Money Tips for buying a home with Bankrate’s Greg McBride
Competition is fierce for home buyers. Greg McBride tells us everything financial grownups need to know to get the best deal on their new home and other real estate buying insider secrets.
Greg’s Best Tips For Aspiring Homeowners
Yeah, this is a market where I start to get concerned that there's the tendency to get swept up in the fervor, and then people stretch and stretch too far. I mean, people typically stretch when we buy a home anyway, but I think in an overheated market like this, you've got to be really wary because the competition is so heated. People might have a tendency to stretch a little too far. And so, don't buy a home based on your best case scenario, or assuming that your best income year is what is going to be status quo going forward. I mean, as we learned over the last 12 months, the economy goes through ebbs and flows, how a lot of households saw their incomes drop off very suddenly.
Greg McBride:
You need to plan for those types of contingencies and lead yourself plenty of financial breathing room. And look, the bottom line is for a lot of people, that might mean rethinking home ownership, not for good, but at least just for right now, given the overheated market and the tendency to stretch beyond what you can afford. The novelty of that new home is going to wear off in a few years, the mortgage payments will not, that's the thing to keep in mind.
Bobbi Rebell:
So true. But also we tend to look at what the bank will approve us for. The base will say, "Here's how much we will give you a mortgage for," this is what you qualify for when they do pre-approvals, which is something that is a tip for everybody, make sure you do get pre-approved for mortgages. How do people gauge realistically what that number means in terms of figuring out, as you say, what's the stretch and what's the more conservative number?
Greg’s Tips For Gauging A More Realistic Number Than What We Are Pre-Approved For
Greg McBride:
Well, couple things. First that pre-approval amount, this is not the Wild Wild West, anything goes, days of 2005, 2006, 2007, where people were being approved for far more than they can afford to repay. Lending standards are much more sane now, if anything, lenders are eerie on the side of being conservative. The amount that people are getting approved for isn't sky high, relative to what they can actually afford.
Greg’s Tips For Managing Interest Rates
Greg McBride:
The best rates out there are available for consumers and have credit scores of 740 and above. So, if you're in that neighborhood, you're going to score those great rates that are out there. But even if your credit scores, 700, 710, 720, you're still going to get a really good rate. It's if your credit score gets below 680, that's where lenders get a little bit more conservative. There's not as many lenders at the table and the offers aren't as good. And, I think that's where you really got to worry about biting off more than you can chew, in terms of the actual cost of the financing. Rates are still well below 3% and those are on 30-year fixed rate. Mortgage rates aren't going to price people out. It's the pricing, it's the lack of inventory of homes available for sale, those are going to be the real obstacles, not mortgage rates, at least for well qualified borrowers.
Greg’s Tips For Mitigating Surprises
Greg McBride:
There are a lot of other costs that go beyond just that monthly principal and interest on the mortgage payment. You're going to have property taxes. You're going to have property insurance. And the property insurance, that's one that tends to sneak up on people. I mean the average premium annually is over 1300 bucks. Now that varies widely based on geography, property type, but just as a sort of a rough place holder, that's more than a hundred bucks a month that you need to factor in whenever you're shopping, so that you don't stretch too far. And too often as home buyers, you're well into the process, you've already signed the contract by the time you start shopping around for homeowners insurance, and that's where the potential for surprises can come into play.
Bobbi Rebell:
What other surprises are out there?
Greg McBride:
Well, there's the maintenance, the upkeep. I mean, when you own it, if it breaks, you got to fix it. There's no picking up the phone and calling the landlord to fix it. And so, it's those ongoing costs that really need to be factored in. I mean, we have found that Millennial home buyers, for example, almost two thirds of millennial home buyers have some regrets about their home purchase, and the top one was maintenance and the cost of home ownership. So, buying a house that is 20 years old means that you're kind of getting to that end of life cycle on a lot of the initial appliances, things like, you might be looking at a new roof within the next five to 10 years, depending on the type of construction market you live in, wear and tear, those kinds of things.
