Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:
Craft your holiday shopping plan with Black Friday insights, then understand options for buying a home in today’s market.
This Week in Your Money: Unlock the secrets of savvy shopping by learning about the biggest sales events of the year. Hosts Sean Pyles and Sara Rathner discuss the holiday shopping season with Personal Finance Nerd Tommy Tindall, who talks about the value of shopping on Black Friday versus other annual sales events, the best days of the season to find deals in certain categories like big ticket electronics and winter clothing, and helpful tips for how to budget for your holiday shopping list.
Today’s Money Question: Home and Mortgage Nerd Kate Wood joins Sean and Sara to answer a listener’s question about whether to purchase a home now or wait and see if interest rates go down. They discuss the current state of interest rates, the refinancing process, interest rate buydowns, adjustable rate mortgages, and how state and local programs can help first-time homebuyers. They also explore different types of homes such as condos or townhouses on their way to helping first-time buyers understand their options for making homeownership an affordable dream.
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This transcript was generated from podcast audio using an AI tool.
Hey, Sara, what’s the best Black Friday purchase you ever made?
Not to be basic, but I frigging love my Instant Pot. That was the hot item to buy back in, what? 2019?
I swear, I use that thing weekly. Last night I made chicken shawarma rice bowls for dinner.
And I am very excited for the leftovers tonight. What about you?
For me, it’s got to be the UGG minis that I picked up last year. I don’t care what anyone thinks, they are so dang cozy and I wear them all winter long.
Well, it was 30 degrees where I live when I got up this morning, and I have a cold, so honestly, they sound delightful. I would love a pair.
Welcome to NerdWallet’s Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius Nerds. I’m Sean Pyles.
And I’m Sara Rathner. Listeners, you know the drill. You’ve got money questions, and we’ve got Nerdy answers, so send your questions our way.
You can email a voice memo of your question to [email protected] or leave a voicemail on the Nerd Hotline at (901) 730-6373. That’s (901) 730-NERD. You can also text your questions to the Nerd Hotline or write an email to [email protected].
This episode Sara and I answer a listener’s question about whether to jump into the housing market now or wait until interest rates come down, whenever that is.
But first, it’s Black Friday, the best day of the year, maybe? We’re talking with NerdWallet shopping writer extraordinaire Tommy Tindall about what you need to know about the original shopping holiday in 2023, including whether it’s even relevant anymore, and how to find the best deals if you are planning on shopping. Tommy, welcome back to Smart Money.
Hey, thanks, glad to be here. Let’s talk shopping.
So, Tommy, given all of the shopping holidays that the Amazons and Targets and Best Buys of the world keep making up on a seemingly monthly basis, are there actually better deals to be found on Black Friday or not so much?
I mean, I’d say yes, to a certain extent, at least deals on par. I mean, let’s be real. Like you said, Black Friday is the OG of big sale holidays. I mean you can find deals on everything. It’s more than one day. I think some deals are kicking off the second week of November, but we’re talking about really kind of that weekend that spans Thanksgiving, Black Friday, Cyber Monday, with potentially better buys on Cyber Monday, which you may be surprised to know that’s the biggest shopping day of the year.
And I think what we’ve seen in our coverage is a shift towards three major sale events on the annual calendar. Two of which, as you mentioned, Amazon sort of made these things up, Prime Day in July, then you’ve got the early October sales, Prime Big Deal Days Amazon called it. Other retailers get involved, so it makes it a big thing. And then third, there’s the tried and true sales around Thanksgiving. And we’ve learned this by looking at a handful of products over the past couple of years looking at price changes during every major sale holiday. And what it’s shown us really is the old school sales, like Labor Day or President’s Day, those are good, but the big three tend to be better.
That is interesting, especially the Cyber Monday part. I wouldn’t have guessed that.
It makes sense to me because I do not want to leave my house to shop.
Yeah, we’ve definitely seen a trend towards more online shopping. And Cyber Monday just sort of leads the way, at least on what we’ve tracked, with better deals. It’s interesting because Black Friday gets a lot of the hype, I think.
