Kate Wood
Appearances
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
Of course, and then we'll both be millionaires.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
Yep. With regard to tariffs, the uncertainty is a big part of why markets are whipsawing up and down so dramatically over the last month. No one really knows how far tariffs will go or when we've arrived at the final tariff program. Things keep changing.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
For example, the Mexico and Canada tariffs were announced, and then they were delayed, and then they were implemented, and then they were partially scaled back.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
Tariffs are taxes on imports, and we import quite a lot of stuff. They may raise production costs for businesses, which would be bad for the stock market because it would hurt corporate earnings. But tariffs may also be passed on to consumers in the form of higher prices. In other words, they could juice inflation.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
That would be unfortunate in its own right, and it could also complicate the Federal Reserve's plans to lower interest rates, which is something the stock market has kind of been counting on for a while now.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
This might not age well, depending on when people are listening to this episode, but this tariff volatility so far isn't nearly as bad as either of those things, at least not yet. 2008 and 2020 both saw severe bear markets in all the major stock indexes. And for reference, a bear market is when an index falls 20% or more from a recent high.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
For now, the NASDAQ is in bear market territory, but the S&P 500 and the Dow Jones Industrial Average haven't gotten there yet.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
This tariff news has brought up fears of a stock market downturn or maybe even a recession or higher inflation. And yeah, it's enough to make anyone feel a little helpless. But zooming out from investments for a second, one way to gain a sense of control is just to take some basic steps to make your personal finances more resilient.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
That might mean trying to build up an emergency fund with three to six months of living expenses, which can act as a cushion against a job loss. Or it might mean paying down high-interest debts. For example, credit card debts, whose APRs are often quite a bit higher than any kind of realistic rate of investment return. That's another good way to get ready for anything.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
Paradoxically, international stocks have actually held up pretty well because many publicly traded companies in other countries do most of their business in that country and aren't super exposed to trade with the U.S. As a result of that, there are a lot of ex-U.S. ETFs out there, funds that exclude U.S.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
stocks and just contain international stocks, that are actually up for the year while the S&P 500 is down. Also, although there have been some recent headlines about treasury bond prices being volatile, many bond ETFs have also held up better than U.S. stocks. One advisor I spoke to recommended that retirees in particular should look into bond ladders.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
These are sets of bonds with staggered maturities that you invest in, and they provide monthly or annual cash flow, which can then be reinvested or withdrawn and spent. Bond ladders can cushion retirees from needing to sell stocks at a loss if they need money.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
But to answer your second question, no, just because certain investments are holding up better than others doesn't mean that we should all pile into those investments. The US stock market looks pretty scary right now, but it's worth holding on to some US stocks for diversification purposes.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
This might be optimistic, but there's still some chance we could back down from all this tariff business, in which case the current volatility could retrospectively look like a great opportunity to buy the dip.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
Thanks for having me on. And thank you, Ana.
NerdWallet's Smart Money Podcast
Strategies for Navigating Market Swings and Leveraging Home Equity Wisely
Great to be here.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
And so in order to offset what might now be a fairly steep debt to income ratio, Amy might need to be able to show the lender that they can get significant rental income from that first home in order to offset that debt. So ideally, that would be something like a signed lease, which they might have because it kind of sounds like they were renting it out now.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Could also be a rental appraisal of comparable properties in the area. You know, like this is kind of what rentals are going for. This is what we're going to be able to get, hopefully.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Absolutely. There are so many sort of do you want to be a learn their questions? You know, do you want people calling you in the middle of the night because something's gone wrong? Do you want to be driving back to Oregon to deal with a maintenance issue?
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Or do you want to be paying someone in Oregon to be the person who answers that phone, who deals with those maintenance issues, who does all that for you, and then that's eating into the income that you're getting from that property?
