With Terry Story, 30-year veteran Real Estate Agent with Keller Williams in Boca Raton, FL
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This week’s Real Estate Round-Up focuses on home affordability, managing your mortgage payments and tips on buying fixer-upper homes.
Easier To Qualify For A Mortgage
There’s good news for home buyers: qualifying for a mortgage has gotten easier because lenders have bumped up the debt-to-income ratio from 45% to 50% for those with excellent credit scores.
But, Steve cautions, this should not encourage you to take on more debt. A high debt-to-income ratio makes you a riskier borrower and raises your mortgage interest rate. With a higher rate, you could end up paying thousands more in interest over time.
3% Down Payment
Home buyers with excellent credit can also put just 3% down towards a mortgage and borrow up to 97% of the purchase price. But a lower down payment leads to higher borrowings and higher monthly mortgage payments. This poses a serious risk if the economy goes into recession, home prices drop, or you lose your job.
To minimize this risk, make sure you have enough in emergency funds to pay off your monthly bills until you find another job. Otherwise, the bank could foreclose on your property, sell it for less than you bought it for, and straddle you with more debt.
To minimize your exposure, Steve recommends buying a house that you can easily afford.
Lower Requirements, Tighter Checks And Balances
Remember how just about anyone could get a home loan before the housing crisis of 2007?
Fortunately, today’s lending has not returned to those crazy-low pre-crisis levels. Lenders are pragmatic about making home loans easier to get for those with excellent credit. Yet, they haven’t dropped their lending standards to lead us into another crisis.
Fixer-Uppers
To keep mortgage expenses down, consider buying a fixer-upper home. But don’t do so blindly.
First, figure out what the home needs to be habitable, safe, and comfortable. Examine the home’s structural needs. For instance, does it need new plumbing, a new roof, or other must-haves? In addition, look at cosmetic changes such as a new paint job, new appliances, a new kitchen, etc.
Steve suggests developing a plan for the fixer-upper home and getting realistic estimates on the costs of permits, labor, material, etc. Don’t rely on your own ballpark estimate. As Terry says, “It’s always more than you think. I’ve got a little home bathroom project going on, and it’s quadrupled in price.”
A fixer-upper home also attracts investors looking for quick profits. Professional home-flippers know their numbers, but their fix-up estimates include cosmetic changes with cheap material and are lower than what you’d pay if you wanted to do up the fixer-upper home properly.
Be A Good Neighbor
It’s also good to speak to your future neighbors and give them a heads-up on your plans. Most neighbors welcome renovations because that increases property prices for everyone on the street. Moreover, informing your neighbors keeps things safe for everyone.
Check Every Invoice
Once the fixer-upper home renovation starts, check every invoice. Contractors often inflate costs, especially when no one is checking. Keep tabs on everything and regularly visit the property so you don’t overpay for the work being done.
Should You Pay Off Your Mortgage Before You Retire?
Switching gears, as homeowners head into retirement, they may be tempted to pay off their mortgage to reduce expenses on their limited retirement paychecks.
While tempting, Steve says that paying off your mortgage isn’t always a good idea. For instance, if you have a low locked-in mortgage interest rate of 4%, you may be better off keeping the mortgage and investing your money to earn 6% to 8%, compounded over an extended period of time. Moreover, if paying off the mortgage drains your emergency fund, it’s probably best to not do so.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate Round-up. This is the time every single week we get together with noted real estate agent Terry Story. Terry is a 30-year veteran with Keller Williams, located in Boca Raton, Florida, welcome back to the show, Terry.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: We love having you in the studio every single week.
Terry Story: Love being here.
Steve Pomeranz: It’s so wonderful. Hey, so, we’re keeping up on real estate, we’re keeping up on home affordability and the way people can buy homes these days. And I understand it’s getting easier to qualify for a mortgage.
Terry Story: That’s right, they’re making it easier.
Steve Pomeranz: Remember after the Great Recession.
Terry Story: Ugh.
Steve Pomeranz: Rates were so low, but nobody could qualify.
Terry Story: Yep, yeah, yep, so they’re easing up on things. One of the things that they’re doing is they’re allowing for a higher debt to income ratio.
Steve Pomeranz: Mm-hm.
