Dina Milne: Welcome to AdviseHer, a special episode of The Adviser You Can Talk To podcast. Here at Adviser Investments, we’ve noticed that when it comes to managing money and planning for your financial future, there are some issues that impact women differently. With decades of experience helping families navigate their financial lives, we want to share that experience highlighting some of the financial topics that are especially relevant to women and give you some practical tips on how to handle them.
Dina Milne: Today, we’re talking about buying or selling a home—whether this is your first home, second or third, or even a vacation home. There’s a lot that goes into the process of buying a home. It’s both an emotional and financial decision and it requires you to be very well prepared. I’m Dina Milne and I’m an account executive working with clients in a relationship capacity. Today I have with me Megan Higgins, assistant director of client service.
Megan Higgins: Hi, Dina.
Dina Milne: I’m also joined by Jen Zebniak, a research analyst.
Jen Zebniak: Hi, Dina.
Dina Milne: I’m really excited to have both Megan and Jen with us today because they’re both going through the home-buying process, so they’ll have a lot of valuable insight to share with us. Also with us is Sophie Benander. She’s a client service manager. She works directly with clients and she’s also one of the founders of our Women in Wealth Management Initiative here at Adviser Investments.
Sophie Benander: Hi, Dina. I’m actually really excited we’re talking about this today. I saw an article recently in The Wall Street Journal about how consumer product companies are revamping their marketing and really taking note of the rise in single home buyers.
Dina Milne: A lot more single women are buying homes, whether they’re millennials or widows.
Sophie Benander: Yes, 22% of homes are owned by single women and this compares to men who own less than 13%. What we’re seeing is the shift from family-focused products more towards convenient, really scaled to size products.
Dina Milne: Those numbers are practically double.
Sophie Benander: We tend to see women waiting longer to get married. They’re putting their careers first—not to mention, unfortunately, the divorce rate is doubled for those 50-plus and women are just outliving men. This is all really setting the stage for women to independently own their homes.
Dina Milne: There are a few takeaways that we’d like our listeners to take from this podcast. First of all, when are you financially ready to buy a home? We’ll talk about that a little bit. We’ll also discuss whether it makes more sense to buy or rent. Finally, we’ll touch upon the downsizing thought process and when it’s right to do that. We’re also going to move through the different life stages of a person. We’re going to focus in the beginning more on first time home buyers and then work our way through to people that are buying second , third and fourth homes.
Dina Milne: Let’s just dive in. The first question that we want to ask ourselves is when do we think that we’re financially ready to commit to buying a home?
Jen Zebniak: There are some questions that you can ask yourself when you’re thinking of buying a home. The first is, “How stable is your income at this point in your life?” Then, “Do you foresee any major changes in the next few years? Are you planning on changing jobs? Are you planning on starting a family and are you willing and able to take the time to maintain your house? What if something breaks? Are you willing to pay someone to repair it or can you repair it yourself?”
Sophie Benander: These decisions really apply to anyone in any stage in life, not just first-time home buyers.
Jen Zebniak: Exactly.
Megan Higgins: That’s for sure.
Dina Milne: Jen, so consider the whole preapproval process. How do you know how much home you can afford?
Jen Zebniak: What I’ve learned is that if you’re looking to put 20% down and you have a moderate amount of other debt—such as maybe car loans or student loans—then lenders will recommend that you look for a home that costs no more than three to five times your annual household income. That’s before taxes.
Megan Higgins: In terms of my debt payments, if I’m making, say for example, $100,000 a year in annual income, what should my numbers look like?
Jen Zebniak: With that example, you’d want to spend no more than $40,000 total in debt payments, and that includes your mortgage payment, car payments, student loans, whatever debt that you may have. Obviously if you’re buying a house, you’ll have more than $40,000 in debt, most likely.