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
I'm not trying to be discouraging. I just want to be realistic that this isn't, you know, just like an, oh, easy money kind of thing, right? No matter what you might have seen from like a finance bro on TikTok. Again, we're talking about maybe having two homes with three mortgages, a lot of money borrowed. We're also talking about a lot of interest.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
And so, you know, even though your first home was an inexpensive home, once you're borrowing against it, that inexpensive home is now more costly, right? Because you've got a larger loan and you're paying more interest. So really kind of doing that short term math and that long term math, figuring out what's going to work for you.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
No, thank you for having me. Always a pleasure.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
I really feel like we need to let go of the idea that mortgage rates could go to rock bottom again at any minute or that that's where they should be. This was really an anomalous circumstance during the pandemic. And for what it's worth, interest rates on mortgages are still among some of the lowest interest rates that you're going to get if you're borrowing money.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Yeah. I mean, if I could jump in for a second, something that I keep trying to emphasize to people is that like, yes, mortgage rates are bad, but like rates are just the storyline villain here. Home prices are the actual villain, right? Like if you want to look at something over time and how it's changed and is it way out of whack with kind of what should be reality, it's home prices.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Although I think also too, something that's getting lost here is the decision about where to live isn't just a financial decision. Obviously it's a financial decision in that, you know, this is a tremendous amount of money. It might be the largest transaction you make in your life, but it's not only a financial decision.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
It's also like a really emotional and really personal one because this is your home. This is where you're going to live, right? It's not just an investment.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So there are kind of like multiple reasons that it's a resounding no. And I would point out like, this isn't about, oh, that we're using cash to make this purchase. This is about the idea that you would be using all of your savings, that you'd be using all of your money.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So even if we're talking to folks who are getting a mortgage and they're just considering like, well, in order to afford the house I want and pay for the down payment, the closing costs, all the other things that come up, I'm going to be spending every single dime of my savings to do that. our general advice is like, don't do it, buddy.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Because there are, like Sean was just saying, there are so many things that come up when you buy a home, whether it's like unexpected repairs or just a billion trips to the home center because you need more painter's tape or like potting soil or just the expenses just mount and mount. And they might not be huge dollar amounts, but you need some kind of income to deal with them.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So really, whether you're talking about buying a house in cash, which if you can do it, that makes you a super competitive buyer, right? Or if you are saving up to buy a house with a mortgage, really our consistent advice is that you don't want every last dollar tied up in that because life happens, things happen.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Sure. So in a nutshell, the title agency goes through public records and they just make sure there is nothing fishy with the home's ownership. They're looking to see that the house or the home has a clear title, which means that it is the seller's house to sell. No one else can make a claim to it.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Absolutely. I mean, the other thing to think about, too. So, you know, say someone in this situation were to move forward with buying a home and getting that 15 year mortgage, you know, given the amount of income or savings that they're talking about of being able to buy the home outright. they could make a very substantial down payment, right? They could even go above 20%.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
They could make like a 25% down payment. At that point, you're not dealing with private mortgage insurance. You are probably, assuming your other financials are solid, you're potentially getting the best rate that any lender is going to give you.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
And when you're paying down that mortgage, you can keep paying extra toward the principal to pay it down even faster and start cutting months and even years off that loan. But at the same time, because you did not put every single dollar that you have into that house, you can be dealing with anything that happens.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
You can be dealing with a non-negotiable like must pay for this now emergency, like a plumbing catastrophe or thinking about like longer term goals, like making sure your retirement is fully funded. Right. But you've got that money to use and to do things with.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Mortgage-wise, there are other options. So if their priority is strictly, I want the lowest interest rate that I can get in this current environment, and I want to pay off this home as rapidly as possible, they could potentially talk to a lender and get a mortgage term that is as short as 10 years.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So when I was buying my home, actually, the title agency found that there was a former occupant who owed a bunch of back taxes, which was a big yikes. Luckily for me, it turned out that that person had just lived there. They didn't have an ownership stake. They weren't on the title. But if they had been, I could have been dealing with the IRS and a tax lien and it would have been a lot hairier.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Now, that is going to come with, again, assuming your other financials are very solid, probably the lowest rate that a lender will be willing to give you because that's not a lot of time for them to have that funding tied up in the loan. But at the same time, remember that the monthly payments then are going to be extremely steep because you're paying off a larger price over a much shorter term.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