Greg McBride:
But these are the type of costs that you need to be mindful of going in and being able to budget for. Setting aside 2% of your home value every year as a budget for the inevitable maintenance and upkeep, factor that in from the beginning. And with prices going up, that's going to squeeze people's budgets even more, but that's also means that people buying older properties means they're going to face higher, and higher maintenance and upkeep costs as time goes on.
Greg’s Tips For Avoiding Red Flags
Greg McBride:
Do not skip the home inspection. Do not. People are doing that because the market's so hot and they're in competition to get this house. They've been outbid on other ones. And so, people tend to take shortcuts. And one of the shortcuts is people are... They're waving the inspection, that can really come back to bite you financially in a huge way. Do not skip the home inspection, because that home inspection, that's really what's going to tip you off. Not just the things that might need repair now before the sale takes place, but things that might be on the near term horizon, things you're going to have to factor in terms of, is this the right price for this house, given that I have these other upcoming costs?
Greg McBride:
And we talked about the appliances, that's sort of the 15, 20 year mark on a lot of appliances are 20 to 30 years on a roof, for example, some things are even shorter than that. If you're in Sun Belt states where you're running your air conditioner a lot, lifecycle of air conditioners could be five to seven years. So again, other costs that you need to factor in, be aware of and be setting money aside regularly, so that you are not in a pinch at the time when something breaks.
Bobbi Rebell:
That's so important to remember. I do want to circle back. We talked about the fact that people are moving out of generally places where they absolutely had to live previous to the pandemic for work into areas that may be more rural, maybe have more space, maybe have amenities that they couldn't have where they were living. If you are interested in buying in one of the places that is maybe less popular now, what advice do you have for buyers? I mean, is there a buyers market there at least for people, is this an opportunity for them?
Greg McBride:
Well, I wouldn't term it a buyer's market because there, you still suffer from this limited inventory of homes that are available for sale. Builders aren't able to build fast enough. The prices of new homes, newly constructed homes have also been bid up, but a lot of people, that's where they're looking. And, people are moving into newer areas, different zip codes. We talked about the homeowners insurance earlier, that could bring on some additional costs on the homeowners insurance. It may be a quote, "Local move, but changing zip codes could be enough to trigger a different pricing structure on the homeowners insurance."
Greg McBride:
It could be in a flood zone that necessitates having a separate flood insurance policy, for example. Really important to factor all those issues in, things that can impact, not just your property insurance, also the property taxes. Some states, the current owner, their increases in property taxes may have been protected by an amendment to kind of prevents them from being priced out of their home. So, what they're paying may have no bearing on what you were paying. And a lot of people, again, they don't find that out until after the fact, check with the local tax recording office to get a sense of what the property tax is going to be on that particular property before you sign them at that point.
Greg’s Tips For Finding The Best Resources
Bobbi Rebell:
What are the best resources for people? I know that Bankrate has tons of information for people. You just mentioned the local government, I guess. How do you do that? Is there a website? Do you know? Can you give us some guidance and other resources as well?
Greg McBride:
Again, it depend upon your locality, but look at your local city, state or county, tax recording office, that's where you're likely to find information on property tax rates, what the assessed value of homes are in a particular area. If there are any sort of homestead exemptions for new home buyers and what the process is for that. On homeowners insurance, comparison shop. Not every insurer charges the same price. And like I said, premiums have been going up, so puts even more urgency on that comparison shopping. Look at bundling your policies, your auto policy, your liability policy, putting that in with your homeowners insurance policy could be a way to reduce the total cost of all three of those. Look for potential discounts, do you have a security system? Even something like distance from a fire station or a fire hydrant can affect the premiums that you pay.