Megan Higgins: That makes sense. Thanks so much for breaking down those numbers. I know you’re like me: You’re financially responsible and let the numbers speak for themselves. It’s really good to know that threshold for that debt, especially for those of us that like to have a little bit of wiggle room in our budgets.
Jen Zebniak: Exactly.
Dina Milne: Megan, I’m going to turn to you. Unlike Jen, this is not a first-time home purchase for you. You actually just recently sold a home and you’re in the process of buying a new one. Tell us a little bit about your experience.
Megan Higgins: I’d be happy to, Dina and I do have happy news to report. I actually just closed on my house last week.
Sophie Benander: Congratulations.
Jen Zebniak: Congrats, Megan.
Megan Higgins: Thank you so much. Second time’s the charm! With that being said, I’d like to share some of what worked really well for getting my preapproval to allow our listeners to kind of see the breakdown of what that process looks like so they’re also better prepared for when they’re looking to buy maybe their first home or their second or third home.
Before we started going to open houses, we wanted to make sure we got started on the right foot. We got our preapproval before going to open houses. It shows that you’re just a more serious and more competitive buyer. It’s also a good idea to check your credit and get your debt assessed and get it in line. Banks use that specific information to determine how you handle your credit and calculate what’s affordable for you as Jen was referring to a little bit earlier and that information impacts the interest rate that you qualify for at the bank that you’re working with. It’s also a really, really good idea to consider where your down payment will come from.
Jen Zebniak: Megan, you mentioned the interest rate that you’ll get on your mortgage and as a bond analyst, I’m looking at rates every day. It doesn’t hurt that we’re in a low-rate environment right now.
Megan Higgins: Absolutely and I’m thrilled about that too, Jen. You know what? I was able to lock in a lower interest rate during my preapproval process on my mortgage.
Jen Zebniak: That’s great.
Dina Milne: I want to come back to the down payment. Speaking of down payment, where should it come from and how much should we put down? Sophie, you and I have talked about this a lot. What are your thoughts?
Sophie Benander: There’s still this belief that you need to put at least 20% down, if not more. There really are so many options out there where you can put down less, sometimes as little as 3.5% but do keep in mind if you make that decision that there could be other costs associated with that down the road. We’re looking at mortgage insurance, usually a larger monthly mortgage payment.
Jen Zebniak: Sophie, for me being a first-time home buyer, it’s actually pretty encouraging to know that a smaller down payment is an option. We live in the Northeast and it can be really hard to save up for 20% down. I mean, it’s pretty expensive to live here.
Sophie Benander: It’s so true. 3.5% could mean $4,000. It could mean $14,000 or $40,000. That’s a lot of cash!
Jen Zebniak: Yeah, it’s crazy.
Sophie Benander: We have a client who’s in her early thirties. She is excelling in her career and making a substantial salary, especially for her age and at this stage in her life. She’s in the process of buying her first home. She’s been renting for a long time. She came to us and said, “I’m ready to put 20% down towards my down payment, but I have more. I have more cash on hand. What should I do?” She was kind of on the fence. We looked at everything for her financial situation and talked about interest rates being low right now.
Sophie Benander: We talked about how the market’s doing well and how she’s on the fence anyway about putting down that extra on top of the 20%. She ended up deciding that she would only put down the 20% and that she would use the rest of the cash that she had on hand towards furnishing her home and there were some other small home improvements that she wanted to do. We also let her know that 20%, especially living here in this area, is great to put down, but that we can reassess things in three years or five years. If she has an extra lump sum of cash, she can always throw that at her at her principal, on her mortgage.
Sophie Benander: I love this story, not just because she’s an amazing, smart woman but women are really on the rise for home buyers: 18% in 2017 versus 7% for single men.
Jen Zebniak: Wow.
Megan Higgins: Speaking of high-income earners, as you were referring to Sophie, she could always double up on mortgage payments over time and throw an additional lump sum onto her mortgage to pay down faster. If you are able to make just one additional mortgage payment a year on a 30-year term, it shaves roughly four years off your mortgage. What a great way to give yourself some financial flexibility and start your retirement years mortgage-free!