When Sarah was talking about the difference between rent payments and mortgage payments and how much those would be, that's really with like a 30-year traditional mortgage. Because when you're spreading out your cost over decades, it's going to be a lower cost per month.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
A 30 year mortgage is actually still a pretty good option. Like, yes, your interest rate will be higher than if you had a shorter term loan. But your required monthly payments are, again, going to be significantly lower because you're spreading out the cost over such a long period of time.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
And, you know, that can actually allow for someone in this situation where it sounds like there's potentially a good amount of income, a good amount of assets. a fair amount of flexibility.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So if you're having a month where you're like, I really didn't spend that much, I'm feeling good about everything, you could just pay down a big chunk of your principal and just immediately be like, I'm knocking out part of this mortgage. I'm taking down the amount that I owe. But if you have a spot where you're like, I kind of need the money for something else, whether it's like
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
something dire and crucial, or it's like, you know what, I really want to take an awesome trip and it would be great if I could just like buy these tickets outright instead of putting them on my credit card, then you can do that. And you are still making your required monthly mortgage payment, which is nice and low and super, super manageable.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So because the required monthly payment on that 30 year loan is going to be a lot lower than what you get with a 15 or a 10 year loan, you're going to have that sort of like extra cash on hand and it could help you feel more flush.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Thank you for having me.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
No, not at all. And so this is kind of what you're paying for with the title company. The listener mentioned the company handling title and escrow. So title companies sometimes do escrow, which is just being the third party that holds onto your deposit during closing. But that is not always the case.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Title insurance, which they don't mention and which is related, is something else that title companies are often involved with. And that covers any title claims or defects. Anything that would come out after the initial title search is done.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
That way you can't have someone crawling out of the woodwork later, you know, claiming they're like a long lost heir of the previous owner and it's really their house. And there are usually two separate title policies. Lenders generally will insist on lender's title insurance in order for the transaction to go through. Buyer's title insurance is more optional, but it's generally recommended.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Title fees vary pretty widely because it depends on what's being included. So the home seller is actually usually going to pay for an initial title search, and that's pretty minor. That's like $75 to $200. What the buyer is going to be paying for is the title settlement, and that can cover a lot of different things. So as mentioned, that could cover escrow, which comes with a bunch of fees.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
It could cover notary fees, preparing the deed, real estate attorney fees. For me, that was the thing I paid the most with. And you might or might not see those itemized when you're looking at the bill. So depending on what's included and also the complexity of the search, that all could run to a thousand plus dollars. Title insurance is separate.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So again, there's a lender's title insurance, owner's title insurance. Getting both of them from the same company can sometimes save money. And the total cost of both those policies is usually like 0.5 to 1% of the sale price of the home. So say it's a $300,000 property, that's $1,500 to $3,000. So all in, you're probably looking at a few thousand dollars.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
You know, that's a decent chunk of your closing costs. But again, it's going to vary depending on the cost of the home, the complexity of the title search included.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
saving some small amount of money, having some small amount of peace of mind. But very few people are shopping for the title agency for all of the reasons that you mentioned. So, you know, when you are looking at your loan estimate, you will see all the estimated title costs listed under the section that says services you can shop for.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So it is like, yes, you can go out and see who you want to work with. But again, hardly anyone is shopping for these because once you've had an offer accepted, your mortgage application has been submitted, all of your incentive, all that energy is really going toward closing the deal, just like get to closing.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
And so taking the time to suddenly step back and research a title company or research something like a home inspector, right? These different providers that kind of show up during the closing process, you just don't have the time, right? And you often don't have the energy.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So if this is something that you really want to do, you are actually much better off doing it well before you've reached this stage so that you're not holding things up so that you can research, you know, in the case of a title company, you're researching a company that's going to do research. So well
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
While you're kind of still in that like daydreaming phase where you're just like spending a lot of time scrolling through houses online, spend some of that time going through these different companies, look into different title companies, look into home inspectors, look into these different service providers so that when it does show up, you kind of know what you're looking for or what you're not looking for.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