Greg McBride:
And then, shop around for your mortgage. This is another one where just a slight difference in rate could save you thousands of dollars. Shopping around can also save you thousands of dollars in fees. Not everybody charges the same price. That was one of the top regrets among new homeowners as well, is that the financing costs surprised them to the upside. Fannie Mae and Freddie Mac have done surveys in the past that show homeowners that shop around, that get additional quotes on their mortgage save thousands of dollars relative to those that did not. So, all of that critically important, doing that earlier in the process rather than later.
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Website - www.bankrate.com/authors/greg-mcbride/
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Full Transcript:
Bobbi Rebell:
I hope you guys are all celebrating some big adulting milestones this season. And, you know what? Finding the perfect gift for those celebrations can be kind of tough. I have the solution over at grownupgear.com. We have adorable hats, totes, mugs, pillows, tees and seriously, the most cozy and comfortable sweatshirts. They're all on grownupgear.com and all at affordable prices. We even now have digital gift certificates. If you can't decide, use code grownup for 15% off your first order, buying from our small business helps to support this free podcast. And, you know what? We really appreciate it. Thanks guys.
Greg McBride:
The novelty of that new home is going to wear off in a few years, the mortgage payments will not.
Bobbi Rebell:
You're listening to Money Tips for Financial Grownups with me, certified financial planner, Bobbi Rebell, author of How to Be a Financial Grownup. And you know what? When it comes to money, being thrown up is hard, but together we got this. Hello my grownup friends. We all know as we go through life, all those adulting milestones, things change. So, that was magnified recently during the pandemic, when it came to what so many of us wanted and needed in our homes. Subtly, it wasn't just where we lived, it was where we worked, it was where we socialized, it was our everything. That meant rethinking where we lived, how we lived. And for a lot of people, that meant moving to a home that fit new needs. So, I decided to call in one of my favorite financial grownup experts to give us the best tips for what we need to know, not just when we are looking to buy a home, but when we are deciding even if we should be, because maybe buying a home is not for us, even maybe not for us right now, maybe later, we'll see.
Bobbi Rebell:
But how do you know? Bankrate's Chief Financial Analyst, Greg McBride was one of my favorite people to interview when I was an anchor at Reuters. And, I was so glad I was able to get him on this podcast to walk us through what we need to know. Here is Greg McBride. Greg McBride, you're a financial grownup. Welcome to the podcast.
Greg McBride:
Great to be with you, Bobbi. Thanks for having me.
Bobbi Rebell:
Well, I asked you on as the chief financial analyst over at Bankrate, because I want you to share with us a lot of money tips that you have for our grownup audience on home buying, home ownership and so on. But as we get out of the pandemic, before we get to those tips, I'd love for you to give us a state of the housing market overview. How do things look right now, aspiring homeowners and for buyers and sellers in general?
Greg McBride:
The housing market is red hot. We haven't seen housing market this hot since the housing boom prior to the financial crisis. It is very much a sellers market. We are back to the days of bidding wars, people even doing things like buying homes, sight unseen. And, the reason is there's just a massive imbalance between demand and supply. Demand is really, really high. People have the flexibility to work from home. And so, geography matters a lot less. They don't necessarily need to live downtown in a metro area, they can move to the suburbs, they can move to another part of the country. People that have been working from home realize, "You know what?" "We probably need a different set up here if we're going to do this."
Greg McBride:
And so, that's driven a lot of demand for people moving, people moving up, or first time home buyers getting in the market. At the same time, the supply of homes available for sale, which was already a low coming into the pandemic has only gotten lower. It's now at a record low, so you see that massive imbalance between supply and demand, and that is driving a lot of what we're seeing prices have been going up at at a breakneck pace. So great time for sellers, but not so much for buyers.
Bobbi Rebell:
So the obvious question then, what are your best tips for aspiring home buyers?
Greg McBride:
Yeah, this is a market where I start to get concerned that there's the tendency to get swept up in the fervor, and then people stretch and stretch too far. I mean, people typically stretch when we buy a home anyway, but I think in an overheated market like this, you've got to be really wary because the competition is so heated. People might have a tendency to stretch a little too far. And so, don't buy a home based on your best case scenario, or assuming that your best income year is what is going to be status quo going forward. I mean, as we learned over the last 12 months, the economy goes through ebbs and flows, how a lot of households saw their incomes drop off very suddenly.