Dina Milne: That’s amazing. That really makes a difference, and that additional savings can be used toward retirement. Whatever it is, it’s money in the bank. One of the things I see frequently with clients, especially our older clients, is the desire to either pay off their mortgage or avoid a mortgage altogether and purchase the home in cash. If you have substantial investments saved, this makes a lot of sense. However, remember to pay close attention to capital gains if you’re liquidating investments.
Sophie Benander: Can you just define capital gains?
Dina Milne: Yeah, so if you’ve had your investments invested for a period of time, hopefully they’ve grown and that growth when you sell them is taxable.
Sophie Benander: I just want to stress the importance here too of consulting your tax adviser, your CPA. There are a lot of nuances when it comes to capital gains on your home and each state is different; every person’s situation is different. Definitely consult your CPA.
Dina Milne: That’s a great point, Sophie. I think also an important thing to note here that a lot of our clients live off of the income generated by their portfolios. If they’re taking a large lump sum out of the portfolio, that’s going to eat into the income that their portfolio is going to generate. It’s also a lot harder to put back, especially if you’re not working and you’re retired. I know that desire to be debt free is a great desire. We all want to be debt free but pay close attention to cash flow.
Megan Higgins: I don’t know about you, but I’ve yet to hear of anyone paying off debt and then regretting it later.
Dina Milne: That’s true.
Sophie Benander: It’s an emotional decision. You know a lot of people sleep better at night when they know they don’t have much debt, but other people like to know they have a smaller monthly payment. There are a lot that factors in it.
Megan Higgins: It runs the gamut.
Jen Zebniak: Yes, it does.
Dina Milne: We’ve talked about a lot: We discussed affordability, mortgage, preapprovals, down payments; but, Jen, you mentioned previously as a first-time home buyer that you had a couple of surprises—especially when it came to additional costs. Can you tell us a little bit about that?
Jen Zebniak: First I would just like to say that you’re probably going to be preapproved for more than you’re comfortable with. Then some of the ongoing additional costs are you have to factor in your property taxes and your insurance payments, but those can roll into your monthly mortgage payments. That’s convenient, but it makes those payments higher. Then some one-time fees can include HOA fees if you’re buying a condo, lawyer fees, inspection fees and closing costs, all of which can really add up right in the beginning.
Megan Higgins: Those are all great points and I’d add don’t feel like you have to spend everything that the bank is allowing you to borrow. Most often they’ll lend you more than you can truly afford and it’s always wise to do some number crunching, get to the bottom line and assess to see what your monthly bills and your income outlay will look like.
Jen Zebniak: Exactly and a lot of times it’ll actually look a lot differently than you expected, which is what happened in my case. There are some great mortgage calculators online that are a good place to start and www.BankRate.com is one of them.
Megan Higgins: I’m a big fan of that one.
Sophie Benander: Buying a home is not always the right choice. I think there are a lot of cases where it makes more sense to rent than it does buy, right?
Jen Zebniak: I ultimately decided to continue renting. Sometimes it just makes sense to pay yourself back first. For me, I’m newly engaged. I’m getting married next year. I felt better paying down some debt first. Obviously now I’m saving for the wedding but in a few years I can reassess my situation and probably be in a better position to buy, well hopefully; but the circumstances could really be different for anybody when you consider all the costs involved with buying a house.
Dina Milne: Tell us some of the costs that you might save by not buying a house and renting.
Jen Zebniak: When you rent one great thing is that you’re not really responsible for the maintenance. You have the landlord, so if something breaks you don’t have to fix it yourself. More often than not, they pay for it and they come and fix it and you don’t have to worry about any of that so you’ll save some money there. Sometimes you can even find a place to rent where utilities are included and that can also really help.