You can have some kind of preference, right, when the different things are being suggested. The one other thing that I would mention that the listener brought up was their example of the real estate agency and the title company having some kinds of financial ties, anything like that, where there is that kind of conflict of interest.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
If that's coming up during any part of the home buying process that could possibly raise some red flags for you, it is okay to step back and be like, oh, hold on. Maybe let's not go there. Let's hit pause.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Nope. Not at all. As I mentioned, I did have a, you know, I had a positive experience with my title company. Everything worked out for me, but absolutely, absolutely not. I don't remember who they were.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Anything involving home equity is inherently risky because we're talking about loans where failure to repay could result in losing the home. But if you are on the wealth building side of TikTok, you might be hearing this and thinking using equity from house one to buy house two is something that people do all the time.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Pretty much the standard options for accessing equity. So one is to do a cash out refinance. So that's where you refinance your original mortgage for a larger sum. And then you get the difference between what you owe on the original mortgage and that larger mortgage in cash. The other option would be to take out a second mortgage.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
And so second mortgage wise, we'd be talking about a home equity line of credit, commonly called a HELOC or a home equity loan. The biggest difference between doing a cash out refi and doing a second mortgage, whether it's a home equity loan or a HELOC, is that with a cash out refi, you only have one loan.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
But interest rates have gone up a lot since 2020, and Amy's gonna lose that 3.75% mortgage rate since prevailing rates are higher now. Cash out refi rates also tend to be higher than purchase mortgage rates since cash out carries more risk for the lender. So it's going to be a higher interest rate on a larger loan amount. With a cash out refi, you are going to have refinance closing costs as well.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
That's usually 2% to 6% of the amount that you're borrowing. So that's that total larger amount. Again, closing costs with a second mortgage, with a home equity loan or a HELOC are usually lower. They're about the same percentage wise, but because you're borrowing a smaller amount of money since the cost of your original mortgage isn't included. So 2% to 6% of, say, $50,000 is usually a lower sum.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Well, with a second mortgage, as the name implies, you now have a second loan. So in this case, Amy would be keeping that original mortgage that has the low interest rate, but would now also have another loan on that property. And that loan would probably have a higher interest rate, both because prevailing rates are higher and because lenders consider second mortgages inherently riskier.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So again, they tend to have higher rates too. Like I said before, that interest is on a smaller sum of money. So there's some math to consider here. In terms of if we're looking within second mortgages, the differences between a home equity loan and a HELOC, a home equity loan is like a one-time lump sum payment that usually has a fixed interest rate. It's a pretty much a straightforward loan.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
The biggest difference is that it's secured by your house. A HELOC is a revolving line of credit. And so that's usually more meant to be used over time. You have a credit limit, you borrow money as you need it, you repay it over time. And HELOCs usually have variable interest rates. So that can kind of fluctuate as the market goes up and down.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Because of the sort of like, oh, pay as you go or take money as you need it. People most often use HELOCs for big renovations or like a lengthy home repair where it's like, oh, you know, something else comes up and now we have to pay for that too. You know, that kind of thing.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Whereas home equity loan, you're saying upfront, okay, this is how much I know I want to borrow and I'm borrowing all of it right now.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So there's definitely a lot for them to consider because, you know, I just went through a whole bunch of stuff, but that was just how can you access the home equity? And that might actually be the easier part of the equation here compared to using it.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So, you know, I was mentioning renovation and usually with a cash out refinance or a second mortgage, because you're home securing the loan, because there's that foreclosure risk, At Nerd Wallet, we do tend to recommend using liquidity from home equity to accomplish goals that put you in a stronger financial position.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
And so things like, you know, a home renovation, something where you're working to increase your home's property value rather than something like, you know, going on like a bucket list vacation.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
Oh, I mean, potentially, yes, absolutely, right? Buying a second home, having that first home as an investment property could totally put you in a stronger financial position. But using your equity to buy the second home is like a whole other deal. That's kind of where my hesitation's coming from here.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So even if you're keeping the first home as an investment property and the second home is going to be your primary residence, to a lender, when you're going to get that loan to buy your new home, that is still a mortgage for a second home, right? So that's more risk for the lender. That's a higher interest rate. Even though it is going to be your primary residence, this is not a distinction.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
They're not going to split hairs with you on this. This is a second home. So you are going to be held to higher lending standards. You're going to need a higher credit score. Both people, assuming both people are going to be on the mortgage, both people are going to need really strong financials. The lender might require a larger down payment.