Greg McBride:
You need to plan for those types of contingencies and lead yourself plenty of financial breathing room. And look, the bottom line is for a lot of people, that might mean rethinking home ownership, not for good, but at least just for right now, given the overheated market and the tendency to stretch beyond what you can afford. The novelty of that new home is going to wear off in a few years, the mortgage payments will not, that's the thing to keep in mind.
Bobbi Rebell:
So true. But also we tend to look at what the bank will approve us for. The base will say, "Here's how much we will give you a mortgage for," this is what you qualify for when they do pre-approvals, which is something that is a tip for everybody, make sure you do get pre-approved for mortgages. How do people gauge realistically what that number means in terms of figuring out, as you say, what's the stretch and what's the more conservative number?
Greg McBride:
Well, couple things. First that pre-approval amount, this is not the Wild Wild West, anything goes, days of 2005, 2006, 2007, where people were being approved for far more than they can afford to repay. Lending standards are much more sane now, if anything, lenders are eerie on the side of being conservative. The amount that people are getting approved for isn't sky high, relative to what they can actually afford.
Bobbi Rebell:
Are there tips for how to manage interest rates and lock-in rates in a sustainable way, and a deal that you're really going to actually get? Because sometimes, I know in the past I would just skim what the rates were, these teaser rates on the ads, and that's not always the rate that you're going to get.
Greg McBride:
The best rates out there are available for consumers and have credit scores of 740 and above. So, if you're in that neighborhood, you're going to score those great rates that are out there. But even if your credit scores, 700, 710, 720, you're still going to get a really good rate. It's if your credit score gets below 680, that's where lenders get a little bit more conservative. There's not as many lenders at the table and the offers aren't as good. And, I think that's where you really got to worry about biting off more than you can chew, in terms of the actual cost of the financing. Rates are still well below 3% and those are on 30-year fixed rate. Mortgage rates aren't going to price people out. It's the pricing, it's the lack of inventory of homes available for sale, those are going to be the real obstacles, not mortgage rates, at least for well qualified borrowers.
Bobbi Rebell:
You also brought some tips to mitigate surprises. What kind of surprises do new homeowners and aspiring homeowners need to be prepared for?
Greg McBride:
There are a lot of other costs that go beyond just that monthly principal and interest on the mortgage payment. You're going to have property taxes. You're going to have property insurance. And the property insurance, that's one that tends to sneak up on people. I mean the average premium annually is over 1300 bucks. Now that varies widely based on geography, property type, but just as a sort of a rough place holder, that's more than a hundred bucks a month that you need to factor in whenever you're shopping, so that you don't stretch too far. And too often as home buyers, you're well into the process, you've already signed the contract by the time you start shopping around for homeowners insurance, and that's where the potential for surprises can come into play.
Bobbi Rebell:
What other surprises are out there?
Greg McBride:
Well, there's the maintenance, the upkeep. I mean, when you own it, if it breaks, you got to fix it. There's no picking up the phone and calling the landlord to fix it. And so, it's those ongoing costs that really need to be factored in. I mean, we have found that Millennial home buyers, for example, almost two thirds of millennial home buyers have some regrets about their home purchase, and the top one was maintenance and the cost of home ownership. So, buying a house that is 20 years old means that you're kind of getting to that end of life cycle on a lot of the initial appliances, things like, you might be looking at a new roof within the next five to 10 years, depending on the type of construction market you live in, wear and tear, those kinds of things.
Greg McBride:
But these are the type of costs that you need to be mindful of going in and being able to budget for. Setting aside 2% of your home value every year as a budget for the inevitable maintenance and upkeep, factor that in from the beginning. And with prices going up, that's going to squeeze people's budgets even more, but that's also means that people buying older properties means they're going to face higher, and higher maintenance and upkeep costs as time goes on.
