that account, they basically pay your insurance company. But what I’ve found is that if you have that money in escrow, you don’t get a lot of flexibility with how that payment works. And if you can pull that out — and some lenders will allow you to do this free, some may charge you a small amount — but if you can pull that out, you can get even more creative with how you pay it. I’ve noticed that if you pay your home insurance premium monthly versus yearly, you can get a huge discount by paying it all up front. And so if you know you’re going to be there and you have the funds to do so, you can actually pay it Day 1 of the year and get a whole year’s worth of that payment taken care of at a much lower rate. So there are more flexibility here than I think people really realize, but a lot of it comes down to what are you allowed to do with your lender? And what are you willing to do in terms of that negotiation process?

Tim Ulbrich: Yeah, and I think too — great stuff there, Nate — I think it’s important to note, as you mentioned, these policies vary, you know, in terms of what they coverage, what the coverage includes, obviously personal belongings, other features of policies, and one thing I notice in this process, which certainly makes sense for those that have gone through this one or more times before, is that it’s easy to get focused on price shopping and not necessarily do an apples-to-apples comparison on coverage. So you know, some of these policies may present themselves as oh, well, you know, we could save you $300 a year or whatever. But when you look at the close details of the policy, you might be changing some of your coverage components. So I found it helpful, if you want to keep coverage the same, essentially as you’re going out and getting quotes, say, “This is my coverage. These are the eight things that are included. Here’s my deductible, here’s what’s covered in the policy. And basically give me a quote for this coverage.” You know? So you can do an apples-to-apples type of comparison.

Nate Hedrick: And watch because some will call things something different, right? They’ll have this special feature with Company A versus Company B and it’s literally just the same thing but with a different name. So watch out for that. The other thing I wanted to mention too is that some of them will offer discounts based on certain parameters of your home. So if you live in a disaster-prone area, ask them about what you can do to your homeowners insurance policy by doing some disaster-proofing. Maybe it’s adding storm shutters or maybe it’s actually a security discount. I’ve seen where if you put in electronic locks or deadbolts, just simple deadbolts versus a regular door lock, they will give you a discount on your overall insurance policy. So there are a number of things you should ask about too, like is there any way for me to get a discount on this? What can I do to improve this?

Tim Ulbrich: Yes. Always ask for a discount, right? Yeah, and as some of you are looking to shop around, you know, certainly many ways that you can go about this. Policy Genius is somebody we’ve talked about before, allowing you to compare life and disability insurance quotes, now also has a platform to compare homeowners insurance quotes. Also, renters insurance as well. If you go to PolicyGenius.com/YourFinancialPharmacist, you can learn more. So that’s No. 6 on our list of seven ways to reduce your monthly housing costs. No. 7 is refinance your mortgage. Again, something that’s near and dear to me. We went through this process last summer. We’ve talked about how low rates have been recently for purchasing a home, for refinancing your mortgage over the last year. Nate, talk to us about what mortgage refinancing is and how this can ultimately lower monthly housing costs.

Nate Hedrick: Yeah, so think about refinancing as basically resetting or getting a new loan. Effectively, what you are doing is you are clearing out your old loan, someone is paying that old loan off, and you’re establishing a brand new loan. So it’s similar to — we’ve talked about student loan refinancing. It’s the same idea, right? We’re paying off what you currently have with Lender A, and we’re moving that to Lender B at a new rate or at a lower monthly payment. And so the goal here would be obviously to lower the interest rate and then hopefully as a result, your overall payments are going to go down. So you’re going to eliminate your — hopefully maybe eliminate PMI if you have that in place today. You can, again, drop your interest rate from maybe a variable to a fixed rate that is much lower. You could lower the term over which you’re paying that loan. So you could go from a 20-year rate to a 15 or a 30-year to a 15. And now your overall expenses for the longevity of that house are going to go down. So there are a number of ways that you can use refinancing to cut your costs. But if you’re looking to lower your monthly housing payment, a lot of times it comes down to finding an interest rate that is lower than what you have today and finding a term that makes sense for your financial plan and is less than what you’re paying already.

Tim Ulbrich: Yeah, and I think it’s, although obvious, worth reiterating one of the traps that I see folks often falling into is yes, you know, you can lower the monthly payment, but if you’re extending out the term, keep in mind the total cost of the loan, right?

Nate Hedrick: Yep.

Tim Ulbrich: So trying to make this as apples-to-apples as you can. If you’re already five years into a 30-year term, and you refinance out to a 30-year, obviously you’re tacking on five more years. So yeah, monthly payment might go down, likely will if interest rates are lower, but what does that mean in terms of the total amount paid over the life of the loan? And keeping that in mind as you’re evaluating various options.

Nate Hedrick: And don’t forget, you’ve got closing costs as well in there, right? So you’ve got to make sure that the actual process of buying that loan, you’re getting a new loan but there’s going to be closing costs associated with that to factor in as well.

Tim Ulbrich: Absolutely. Great stuff, Nate. Seven ways to reduce your housing costs, certainly a topic for the reasons we mentioned at the beginning I think folks are interested in. This won’t be the last time that we hear from you and so if you’re listening and you’re looking to buy your first home or you’re looking to move and you want to work with an agent, you don’t currently have one, as Nate alluded to, we’ve got the concierge service working with Nate. It’s free to our community to work with Nate, who will help get you connected with a realtor in your area. And you can go to YourFinancialPharmacist.com, click on “Buy or Refi a Home” at the top, and once you do that, you’ll see an option to find an agent and that will get you connected up with Nate. Also, if you’re looking for a loan, looking to refi your mortgage, want some additional information, again, YourFinancialPharmacist.com, and then you can click on “Buy or Refi a Home” and get some additional information. So Nate, as always, appreciate your time and expertise and thanks for your contribution on the show.

Nate Hedrick: Thanks for having me.

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