NerdWallet's Smart Money Podcast
Cash or Mortgage? Navigating Home Equity and Title Agency Shopping
So, you know, having cash on hand from accessing equity could definitely help with that. And, you know, because they'll already own the first home, right, that they're keeping, that home, which also might now have two mortgages on it potentially, right, or one very large mortgage if they do a cash out refinance, you're now carrying a lot of debt.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So in most parts of the country, it is very much still a seller's market. And, you know, realistically, in that kind of market, making a larger down payment could potentially help set you apart from other buyers, especially if you're competing with cash buyers.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Even if the seller is looking at two offers that are offering the same price for the home, sometimes seeing a larger down payment can feel like more money to them. Just seeing that number feels a lot better. They feel more confident. It can also send the message that you're making a serious offer.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
But especially for first-timers, it's important to remember that you are not required to make a 20% down payment. Last year in 2024, according to the National Association of Realtors, the median down payment for first-time home buyers was 9%.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
generally a substantial amount, right? Even if you were looking at a $100,000 home, which really doesn't exist at this point, but even if you were, that would be saving up $20,000. That's a lot of money to set aside.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So the idea that you need that size of a down payment, it just comes from conventional loan requirements that you need a down payment of at least 20% to avoid private mortgage insurance. So you can make a lower down payment. So you'll need to pay private mortgage insurance until you've got at least 20% equity in the home.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
And this is to help assure the lender that they aren't taking on too much risk. So mortgage insurance, it's not nothing, but I also want to emphasize it's not the end of the world, okay? So mortgage insurance is going to vary between about 0.5% to 1.5% of the amount of your mortgage. So not of the price of the home, but the amount that you actually borrow.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So you'll be at the lower end of that, that 0.5%, if you have a higher credit score. On a $350,000 mortgage with a 10% down payment, that would be like $120 at that 0.5% to about $400 at that 1.5% per month. And again, with private mortgage insurance, when you have enough equity, you can cancel it.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
In my experience, so back when I bought my home because I was a pandemic home buyer myself, I got really hung up on avoiding mortgage insurance and I actually did make a 20% down payment.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
And in retrospect, that was something that I actually came to really regret because I could have made a smaller down payment and had my budget stretch a bit further, or I could have made a smaller down payment and just had more cash on hand for improvements, which I really needed because the home I bought was a fixer-upper.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
This is a calculator where you just put in your info, so your income, your monthly debts, other expenses, along with the basics of the home loan that you're looking to get. So an estimated down payment amount, estimated interest rate. So we have a great calculator on nerdwallet.com, the how much house can I afford calculator.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
That gives you a detailed breakdown showing you whether what you've entered would be affordable or whether it would stretch your budget a bit. And you can find a link to that in our show notes.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
You can also use this kind of calculator to see how your monthly mortgage payment and your home buying budget would change if you made a higher or a lower down payment, if you paid off some of your debt, or if you otherwise sort of changed your financial picture a little bit.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Really, whether you want to make a larger or smaller down payment depends on you. Again, it does also depend on the type of loan that you're choosing because that will decide what the bare minimum is. But there are pros and cons to whether you want to pay that bare minimum or if you want to save up and make a larger down payment.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So like we mentioned a minute ago, a higher down payment can help you stand out as a buyer. And it will also give you more equity in the home more quickly. So even if you are in a position where you're paying private mortgage insurance, you're not paying for it for as long. But on the other hand, you could be saving for years to put away enough cash to make that big down payment.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
On the other hand, a lower down payment could help you become a homeowner much more quickly. And it could leave you with more cash on hand for other homeownership needs. But you're going to need to have a higher credit score to qualify for the lowest down payment loan options. And you'll also have minimal home equity.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So in a situation where home values were to decline, you could potentially end up owing more on the mortgage than the home is actually worth.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
You know, down payment is big, but it is not everything. There is a lot to plan for. So as a buyer, you're going to pay closing costs in order to close the sale of the home and I am sorry to tell you there are kind of a lot of them. To give you the basics of what you can expect to pay for, you're going to pay an origination fee.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So it's basically a fee the mortgage lender is charging you for giving you the loan. You're going to pay for an appraisal that the lender orders. You might pay for the title search and title insurance. If you want any home inspections, which generally you should want at least a basic home inspection, you're going to pay for those.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Another thing, you might actually end up paying your real estate agent. This is relatively new for home buyers, and this was a big component of a lawsuit in 2024 against the National Association of Realtors. So previously, home sellers generally paid the buyer's agent's commission as well as paying their own agent. Now, that's something you can negotiate the seller.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Admittedly, this is something you could have negotiated with the seller before, but again, because of this lawsuit, this is much more front and center. If you are in a situation where you are paying for your own agent, that's potentially adding a big line item cost to your budget, like as much as 3% of the purchase price.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Overall, closing costs generally run between 2% to 6% of the home's price, and that's again before we get into agent commissions. Don't get completely scared off by the agent commission stuff. This is really just a good to know that it's something that could come up.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Also, because of these changes, a buyer's agent is more likely to want you to sign something when they initially start showing you homes. That didn't used to be the case. It used to be much more. You could call someone, they'd show you some things, you'd eventually get around to signing something before you actually closed on the home.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Now, real estate agents are more likely to want buyers to sign something upfront.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Yep, you will definitely want to budget for moving, which can get pricey really quickly. Home repairs are another one. You know, I talked about buying a fixer-upper, but even if you're buying a new construction home, there are always things that are going to come up. And so you don't want to have drained your bank account for that initial home purchase.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Another thing to bear in mind is that when you've just bought a home, you're pretty likely to be very spendy. If you've never been to a Home Depot or a Lowe's, you are probably about to get very familiar with your Home Depot, right? You are going to feel like Home Depot is an extension of you.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So one thing that I did after I bought a home, and this helped me out a lot, during the time that you are getting ready to buy the home, you know, you're working on building your credit, you're trying not to touch your credit, you know, let's keep it as high as we can. Let's keep this score pristine. Once the sale has closed, you can put that credit score to work. And so I absolutely did.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
I applied for the best credit card I could get that had the longest introductory 0% APR period. And that was incredibly helpful because I was able to pay off really big purchases I was making for my home, like furniture over time without paying interest on them.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
That is very relatable. And I don't blame anybody for feeling that way. You know, home prices are high in the U.S. They've been high for decades.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
a while and so i think something that's really important is to have a good idea of how much you would actually need know that there are low down payment options out there if you're a qualified borrower you can put down as little as three percent on a conventional loan something else that i always like to plug because i feel like not enough people know about them are first-time homebuyer assistance programs so these are available in every single state through your state's housing finance agency
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
We actually have a page on nerdwallet.com that has tons of state-specific info. We can put a link to that in the show notes. So these HFA programs can provide a bunch of different kinds of assistance, but one you'll see pretty frequently is down payment assistance. Sometimes this is in the form of a low interest deferred loan. Other times it's grants. So that's free money to help you buy a house.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Down payment assistance is also something that you can look out for when you're comparing mortgage lenders. Lenders obviously know that this is a really tough time to be a buyer. And especially over the past year or so, we've been seeing a lot more lenders offering a down payment assistance as an incentive.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So this is going to be a pretty personal one, right? What's going to be comfortable for you is going to depend on your overall budget. That said, when you're specifically looking at qualifying for a mortgage, you are going to want to examine your debt-to-income ratio. Debt-to-income or DTI is pretty much what it sounds like.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
It's your monthly debt payments relative to your gross or pre-tax monthly income. Lenders will look at your front-end DTI, which is just what the mortgage would cost versus your gross income, as well as the back-end DTI, which is inclusive of the mortgage and your other debts. And what's a good DTI to have?