Dina Milne: That’s great and probably HOA fees, too. You’re not paying HOA fees.
Jen Zebniak: Exactly.
Dina Milne: Megan, we’ve talked about some of the cost savings. What about some of the actual costs that you pay renting that you wouldn’t pay if you owned a home?
Megan Higgins: I can definitely speak from experience, Dina. So as you all know, I sold my house, my first home, in January. I went to a temporary housing in an apartment community because I wanted the ability to be able to be flexible with buying my second home. What I realized, because I’ve already owned a home to go from that and then to go from renting, I realized the cost savings was better for me to buy rather than continue to rent.
Dina Milne: How come?
Megan Higgins: The reason is because the various amount of fees that go into renting. First I pay the month-to-month fee to give myself flexibility. It’s nice that apartment communities offer that flexibility, but secondly, I had additional fees—like a pet fee because I had my dog living there with me, a storage unit fee, a parking fee, maintenance fees… not for everything but for some things. Utilities aren’t always included. In my case they were not. I realized when I did the numbers (as you know, we love to number-crunch here), I realized, what I’m paying in rent and for all those additional fees I could have a decent size mortgage for that.
Sophie Benander: I feel like that’s what I hear from most people: “I pay all this in rent, this could be going toward my mortgage payment.”
Megan Higgins: Absolutely.
Jen Zebniak: Most rental complexes will raise your rent year after year, too.
Megan Higgins: That’s true.
Jen Zebniak: That’s something else to keep in mind.
Dina Milne: I actually have an example where renting made a lot more sense for our clients. I worked with clients who lived in southern California. The husband retired about two years ago and they decided to move to northern California where their kids lived so that they could be closer to the kids and the grandkids, but the decision came up as to should they buy a home or rent a home? They had already sold their home. They made quite a good profit on it and we sat and looked at different scenarios. We looked at the area. It’s a lot more expensive to buy a home in northern California and we decided that maybe temporarily they would rent for a year, so they did.
Dina Milne: They enjoyed it so much. They actually liked the flexibility because in their second year of retirement, they were able to move and live next to one of their other kids who lived in northern Oregon. They’re enjoying that flexibility, they don’t view this as an extra cost and they’re liking the freedom that renting gives them.
Sophie Benander: What kind of reasons during the thought process did they have for wanting to buy? It sounds like renting is really what they were leaning toward and what works, but what were they on the fence for?
Dina Milne: I’m glad you asked that because this was actually a very interesting couple to work with. They both had such different perspectives of the situation. From the husband’s perspective, this home that they sold in southern California was an asset. When he sold it, it’s almost like he felt like he lost it and it needed to be replaced by a new home.
The wife, on the other hand, had a completely different view of the situation. From her opinion, this was an investment that they had invested in 40 years ago when they bought the home. It’s an investment that did really well and grew and she wanted to use that to supplement their living expenses. She didn’t feel that it needed to be replaced with a new home and it was very difficult to get them both on the same page and they couldn’t actually vocalize that, but this is one of the reasons why we’re doing a podcast like this. We have very different ways of approaching things. As women, we view things a little differently.
Sophie Benander: Much more emotionally I think, too—like to her being with the kids. These life experiences are valuable.
Megan Higgins: That’s for sure.
Sophie Benander: This is just as valuable as their investment, whereas to him it was the actual replacement of the dollar value with the…
Dina Milne: Security. I think he viewed it as security as well.
Megan Higgins: Absolutely.
Dina Milne: It was very interesting. I’m really happy to see how they’ve come a long way. He’s a lot more comfortable with the rental now. He likes the idea of being able to move around and be close to his kids.
Sophie Benander: It takes time and change is hard. Habit is hard, especially after 40 years being in a home.
Dina Milne: I’m going to switch gears here. We focused a lot on our first and second time home buyers. I think we also talked a little bit about the rental versus buying decision. Now I want to switch over to focus on when and who should be considering downsizing.