Bobbi Rebell:
And that's interesting, so there's a tip there about 20 years, is the life cycle of a house in terms of maintenance of things. So, you need to go in and look for example at say the appliances and stuff, I mean, how do you manage that stuff? What are some things to look at when you're examining a home that are sort of red flags in terms of maintenance that's going need to be done sooner rather than later?
Greg McBride:
Do not skip the home inspection. Do not. People are doing that because the market's so hot and they're in competition to get this house. They've been outbid on other ones. And so, people tend to take shortcuts. And one of the shortcuts is people are... They're waving the inspection, that can really come back to bite you financially in a huge way. Do not skip the home inspection, because that home inspection, that's really what's going to tip you off. Not just the things that might need repair now before the sale takes place, but things that might be on the near term horizon, things you're going to have to factor in terms of, is this the right price for this house, given that I have these other upcoming costs?
Greg McBride:
And we talked about the appliances, that's sort of the 15, 20 year mark on a lot of appliances are 20 to 30 years on a roof, for example, some things are even shorter than that. If you're in Sun Belt states where you're running your air conditioner a lot, lifecycle of air conditioners could be five to seven years. So again, other costs that you need to factor in, be aware of and be setting money aside regularly, so that you are not in a pinch at the time when something breaks.
Bobbi Rebell:
That's so important to remember. I do want to circle back. We talked about the fact that people are moving out of generally places where they absolutely had to live previous to the pandemic for work into areas that may be more rural, maybe have more space, maybe have amenities that they couldn't have where they were living. If you are interested in buying in one of the places that is maybe less popular now, what advice do you have for buyers? I mean, is there a buyers market there at least for people, is this an opportunity for them?
Greg McBride:
Well, I wouldn't term it a buyer's market because there, you still suffer from this limited inventory of homes that are available for sale. Builders aren't able to build fast enough. The prices of new homes, newly constructed homes have also been bid up, but a lot of people, that's where they're looking. And, people are moving into newer areas, different zip codes. We talked about the homeowners insurance earlier, that could bring on some additional costs on the homeowners insurance. It may be a quote, "Local move, but changing zip codes could be enough to trigger a different pricing structure on the homeowners insurance."
Greg McBride:
It could be in a flood zone that necessitates having a separate flood insurance policy, for example. Really important to factor all those issues in, things that can impact, not just your property insurance, also the property taxes. Some states, the current owner, their increases in property taxes may have been protected by an amendment to kind of prevents them from being priced out of their home. So, what they're paying may have no bearing on what you were paying. And a lot of people, again, they don't find that out until after the fact, check with the local tax recording office to get a sense of what the property tax is going to be on that particular property before you sign them at that point.
Bobbi Rebell:
And that was going to be my next question, which was what are the best resources for people? I know that Bankrate has tons of information for people. You just mentioned the local government, I guess. How do you do that? Is there a website? Do you know? Can you give us some guidance and other resources as well?
Greg McBride:
Again, it depend upon your locality, but look at your local city, state or county, tax recording office, that's where you're likely to find information on property tax rates, what the assessed value of homes are in a particular area. If there are any sort of homestead exemptions for new home buyers and what the process is for that. On homeowners insurance, comparison shop. Not every insurer charges the same price. And like I said, premiums have been going up, so puts even more urgency on that comparison shopping. Look at bundling your policies, your auto policy, your liability policy, putting that in with your homeowners insurance policy could be a way to reduce the total cost of all three of those. Look for potential discounts, do you have a security system? Even something like distance from a fire station or a fire hydrant can affect the premiums that you pay.