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
A good back-end DTI, so again, that's the mortgage and your other debts you're paying, would be like 36% or lower. A good front-end DTI, just the mortgage versus your gross income, 28%. That said, those numbers are not realistic for a lot of buyers simply because home prices are so high.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Something else to think about when you are running these numbers is to bear in mind that DTI only looks at debts. So on one hand, yes, that's what the mortgage lender is going to use to figure things out. But because it's only looking at your debt, that might not reflect a number that's really comfortable for you.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
For example, that includes your car payment, but it doesn't include what you spend on car insurance and gas. You know, importantly for many folks, it doesn't include payments like childcare costs, and that can be a really big chunk of your budget, but it's not showing up because it's not a debt.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So when you are figuring out what would be a doable monthly payment for you, you're probably going to want to consider some of those other necessary monthly costs or payments that aren't technically debt. Again, that's something you can do with NerdWallet's Home Affordability Calculator, just to plug that one more time.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Something that myself and the people on my team are constantly telling people is that it's about when is the right time for you to buy, not when is the right market. So if you are not ready to buy right now, do not try to force yourself to hurry up just because you think the market might change. But by the same token, if you're ready to buy now, by all means, go for it.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
No one knows exactly what's going to happen. I will say in general, experts are expecting some change, but no one is really forecasting like a huge change in the market. Mortgage rates have been, you know, in the 6% range for a while, between like 6, 6.5%. We probably will see modest movement, but again, no one's really anticipating a major drop or a major spike.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
I've talked about prices a couple times. I will say the rapid price increases that we saw a few years back have kind of leveled off. Overall, prices are still rising, but the year-over-year increases that we're seeing have become much more modest. And in some markets, especially the priciest ones, we've actually seen some little, little price drops.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So it is still a seller's market, but it is at least becoming a little less intense for buyers. Because again, mortgage rates have held relatively steady and people are adjusting to this new reality of, you know, this is where interest rates are going to be.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
That means your homeowners who were intent on staying put because they had a really good, nice low interest rate are kind of realizing that if they ever want to move, they're going to have to give up that rate. So that rate lock-in easing up a bit is creating a little more inventory. That is good news for buyers because it's more to choose from.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
And that is what could finally create some potential for slightly lower prices.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Well, absolutely. You are in luck because I bought a house during the pandemic and I actually sold it this past summer. So I have a lot of firsthand nerdy advice about home selling. Definitely hit me up if you have any follow-up questions because I'm always happy to come back. One, I cannot underscore enough how strongly I would urge hiring a real estate agent.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
You can go for sale by owner, aka Fizbo, but it's a really tough route. Logistically, honestly, I cannot imagine if I had had to do it on my own, answering buyer agent questions, managing showings, all the stuff that my agent did for me, just yikes. That is so not something that I was about to do.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Now, I was in a relatively good position because I just loved the agent that I'd bought the house with. And so I reached out to her again when I was considering selling. That made, obviously, my agent search really simple. But overall, I felt like it was definitely worth the money. She gave me really good advice in terms of what to do to get the home ready for sale, how to price it.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Really, everything was very hands-off for me once the house was staged. And I was very grateful for that because by that point, I had moved out. I was really busy. I was setting up another place. And I could not have done that without my agent.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So commissions are really the largest cost when you are a home seller. There are other costs like transfer fees, document fees, stuff like that that you can't get around. But the commissions are the largest line item that you're going to have. And if you were to do for sale by owner, obviously then you're not paying a seller's agent's commission.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So the biggest thing to know about commissions, and we've already touched on this a little bit, but the biggest thing to know is that they are negotiable. A key change from last year's NAR lawsuit that people don't talk about as much is that commissions are no longer part of the listing information.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So it used to be that if a buyer's agent was looking at home listings, they would see how much they were going to be compensated. for that sale. They would see what the commission was going to be. This was never something that consumers were seeing. So they no longer have that information. They're not seeing how much they'll be paid. And so that's something that can be negotiated with each agent.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
As the seller, you can negotiate how much you're willing to pay them. You can also negotiate how much you'd be willing to pay a buyer's agent. Now, a really big part of that suit is that it is sort of no longer automatic that a seller will pay for the buyer's agent. That said, a lot of buyers are probably going to try to see if you will pay for their agent because that's been customary in the U.S.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
for such a long time. Like, this was never actually, you know, a rule anywhere that the seller had to pay their own agent and the buyer's agent. It never was a requirement. Now it's formally not a requirement.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
What we have seen anecdotally is that a lot of buyers are very much still trying to see if they can get the sellers to pay their agent commissions, just because as we discussed, when you're a home buyer, you already have a ton of costs. So whether you would get sucked up into that is really going to depend on your market.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So if you're in a hot market, you've got plenty of buyers or like you've got two strong offers that you can play off of each other, you could probably negotiate like, yeah, you know, I'll pay for my agent, but I'm not going to pay for your agent. Thank you very much.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
So I'm going to start pretty general and then we can zoom in a bit more. There are a couple of initial steps the listeners should take. And we can, of course, talk more about what the housing market is like in a minute. So since they are focusing on down payment, first up is knowing just what kind of home loan they intend to use, because that helps determine what down payment you'll need.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
Different types of mortgages have different down payment requirements, and these aren't given as dollar amounts. This is a percentage of the home's price. So conventional loans, which are what the vast majority of homebuyers use, can have down payments that are as low as 3% of the purchase price.