Sophie Benander: I actually just read an article that referred to downsizing as “right-sizing,” which I thought was just the best way to put it.
Megan Higgins: I absolutely love that because you know what? It truly is about making the right decision for you and everyone has their own situation.
Sophie Benander: Downsizing has this negative connotation with it. I think the right-sizing can fit you in any point in your life.
Megan Higgins: Absolutely. That’s a perfect way of phrasing it.
Dina Milne: That’s true and I think that’s what makes it a very emotional decision as well. There’s a lot that goes into it. Your home probably holds a lot of wonderful memories for you. You also want to look at the location. Do you want to be near family? Do you want to go into a community? Also, what about the house layout? Do you want a one story? Do you want something where the bedroom and laundry are on the main floor? What are you looking for? There’s also a lot of financial considerations that go into it.
Sophie Benander: I think as women too, we really have to think about that next phase in our lives. Women live longer than men. This is fact: Studies show five years longer than men. We’re constantly trying to think about, five years down the road, 10 years down the road, 20 years down the road, where am I going to be as a person? Maybe not necessarily with my spouse…
Dina Milne: That’s true. What are some of those considerations that go into this decision to downsize or right size?
Megan Higgins: From the financial perspective, things to consider are one of the main financial benefits of if you lived in your home for a number of years, you probably accumulated a decent amount of equity.
Dina Milne: By equity, you mean the ownership interest in the home. What you own of the home minus the mortgage.
Megan Higgins: That’s exactly right.
Dina Milne: Yes.
Megan Higgins: Other benefits to downsizing and buying something smaller? It could probably allow you to pay off the mortgage quicker, as we referred to earlier, or even being mortgage free. It also gives you the flexibility and financial freedom to enjoy more of the things that you love, whether it’s visiting family or traveling. Dina, as you mentioned earlier, it’s also really important to consider the gains that you generate from the sale of the home. Make sure to take that into account and know how much you may need to pay in taxes from the sale. Again, each case is different.
Sophie Benander: Talk to your CPA.
Megan Higgins: Absolutely.
Dina Milne: Thanks, Sophie.
Jen Zebniak: If you are buying a second or third home and as Megan stated, you probably do have a decent amount of ownership in your home, you might actually have a really good down payment if you are buying again.
Megan Higgins: That’s true and then speaking of just having some money in the bank or a rainy day fund, it’s also a good rule of thumb to have about three to six months’ worth of living expenses in your savings account.
Sophie Benander: Don’t we normally hear 12 months of living expenses?
Megan Higgins: Studies allude that having three to six months’ worth is a good place to start, but it’s wonderful obviously if you can save more than that.
Jen Zebniak: Going back to that emotional decision of downsizing too, unmarried women over 55 is one of the largest and fastest growing demographics of home buyers. As Sophie said, women have longer lifespans. Are they confident? Can they take on a 15- to 30-year mortgage? Many of them want to look for homes with “no bad memories.”
Sophie Benander: The statistics support the other way of that where we ask are women confident: Do they feel they can take on 15- to 30-year mortgages? I think the facts support that they do feel they’re confident because they are taking on the role of women home buyers.
Jen Zebniak: Definitely.
Sophie Benander: That’s on the rise, like we talked about before.
Dina Milne: This reminds me again of another client example. This is actually very near and dear to my heart. With this particular client, her husband retired about 10 years ago and they were making a move. They were moving back to their home state and they were looking at various buying options. One of the things they looked at is one of those independent-living facilities. The other thing they looked at was just a regular single-family home.
They put their names on a waiting list for one of these independent living facilities. A place opened up and they were about to start the paperwork and then the husband at the last minute said, “No, this is not the right move for us. We don’t want it.” They ended up buying a home and they were both comfortable with the decision. They made the home their own: They decorated it. It was great.