Greg McBride:
And then, shop around for your mortgage. This is another one where just a slight difference in rate could save you thousands of dollars. Shopping around can also save you thousands of dollars in fees. Not everybody charges the same price. That was one of the top regrets among new homeowners as well, is that the financing costs surprised them to the upside. Fannie Mae and Freddie Mac have done surveys in the past that show homeowners that shop around, that get additional quotes on their mortgage save thousands of dollars relative to those that did not. So, all of that critically important, doing that earlier in the process rather than later.
Bobbi Rebell:
Thank you so much, Greg. I have owned multiple homes in my life and I just learned so much information from you. This has been amazing. Where can people keep up with you?
Greg McBride:
Bankrate.com. We have all this content we talked about. Shopping around for the insurance, shopping around for the mortgage, using our calculator to figure out how much you can afford, what fits in your budget. You can follow me on Twitter @BankrateGreg.
Bobbi Rebell:
So, much great info there. Here is a recap of some highlights. When it comes to the price that you pay for a home, don't get caught up in the FOMO and the hype, do not overextend yourself, be a little conservative. Pay attention to your credit score, the better the score, the better deal you will get on a mortgage. Don't wait until the end to price in homeowners insurance, know the cost early in the process, so you budget for it. With a home, you own it and it is going to be on you to get whatever needs fixing fixed. Maintenance is real for grown-up homeowners. Appliances have a life cycle, make sure you know the age of not just the kitchen appliances, but also things like air conditioning, things break. Your taxes could be higher than the current homeowner who may be grandfathered in to a lower rate, check with a primary source.
Bobbi Rebell:
Don't assume the real estate's information is fully up-to-date. And finally, look at bundling your insurance policies. Look for ways to get a discount. Even being near a fire station could be a factor that can work in your favor. Now to some podcasts housekeeping. First, how are you guys liking the new money tips format. DM me on Instagram @bobbirebell1 and let me know. Also, get out and celebrate life's milestones with your friends and families. We all need and deserve it. It's been a really hard year, plus make sure you get your gifts at grownupgear.com, and I will be eternally grateful for your business. As a special promotion, we are going to keep giving away $150 gift card to Grownup Gear each week to listeners until July 4th, which of course is Independence Day. Maybe we can also call it Financial Independence Day. There are two ways to enter to win.
Bobbi Rebell:
First, you can take a screenshot of this podcast, post it on social media and tag me @bobbirebell1. And then also, email that screenshot to us at hello@financialgrownup.com. The second way to enter is to write a review of the Money Tips for Financial Grownups on Apple Podcasts. Take a screenshot and send it to us again at hello@financialgrownup.com. Grownup Gear is what a lot of people call a micro business and we really do need and appreciate all of your support, so please check it out and tell your friends. And, thank you. Please share this podcast as well. Greg McBride was so amazing with all of his grownup advice, so thank you Greg, and the team by the way, at Bankrate for helping us all be financial grownup's.
Bobbi Rebell:
Money Tips for Financial Grownups is a production of BRK Media, LLC. Editing and production by Steve Stewart, guest coordination, content creation, social media support and show notes by Ashley Wall. You can find the podcast show notes, which includes links to resources mentioned in the show, as well as show transcripts, by going to my website, bobbirebell.com you can also find an incredible library of hundreds of previous episodes to help you on your journey as a financial grownup. The podcast and tons of complimentary resources associated with the podcast is brought to you for free, but I need to have your support in return. Here's how you can do that. First connect with me on social media bobbirebell1 on Instagram and bobbirebell on both Twitter and on Clubhouse, where you can join my Money Tips For Grownups Club. Second, share this podcast on social media and tag me, so I can thank you.
Bobbi Rebell:
You can also leave a review on Apple Podcasts, reading each one means the world to me. And, you know what? It really motivates others to subscribe. You can also support our merch shop, grownupgear.com, by picking up fun gifts for your grownup friends and treating yourself as well. And most of all, help your friends on their journey to being financial grownups by encouraging them to subscribe to the podcast. Together, we got this. Thank you for your time and for the kind word so many of you send my way. See you next time and thank you for supporting Money Tips for Financial Grownups.