Well, speaking of pricing, what items are folks most likely to see the best deals on around Black Friday?
Well, for Black Friday, and I’m probably not going to shock anybody with this one, but it has always been and probably will continue to be all about TVs and other big ticket electronics like Soundbars for your TVs, Bluetooth speakers, wireless headphones, everything like that. I think an interesting one is small kitchen appliances. What we’ve seen, those are always hot, like the Instant Pots and air fryers, but especially on Cyber Monday, from our research. The deals on Cyber Monday could be better than they were during recent October sales. And this one’s kind of a twist. One retail analyst I spoke with said winter clothing could be better priced around Black Friday than it normally is due to an unseasonably warm fall, so retailers may fear that they’ll have too much stock and move sales up. And this is different because prices on coats and things like that usually are better in December.
Well, what is better to skip during Black Friday?
I mean, on the OG of shopping holidays, I’d say nothing is off limits, but here I think are a few strategies that I’d go with based on people I’ve spoken with this year. Skip toys, at first. I mean it’s hard to skip toys probably if you have kids to buy for, but if you wait for better markdowns in December when retailers kind of are starting to sweat, thinking they’re going to have too much, that could be a good strategy. Holiday decorations. And I think this one is an interesting one, sporting goods, and this is at least according to Adobe Analytics. They have a shopping report that comes out every year. I follow that. The best deals on sporting goods and fitness equipment will come December 4th and you know they had to crunch a lot of numbers to get that specific on that one.
So with all of these deals rolling continuously, how can people make sure they’re actually getting the best price on something and not getting FOMO when it goes down to a lower price maybe a few days after they buy it?
Yeah, I think it’s like it’s all about just gathering your intel. If you have the internet, which I’m assuming most of us do, do a little research on price, get a good sense for what a low price is versus the typical price. And if it gets to that price around that time, I’d say buy it if you’re comfortable with it. And you can look at camelcamelcamel.com. That’s a price tracking tool for Amazon to track the history. So you can look at prices from a couple years back and really get a sense, see if inflation has affected the price. There’s also coupon finders you can install on your browser that will help you track down coupon codes automatically. I mean, the internet is a vast place of deals, so it’s hard to know everything out there, so automate when you can.
So what about the important part of these purchases? Actually funding them. What Nerdy tips do you have for our listeners? How are they going to pay for all this stuff?
Yeah, that’s always the kicker, right? Well, I think ideally you’re going to want to pay for these holiday purchases with the money that you have in the bank or in your pocket. And I’d say, yes, we know most people do use credit cards, and do that for the points, but make sure you pay that card off every month if you can. And this is according to NerdWallet’s recent holiday shopping report. So 74% of shoppers plan to buy gifts with a credit card, so not too surprising. And they plan to charge an average of $680 on holiday shopping.
Which I hope I get away with a lot less than that. Sounds like a lot to me. But we know that inflation in areas like food and gas, interest rates, that’s caused people to tighten budgets, so many people will have to cut back.
And I would say for Christmas shopping in particular, and holiday giving, I’m kind of a big proponent of scaling back and having the talk, quote unquote, with family and friends like, “How about we scale back this year? Why don’t we take the gift giving down a notch? Maybe set a $50 limit for your spouse or something? Let’s get one gift.” So my wife is not in the room, but I can totally feel her rolling her eyes at me. So it doesn’t always work, but it’s an idea.
I mean, you could also do a white elephant gift exchange, so you’re only buying one gift instead of buying gifts for each and every person on your list. And that way you can scale back as well. And maybe you could even afford to get one nicer gift rather than a bunch of smaller gifts.
Absolutely. Pass the parcel, for my Bluey fans out there.
Yeah, growing up we had a kind of non-traditional Christmas where my parents didn’t have me believing in Santa Claus because they wanted the credit for the gifts they were giving me. But they told me from a young age, “You have $100.00 to choose from. You can get $100.00 worth of things. So look at all of the Pokemon toys that you might ever want and get to that amount.” And that actually helped me budget from a young age and it kept the holidays affordable for my parents too. So that’s something that parents might want to consider as well, or even people just shopping for their friends too.