Unfortunately, five years into owning that home, the husband passed away suddenly and by that time there was some wear and tear on the house. The wife had to have maintenance: Replace the roof, do the driveway… It was starting to become a bit stressful for her to own that home. I opened up this topic with her and I actually hadn’t realized that her two daughters had recently started the dialogue with her about this community, this particular one that she really liked. We talked and crunched the numbers together. We looked at the various options and she ended up putting her name on the list. A unit opened up pretty quickly. She moved in and she’s been there for about two years—best decision she ever made. She says that this was the right time for it. It wasn’t right 10 years ago, but this is it and every time I talk to her she’s thrilled. She’s very social so it’s a very good environment for her.
Sophie Benander: Does she still have the fern that you gave her when she moved in?
Dina Milne: She does. She has a green thumb.
Sophie Benander: I love that.
Megan Higgins: What a great example of right-sizing really working out well for someone.
Jen Zebniak: Yes, definitely.
Dina Milne: I’ll just throw a note in here for people that are looking into moving into these communities. There are several different buy-in options. When you go into the community they’ll talk you through them. There’s a lump sum that you put down and then a maintenance fee that follows that. Some of them will account for beneficiaries. God forbid something happens to you. They will reimburse your beneficiaries a portion of that, but some of them don’t. You really want to look at those options. Make sure that you talk to your adviser about them and get a good grasp of how they work in.
Jen Zebniak: A lot of times too, these fees you pay will cover things such as taxes, utilities, food, entertainment depending upon where you are. Correct?
Dina Milne: Yes, that’s true.
Jen Zebniak: That’s good to know.
Dina Milne: We’ve talked about a lot today and we hope you found it helpful. We’ve talked about the discussion of whether to buy or rent. We’ve talked about what goes into the home-buying process, mortgage preapproval, a little bit on the debt, the down payment and downsizing. Jen, Sophie and Megan, do you have any last pieces of advice for us?
Jen Zebniak: I’ll go first. Just remember that your closing costs can add up. Make sure you account for that with the money you’ve saved for your down payment that you’re also prepared to pay for these closing costs. Something I should’ve mentioned earlier: When you’re talking about additional costs, Dina, homeowners can typically spend $5,000 to $10,000 on yearly maintenance. That’s another additional ongoing fee to be aware of. Then the last tidbit I’ll leave you with is that the real estate agent actually gets paid by the seller’s agent. That’s not to say that they’re not in your corner, but it is good to be aware of who they’re ultimately getting paid by.
Dina Milne: That’s true.
Sophie Benander: As a society, we’re always alluding to buying a home as a step towards fulfilling the “American Dream”—the white picket fence. I think we really need to just take a step back and think less about the concept and more about who? Who am I? What’s my position in life? How does buying a home right now impact my future? Buying a home has great advantages for building wealth in life, but it doesn’t necessarily mean that’s the best decision for you at this point in time.
Megan Higgins: That’s true and I think that no matter what your circumstances are it’s important to seek advice from a trusted family member, friend or your financial adviser. Just like an investment portfolio, there’s no such thing as one size fits all. Buying or selling a home is an important and personal decision.
Jen Zebniak: This only touches the surface, so we would love to hear from you. We’re happy to answer any questions that you have.
Sophie Benander: Every situation is so different.
Jen Zebniak: Exactly.
Megan Higgins: Just as a home offers comfort and security, we want to make sure that your finances also make you feel that way.
Dina Milne: Thank you ladies. This has been Dina Milne, and I’ve been joined by Sophie Benander, Megan Higgins, and Jennifer Zebniak. Thank you for joining us today in this edition of the AdviseHer podcast. We hope you’ve found it helpful. If enjoyed the conversation, please subscribe. You can also check us out at Adviser Investments.com/podcasts. We’ll have more to come as part of our AdviseHer series and if you have any topics that you’d like us to explore, please send us an email at info@AdviserInvestments.com. We’d love to hear your feedback and to hear back from you. Thanks for listening.