NerdWallet's Smart Money Podcast
From Broker to Budget: How to Buy or Sell a Home in 2025
There are also FHA loans, and these are often popular with first-time homebuyers because they have less strict qualifications. Those can have down payments as low as 3.5%. It's going to vary by credit score, though. For buyers who have a military connection and are eligible for a VA loan, or if you're buying in a rural area and could use a USDA loan, those loans don't require a down payment at all.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
So with that hypothetical $300,000 refi that I threw out there, the borrower is saving $250 a month, let's say. If we took that sum with closing costs of $6,000 to $18,000, the borrower on the low end would see savings in about two years. And on the high end, it would take them like six years before they were really seeing savings from that refi.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
It can get a little hairy if you want help doing the math. NerdWallet has a free mortgage refinance calculator that we'll link to in today's show notes. And that allows you to see what your costs would be at different interest rates.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
Sure, with a rate and term refinance, it's all about getting a lower interest rate, right? So you wanna be as strong a candidate as you possibly can on that refinance application. It's pretty similar actually to when you were preparing to buy a home, working on your credit score, paying down high interest debt, not taking out new lines of credit, big expenses, stuff like that.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
You also want to be sure you have enough home equity. Lenders usually want you to have 20% equity before you refinance. And now I'm realizing I should define home equity first. So equity is the amount of your home that you own outright. So that's your home's current value minus what you still owe on the mortgage. Either side of that balance can help you gain equity.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
So the home's value going up adds to your equity. Also, you paying down your mortgage's principal adds to your equity.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
Like I mentioned before, when people say refinance, just in general, they usually are talking about a rate and term refinance. Another common type of refinance is a cash out refinance. With a cash out refi, you are getting a new interest rate, you are changing the loan's term, but you are also changing the loan amount.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
So with a cash out, you borrow a larger amount than what's currently owed on your mortgage. Then at closing, you receive the difference between that larger sum and your current balance cash. But because you've now got a larger loan amount, even if you lower your interest rate with the refi, your monthly principal and interest payment might be about the same or potentially higher.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
Any kind of mortgage can be refinanced, though if you're refinancing a government-backed loan, like a VA loan or an FHA loan, you might see other refi types available to you, like the FHA Streamline or the VA EARL, which is I-R-R-L. These are still rate and term refinances, but they have slightly different requirements.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
With any of these, again, the key requirements are that you're a strong candidate and you have sufficient home equity. One thing that's worth mentioning is that sometimes a lender will say, hey, you know what? We can skip the appraisal and save you some money.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
But if you're living in an area where prices just keep rising, you probably want to get that appraisal instead of the lender going off of, say, what you paid for the home. The appraisal is how the lender verifies your home's current value, and so if your home's value has gone up since you bought it, you might have significantly more equity than you realized.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
That's also really important because if you have a conventional loan and you've been paying for private mortgage insurance, refinancing could potentially kill two birds with one stone if your home has appreciated enough in value that you not only qualify for the refinance, but you also have enough equity to cancel your PMI, and you've got the appraisal backing up that valuation.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
Step one, start researching lenders. You do not have to work with the same lender that you bought the house with. You don't have to work with the lender that services your loan. Same as with when you bought a house, different lenders are going to offer different interest rates. And to get the best deal at NerdWallet, we always recommend getting rate quotes from at least three different lenders.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
The mortgage nerds on my team and me have reviewed more than 50 mortgage lenders on nerdwallet.com if you're looking for a place to start. We also have lender roundups that give you lists of some of our top picks in different categories, like refinancing or cash out refi.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
You might also look for lenders that offer more unique refinancing products, so things that go beyond your basic cash out or rate and term. Something that I've always found really interesting is that there are a few lenders out there that let you choose your term.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
So rather than starting over with a full 30 year loan, or maybe really fast forwarding and dropping down to a 15 year term, you could be like, okay, so I have 28 years left on my original mortgage, and I want to refinance it with a 28 year loan. Now, why would you do that? Going all the way out to a new 30 year loan is going to get you the lowest monthly payments.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
But because it's spread out over the most time, you're also going to pay the most interest overall.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
you are paying those costs at some point. You're maybe just not paying them out front. A lot of times it's going to be built into the interest rate that you're being offered. Even though you aren't having that big outlay of cash right then and there, you're going to be paying a higher interest rate over time.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
And so the amount that that is then costing you over the life of the loan might be higher than those closing costs were ever going to be. So this is another reason it's really smart to shop around. The different rate and fee combinations that you're offered are going to change up that refinance math and you want to see what works best for you.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
Let's just back up a couple steps. And for our listeners who are like, what was that again? We'll just start with simply, what is a HELOC? HELOC is an acronym for Home Equity Line of Credit. And it's a type of second mortgage that allows you to borrow as needed against your equity. Since it's a second mortgage, you're not changing anything about your primary mortgage.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
So that's a very big difference from a refi, right? So if you're someone who has a really low mortgage rate and you want to borrow a large amount, that's a pretty big plus. If you had a higher rate and you now have the opportunity to lower it, on the other hand, you might go with a cash out refi and that would accomplish the same goal.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
HELOCs give you a credit limit that you can borrow up to and you sort of use it like your credit card. You borrow what you need and you pay it off as you go. There's an initial portion of the HELOC when you're actively withdrawing money. And sometimes during that, you only need to make interest payments.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
But if you can pay down principal, that'll help make repayment less of a shock when you transition to the repayment part of the HELOC. So usually HELOCs have a 10-year draw period where you're taking out money and then a 20-year repayment period where all you're doing is paying it off.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
HELOCs usually have a variable rate. HELOC interest rates are indexed to the primary, and that moves up and down with prevailing interest rates. Over the last couple of years, because interest rates were rising, some mortgage lenders started offering fixed rate HELOCs just to try to make them a little bit more appealing.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
But something we've also seen, and I think this is what the listener is referring to, is lenders offering their existing HELOC customers the option to temporarily lock the rate on all or part of the balance of their adjustable rate HELOCs. And a rate lock is pretty much exactly what it sounds like.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
You're locking down your interest rate so that even if prevailing rates are changing, your interest rate does not. And that is really helpful if you have a variable rate loan in a rising rates environment.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
But there are pros and cons to each one. If you are really set on a fixed rate loan and you're not finding a fixed rate HELOC that works for you, you could take out a home equity loan. And those are just one lump sum when the loan is taken out. It's also a second mortgage, so it doesn't affect your primary loan. The interest rate doesn't change.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
But you kind of need to know exactly how much money you want because you're getting it all at once. And that also means that you're paying all of the interest on it all at once from day one of that loan.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
With a HELOC, because you're borrowing it progressively in stages and you're paying interest on what you have borrowed, especially if you aren't sure how much something's going to cost, you know, maybe you're doing a complex renovation or something like that, where you're You've got estimates from a bunch of contractors, but will they or won't they end up where you're hoping they will?