Yeah, setting a dollar limit for your adult friends is also really great, but I kind of like the idea of involving a kid in an age appropriate way and just helping them to understand, “Well, we have this amount of money. Here’s how far it can get.” And giving the kids some agency about, “Do I want 10 small gifts or do I want one or two bigger gifts?”
Yeah. I love that idea. Credit to your parents, Sean. That’s a great strategy to use on a young kid.
Yeah, I’ll say at the time I resented it because I always wanted more toys, but now I’m thankful for it.
Well, Tommy, we know that every year consumers go into debt to buy holiday gifts, and they’re especially going into credit card debt, which can be quite costly. And beyond that, products like buy now, pay later loans have been growing in popularity in recent years. What do you think people who are going to use debt around the holidays should keep in mind?
Yeah, and I’d say you’re right about the debt. That’s a theme that we’re seeing in surveys this year. And our NerdWallet study, 52% of Americans are incurred credit card debt last holiday season, and nearly a third still have unpaid balances. So that’s difficult. And I think interest and fees totally negate your discount, so shopping for big sales if you’re going to have to pay credit card interest could be kind of worthless.
And then now, buy now, pay later is growing in popularity. That holiday shopping forecast from Adobe I mentioned, they predict big growth, adding up to 17 billion around the holiday season. And I’d say buy now, pay later. I think it’s okay. It’s sort of like the modern layaway, as one source I spoke to put it, and I like it as a way to spread payments on a big purchase. I mean, when I was a kid, the only way that I could get a BMX bike when I was like 12 years old was for my mom to put it on layaway. But the difference there was I didn’t get the bike until we went to the bike shop and finished our payments. So I think that sort of speaks to some of the drawbacks with buy now, pay later. One, you can have late fees if you don’t pay, and if you already have the item, maybe it’s not as essential for your thinking to pay. There’s no points or perks like using a credit card and you’re just taking on more debt, especially if you do multiple installment plans at once.
Right. And stacking the buy now, pay later loans can be really risky because they can be hard to keep track of too, and you can end up taking on more debt than you can really afford.
Yeah, I’d say stacking those is a big concern because it’s really easy to do online. So you’ve got to read the fine print too to see what the consequences are for missing a payment. By the way, if you are already carrying credit card debt month to month, we wouldn’t suggest buy now, pay later. Wouldn’t necessarily suggest spending more on the credit cards either. In that case it’s best to use cash or debit or even scale back. So you want to let your budget guide what you can do.
All right. Well, Tommy, do you have any final words of wisdom for we already weary holiday shoppers?
Yeah, I think just a reminder that tradition and pressure around this time of year can make shopping such an emotional experience and it is so convenient. A couple of Black Fridays ago I ordered a television while I was in line at a pizza shop. I had researched it, I knew what I wanted, but just speaks to how easy it is just to spend a lot of money.
And I think for me, our minds, they tell us the stuff we buy, it’s going to make us happy, it’s going to make others happy. We do it to keep up with the Jones’ during the holiday season. And I think something that I really work on is a mindset shift. Remind myself that most things I buy, they haven’t made me much happier, and they often detract from my saving. So I would say there’s really no shame in scaling back, bowing out. That pressure is very real this time of year and you can give yourself permission to take the pressure off. And if all else fails, just try the talk with your family and friends.
Tommy, thank you so much for coming on and talking with us.
Yeah, thanks for having me. It was fun.
All right, well, listener, before we move on, a reminder that we are running another book giveaway sweepstakes ahead of our next Nerdy Book Club episode. This time around we are speaking with Farnoosh Torabi, author of the book, A Healthy State of Panic, which is about learning to use your fear as a superpower and to make better decisions when it comes to your finances, career, and life.
To enter for a chance to win our book giveaway, send an email to [email protected] with the subject “book sweepstakes” during the sweepstakes period. Entries must be received by 11:59 pm. Pacific Time on November 29th. Include the following information: your first and last name, email address, zip code, and phone number. For more information, please visit our official sweepstakes rules page.