Terry Story: Yep. They’ve actually bumped it from 45 up to 50%. Now folks, just because you qualify for a loan does not mean you need to spend up to 50%. Now for certain people in certain circumstances, it may make sense. These higher debt-to-income ratios do come at a price; you’re going to pay a higher interest rate. And you have to have excellent credit scores.
Steve Pomeranz: So the bottom line is though that they’ve eased that requirement, but there, of course, are costs on the other side. If a bank is going to consider you more risky.
Terry Story: Right.
Steve Pomeranz: They’re going to charge you more.
Terry Story: That’s right.
Steve Pomeranz: And that’s going to, obviously, that will add up to a lot of dollars over time.
Terry Story: That’s correct.
Steve Pomeranz: Also, you can borrow up to 97% of a property.
Terry Story: That’s right.
Steve Pomeranz: And only put 3% down and that’s conventional.
Terry Story: That’s conventional, we’re seeing that.
Steve Pomeranz: Yeah, so I think this is where people get into trouble, right? I mean, they are or can get into trouble, they’re putting 3% down, they have higher debt-to-income ratios, so a little bit on less solid footing.
Terry Story: Right.
Steve Pomeranz: And then if something unexpected happens, we move into a recession and they get laid off.
Terry Story: They lose their jobs, medical.
Steve Pomeranz: Yeah, a medical thing, it just throws them right into crisis.
Terry Story: That’s right, and you just have to be, you know your own finances, you know what kind of nest egg you have set aside. You have to factor all of that in, emergency funds, so if you’re really set up strong, then, yeah, you can handle this. But this is not for everyone.
Steve Pomeranz: Or make sure you’re just buying a house you can afford.
Terry Story: Yeah, bottom line, how easy is it to make that payment?
Steve Pomeranz: That’s right, good. Now the question I have is, has this ease of lending, has it returned back to those pre-crisis levels?
Terry Story: Now we’re actually about a third of where we were compared to those days.
Steve Pomeranz: Yeah, so it’s not as nutty as it was.
Terry Story: It’s definitely not as nutty, no.
Steve Pomeranz: Yeah, and that’s not going to happen again, I mean.
Terry Story: No.
Steve Pomeranz: Not until a new generation of bankers-
Terry Story: Right.
Steve Pomeranz: [LAUGH] And Congress people.
Terry Story: Right, in another 100 years, when none of us can remember that there was a housing crisis.
Steve Pomeranz: Exactly.
Terry Story: Yeah.
Steve Pomeranz: Right, it’s like when everybody was speculating in the stock market. And then the market crashes, and it’s like we’re never doing that again, and then seven years later, it’s like, what crash?
Terry Story: We’re never doing that again.
Steve Pomeranz: [LAUGH] Let’s buy on margin again and let’s do options and short stocks and all of that. It’s like, wait a minute, don’t you remember anything?
Terry Story: Exactly.
Steve Pomeranz: Please, all right, I want to talk about fixer-uppers.
Terry Story: Yes.
Steve Pomeranz: So one of the ways to kind of get something affordable is to find a house that needs a lot of work. And then you go in and with sweat, equity, and some of your own capital, fix it up. And now you have a home that you bought cheaply, you’ve added money, yes, but hopefully, you’ve done it in a proper way.
Terry Story: Right.
Steve Pomeranz: And now you’ve got an affordable home that’s all yours at a good price. But, like anything else, there’s some things to watch out for.
Terry Story: Yeah, so if you’re going to take on a fixer-upper, the first thing I really think is important is to know your costs. Know what it’s going to cost to put in a new kitchen, know what it costs for a new floor. So many times I see people, oh, we can do this, we can do this. And they’re ballparking, oh, it will run me, oh, say, $50,000 to make all these changes, they don’t have a clue in the world.
Steve Pomeranz: It’s always more than you think, too.
Terry Story: It’s always more than you think, I’ve got a little home bathroom project going on and it’s like quadrupled in price.
Steve Pomeranz: I know.
Terry Story: Even from what I thought it would cost.
Steve Pomeranz: Even backing up a little bit to that, know what your plan is, are you going to do the master bathroom? Are you going to be doing one other thing, or are you doing the whole house? Know going in.
Terry Story: Right, have a plan.
Steve Pomeranz: Have a plan.