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
So for some people, even if the interest rate is variable, the flexibility of a HELOC makes it preferable to a home equity loan. It really depends on you.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
Okay, so we're assuming you've got a variable rate HELOC, which again, most people do. A rate lock on that HELOC will let you take some of your balance and temporarily turn it into a fixed rate loan. Usually we're talking $1,000 or more being locked at a fixed rate for 12 months or longer. So again, if interest rates are rising, that can be really helpful, right?
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
Because you're making your HELOC payments more predictable and you're potentially paying a lower interest rate than where interest rates are going. On the other hand, if rates fall after you lock, you are stuck with that higher interest rate. It really depends on what's going on.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
In a falling rates environment, letting a variable rate HELOC just do its thing might make more sense because it will go down on its own. But if rates are going up again like they were over the last few years, a HELOC rate is going to keep adjusting upward, and so a rate lock might be really appealing.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
A HELOC is a line of credit. So very much like a credit card, you can borrow up to a limit, but you don't have to borrow a certain amount. When you pay down your HELOC, you're paying down the line of credit, and potentially you could pay it down until you have a balance of zero. But that doesn't mean you're closing it. right?
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
So if you're still in the draw period and you wanted to borrow more, you could. Paying off the HELOC, on the other hand, would be paying the balance to zero in order to close the account. That could happen because you've got enough money to get rid of the HELOC and you just want to be done with it.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
A HELOC payoff will also occur if you sell your home, so the sale will trigger the HELOC being due and it'll get paid off out of the proceeds of the sale.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
All of this stuff comes down to math, right? But it's also really personal. You might look at all the numbers for a refinance, for example, and see that you won't break even for a while. And maybe you aren't super sure that you'll even stay in the home for that long.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
But if the monthly savings would make a really big difference to just your budget, your regular cash flow, you might decide the refi is worth it. We don't always have to look at the numbers as though we're economists or doing a math problem. Bring your own personal context to it because it's your life and your goals.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
Sure. This listener sounds like they're interested in getting a lower interest rate and saving money. So we are going to talk about rate and term refinances. When people just say mortgage refinance as a general term, they're usually actually referring to a rate and term refinance.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
So with a rate and term refi, you're getting a new mortgage that's for the same loan balance, but with a different interest rate and a new term. So that means the length of time that the loan is going to last.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
Well, you will definitely sometimes hear different rules for refinancing getting tossed around. So people will say, oh, if you can get an interest rate that's one percentage point lower or two percentage points lower, then you should definitely refinance that kind of thing. But really, as we very often say here at NerdWallet, it's about whether the math makes sense for you.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
So you're comparing what you're paying each month at your current interest rate to what you would pay at a lower rate. Potentially, if you're in a situation where that extra cash on hand would make a really big difference to you, which it could if it's a relatively small interest rate difference on a large loan amount, for example.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
you might decide that it's worth refinancing to go down a fraction of a percentage point. Now, the but here, which this listener kind of already alluded to, is that refinancing is not free. You'll pay closing costs. They won't be as much as when you bought the home because you're not making a down payment, but they aren't nothing.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
It's usually 2% to 6% of the loan amount, so the amount of your mortgage that's remaining and that's being refinanced. You'll pay a new origination fee. The home generally needs to be appraised, so you're getting all those kinds of costs. If you had a $300,000 loan balance, refinancing it would cost between $6,000 and $18,000.
NerdWallet's Smart Money Podcast
Smart Mortgage Strategies: From Refinancing to HELOC
That's right. So even though you're lowering your interest rate right away, you're not technically saving money until you hit your breakeven point. And that's when the amount that you've saved from refinancing exceeds the amount that you spent to do the refi. To find the breakeven point, you just divide the closing cost amount by the monthly savings.