All right, this episode’s Money Question is up next, stay with us.
This episode’s Money Question comes from Nate, who left us a voicemail. Here it is.
Hi, this is Nate in Seattle. My question is, with the way the house market is today and interest rates are today soaring around 8%, is it even realistic to be able to afford a house? Or is it best to ride this one out? The reason I ask is my wife and I have spent a good amount of time saving up a down payment for a house and we satisfied our FHA requirement of 3.5%, but when we plug all the information in, the mortgage payment looks to be between $3,700 and $4,400 for a house. Given that we’re based in the Seattle area, it’s just everything in general is expensive, but when you change that interest percentage, it looks a lot more doable. So I guess my main question is do we just hold out for this interest rate storm to subside? Or is there some other tip we should consider when we are trying to acquire our first house? Thanks. Bye.
To help us answer Nate’s question on this episode of the podcast, we’re joined by mortgage Nerd Kate Wood. Welcome, Kate.
Thanks so much for having me.
Hey, Kate, it’s great to have you on. It’s been a little while because a lot of folks aren’t buying houses and aren’t sending us their mortgage questions. I wonder why.
I mean there are so many issues with the housing market in the US right now that could explain why a lot more listeners are sitting on the sidelines or are sticking where they are. Home prices are incredibly high. Even markets that saw a little bit of softening have gone right back up. This summer the median price of an existing home crossed the $400,000 mark and that stayed there. Now depending where you live, that may or may not sound like a good deal, but looking at it as sort of like an overall US figure, for a $400,000 home, a household that is earning the median US income cannot afford that home.
So can you talk about some of the underlying reasons for the housing affordability crisis?
There are several different things going on contributing to affordability challenges right now. One that has been an issue for quite a while is just the inventory of existing homes. That was low before the pandemic, but when the housing market really heated up and there was a lot of competition for properties, a lot of people coming into the market, pretty much everything that was available sold really quickly and now we’re kind of picking over the bones of what’s left. There are just not that many homes available, very few sellers putting their homes on the market. Most homes are still selling really quickly, still receiving multiple offers, even though a lot of buyers have dropped out of the market.
Right, a lot of people have those 3%, 2%, interest rates that they got in the early years of the pandemic and they don’t want to give those up.
Absolutely. And also, if you’re someone who refinanced to that rate, you’ve lived in the house longer, you might maybe be interested in moving. But for a lot of people who bought during that time, you’ve only lived in that house for two, three years, you’re probably not necessarily ready to move yet. In general, that sort of tenure of homeowners is going up. People are living in the same place longer. Interest rates, like Sean mentioned, are presenting a really big challenge for affordability. People who have low interest rates are reluctant to part with them, so we’re seeing fewer people putting homes on the market. But with how rapidly interest rates have run up on mortgages, home buyers are constantly having to redo their budgets, fix their math, make sure they’re accounting for what the interest rate on their mortgage is going to be. Just this year we’ve seen the interest rate on a 30 year fixed rate mortgage rise almost two full percentage points, from a low of around 6% in February to almost 8% by the end of October.
And as we’ll get into in a little bit, we’ll see that a difference in 2% can mean a lot in the difference in your monthly payment and the total amount of interest you’ll pay over the course of a 30 year mortgage.
So, Kate, you mentioned the math that people are having to do to figure out their situation, essentially. And a lot of people struggle to understand what kind of housing payment they can realistically afford, especially since mortgage lenders seem to be more than happy to lend you an enormous chunk of money. So can you talk us through some of the guidelines people can use to determine how much house they can afford?
There are a bunch of different ways that you can do this. A really simple one that people will often say is that if a home is roughly three times your yearly income, you can afford it. That was what I used a minute ago when I said the median price of an existing home is $400,000. Someone earning the median income probably can’t afford it. The median income in the US right now is between 70 and $75,000. But that’s a really general, very broad number.
Using a home affordability calculator, which by the way we have one on NerdWallet, can help you get a lot more specific because it will take into account variables like your location, which can change your property taxes and things like that, your current monthly debt load, how much you have saved for a down payment, and these can really help you understand everything that goes into a mortgage payment as well. So there’s your principal and interest, which is the actual cost of the loan, but then you’re also having to consider taxes, homeowner’s insurance, mortgage insurance, potentially HOA fees. There’s a lot that goes into that payment.