Terry Story: If it’s in writing, you have a plan, then, because there’s always the unforeseen when you start getting into things. One little project leads to another project, and you can’t get to the next project until you got that one completed.
Steve Pomeranz: You mentioned knowing your prices. I think you need to shop for materials before you begin the project so you actually know what the materials cost.
Terry Story: Exactly.
Steve Pomeranz: And you’ve measured it out, and you’ve done the analysis and got the estimate.
Terry Story: And I understand that in a home that requires fixing up, there’s a lot of competition, there are a lot of investors that like to gobble up. But the experienced people already know their numbers.
Steve Pomeranz: Yes, of course, it’s a business.
Terry Story: That’s right.
Steve Pomeranz: Right. The thing is, though, it’s a little bit different too because if it’s a business and they’re flipping.
Terry Story: Right.
Steve Pomeranz: They’re not really going to put in the best quality stuff.
Terry Story: Exactly.
Steve Pomeranz: They’re just going to get it looking good.
Terry Story: Yep.
Steve Pomeranz: Put a coat of paint on it, fix a couple cabinets, do what they need to do to get it-
Terry Story: To make it look good to sell it.
Steve Pomeranz: Right, but it’s a different kind of mindset all together.
Terry Story: No question.
Steve Pomeranz: I also think you need to be aware of the neighbors. You need to kind of go next door and say, hey, listen, I’m sorry for the inconvenience, but we’re going to be doing some stuff.
Terry Story: Yeah, well, first of all, they’ll probably be really excited that you’re renovating the house because that only improves the value of their house. So, but yeah, as a courtesy, I probably would let them know before the bulldozers starting coming in.
Steve Pomeranz: Yeah and-
Terry Story: And the tractor trucks.
Steve Pomeranz: You’re hammering at 11 o’clock at night.
Terry Story: And the hammering, exactly.
Steve Pomeranz: Not so good. And also, you want to protect the property too because maybe a neighbors’ kid is going to start playing in your property. It’s totally natural for them to be curious.
Terry Story: Curious, yeah. Right, I mean, it’s interesting stuff there, so you want to make sure that that’s protected just to protect everybody.
Steve Pomeranz: Yep, absolutely.
Terry Story: Yep, good, and then I think you should check every single invoice because invariably there’s going to be something wrong.
Steve Pomeranz: Mistakes.
Terry Story: Yeah, that happens all the time.
Steve Pomeranz: Yeah. Some are on purpose and some are not on purpose and they are just waiting for somebody who’s not really paying attention. So check every single invoice, make sure it matches with exactly what your expectations were.
Terry Story: That’s right.
Steve Pomeranz: That’s cool. Okay, good, one last thing, we don’t have that much time, but this idea of paying off your mortgage before you retire. This is kind of a big issue, so let me take it from here.
Terry Story: Sure.
Steve Pomeranz: So there is this idea that before you retire, you should not have a mortgage. And I think in some cases, that is a correct idea because you’re going to be on a fixed income.
Terry Story: Right.
Steve Pomeranz: And a mortgage costs money, so you’re going to be outlaying this money every single month coming from your fixed income. So I could see not wanting to have that obligation on a monthly basis.
Terry Story: Sure.
Steve Pomeranz: However, there are situations really more often than not, where it’s not a great idea. So, for example, if you have invested and you’re invested well. And you hope to earn returns, let’s say 6, 7, 8% over a long period of time, and your mortgage is at 4%.
Terry Story: Not a good idea.
Steve Pomeranz: Not a great idea, use other people’s money, so to speak-
Terry Story: Right.
Steve Pomeranz: In order to do that, and also, finally, and we’ve got to go. But most importantly, is if paying your mortgage off only leaves you with a couple of hundred thousand dollars left?
Terry Story: Don’t do it.
Steve Pomeranz: Yeah, because now you’re taking this liquid capital, turning it into illiquid capital, your house. And maybe you’re not going to have enough money for emergencies and also enough money to generate income for the rest of your life. So it’s not a good idea. My guest, as always, Terry Story, thanks for giving me a chance to talk about that, Terry. 30-year veteran with Keller Williams, located in Boca Raton, and she can be found at terrystory.com, thanks, Terry.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: Thanks, Terry.