So it seems like it would maybe make more sense for people to look at what they can afford on a monthly basis versus this huge nebulous several hundred thousand dollars for a house.
Yes, definitely. Instead of saying, “Oh, you know what, $400,000. That sounds good. I think I can buy a $400,000 house,” and then trying to work backward from, “okay, here’s how much this house costs. Can I afford it?” If you figure out, “what would work for my monthly budget?” And then ladder that up to, “okay, if I can afford this much per month, this is the house that I could afford to buy.” That can make a lot more sense for people. And that also allows you to then when you are going to a mortgage lender and you’re talking to a loan officer, instead of them kind of coming at you with, “Oh, let’s see how much we can get you pre-approved for. Let’s kind of give you this big fat number, get you excited.” You can instead be in the driver’s seat and you can say, “You know what? This is what I want my monthly payment to be. Can you show me what you can do for me? How can we make this happen?”
It’s funny as that’s sort of the opposite of what you would do when buying a car, where you would want to talk about the out door price, as it’s called, and the total price of purchasing the car and not just thinking about it from a month to month basis because how you end up on this seven year loan spending an astronomical amount of interest to buy a car. So it’s funny that for a home you would think about it potentially in the opposite direction.
So interest rates are of course the big headline in the mortgage world right now and they’re what our listener Nate is concerned about. So I want to talk about how different interest rates can change a mortgage payment and total interest paid on a 30 year mortgage. So I used a mortgage calculator and penciled this out for a few different options here. So brace yourself. I will be talking about numbers, everyone. Feel free to grab a pencil and paper and maybe even just listen to this a couple of times because numbers are hard to grasp sometimes.
Yeah, a double espresso might also help in this moment.
Yeah. All right, so let’s pencil in how a difference in interest rates might change home affordability. And these numbers include principal, interest, taxes, and insurance. So Nate anticipates a monthly payment of around $3,700 to $4,400 and that means they’re likely in the market for a house that’s around let’s say $500,000. So with 3.5% down, a rough estimate of a monthly payment at a 6% interest rate would be around $3,800. After 30 years, that would be about $560,000 in interest paid, which sounds like a lot. It is more than the amount of the house, but it gets worse. With an 8% interest rate the payment would be about $4,500 and then after 30 years, that’s going to be about $790,000 in total interest paid. Then, with a 10% interest rate, the payment would be about $5,000 a month, and then after 30 years, that’s going to be a little over a million dollars in total interest paid, which is, again, double the amount of the house.
I would say the one thing that is if you’re going to comfort yourself about this is that remember, you get a 30 year mortgage, that sounds like a huge commitment. You’re probably thinking, “Oh my goodness, this is how old I’m going to be in 30 years.” Very few people keep the same loan for 30 years. So whether you sell or whether you refinance just because that is the loan you got and that is the rate you got, even if it’s your forever home, it doesn’t have to be your forever interest rate.
Yes. And knowing how much you would potentially have to pay in interest over the course of the original mortgage can be a good incentive to look into options to maybe refinance later on.
Yeah. So now that we know how much money can be saved with a lower interest rate, which is a substantial amount of money, let’s explore how you can get that lower rate, especially now, starting with jumping into the market banking on a refinance in the future, which I don’t know how realistic that is over the next few years, who knows? What do you think about the tactic of just holding your breath and jumping into the housing market now and hoping for some better changes later on? Are there any risks that you see to doing this?
Well, you’re going to have to be able to qualify for a loan at current interest rates and so that is going to kind of naturally limit how far you are able to stretch your budget. When you’re using a mortgage calculator, like the one on NerdWallet, it will show you, “Here’s what would be a comfortable payment for you, and then here’s if you’re going to stretch a little bit more and kind of go beyond maybe what’s generally recommended, this is what you could do.” So it is possible if you qualify with a lender to buy a house that’s somewhat beyond your means. If you believe that pressure will be temporary, you might decide it’s worth the risk. But if your budget’s going to be really stretched, if you’re going to be miserable, is being able to tell yourself, “Well, at least I own a home.” Is that genuinely going to be worth it? That’s something that you really need to decide for yourself.
You can definitely bet that eventually you’ll be able to refinance, but you need to recognize that that could be a lengthy timeline and depending on what you’ve decided in your head is the ideal interest rate, what is it that you think you want, you could be waiting for a train that is going to take a very long time to arrive.
The other thing to always bear in mind with refinancing is that refinancing is not free. Refi closing costs are usually 2 to 6% of your mortgage amount. So if you are refinancing with the specific goal of, “I want to save on the interest,” you usually are going to need to stay in the home until you’ve reached what’s called the breakeven point, and that’s where the savings of your refinance outweighs the amount that you spent on those closing costs, and so you’re at the point where you actually see a net benefit from refinancing.
And, Kate, what about interest rate buydowns? Can you explain how this tactic works and how much of a difference it might make for a would-be homeowner?
Sure. Interest rate buydowns are something that used to be pretty popular actually in the 1980s when interest rates were extremely high, much higher than what we’re seeing these days, and they’re something that’s made a comeback as rates have gone up. So with an interest rate buydown, you get a lower interest rate for the first usually one to three years of your mortgage and it’s done by prepaying interest. That sounds a lot like mortgage points. Mortgage points are also prepaid interest. The difference is that points permanently take off a little bit of your interest rate, so over the entire loan, whereas a buydown will temporarily remove significantly larger amounts.
So for example, let’s say that you’ve got an 8% mortgage rate, and you’ve got a two one buydown. That would mean that in the first year of the mortgage you would pay a 6% interest rate, so you’d be paying two percentage points less. And then in the second year you’d be paying 7%, one percentage point less. Year three and beyond, you’re looking at your full 8%. So a big catch obviously is that you need someone to pay for that interest, right? Buydowns are the most common actually with new construction. It’s something that home builders will commonly offer because home builders usually don’t want to change their sticker price on a house. If they’ve got other people who’ve bought at a certain price point, they don’t want them seeing, “Wait, you’re offering a discount to newer buyers.” And so they’ll offer an interest rate buydown as a way to be able to give a potential buyer some money back without taking that price down.
Sometimes you will see lenders offering to buy down your rate, but it’s also something that you can ask the seller for if you are negotiating. You could potentially save more money by having the seller pay for a rate buydown than by offering you a comparable discount on the home’s price.
What worries me about a buydown like this is that it is temporary. So maybe you can afford your house the first couple years when you have that lower rate, but then come year three, year four, it might not be so affordable.
Yeah. Especially when there is the potential for your homeowner’s insurance rate or your property tax rate to also go up year over year. And that can also increase the monthly cost of your mortgage if you pay those along with your mortgage payment. So that’s another thing to worry about as well.
Right. Well, I mean something to consider is that you will have to qualify for the mortgage at the full interest rate. So when you are applying for the mortgage in the first place, you’re going to have to demonstrate that you would be able to make your monthly payment at the full interest rate. If you’re in a situation where you expect that you’re going to be earning more income down the line, maybe you’re thinking, “Oh, I’m going to advance in my career.” You might say, “You know what? This is going to work for me because even when I’m getting hit with the full interest rate, I’m going to be able to afford it.”
You could potentially also say, “Okay, I can afford this entire payment now.” But in the first couple years you might also decide, “Okay, I have that money in my home buying budget. I know that I can afford this full payment at that full interest rate. But what if I take that money I’m saving and I put it into another aspect of my house?” Usually when you’re a new homeowner, there are a lot of things that you need to repair, replace, or just purchase, so that money might be helpful as money that goes right back into your home.
That’s for the overachievers out there.
Or people who bought homes with some pretty scary stuff that needs to be fixed immediately.
So, Kate, we’ve been hearing more about adjustable rate mortgages recently. In October they accounted for nearly 10% of weekly mortgage applications. Can you tell us how these work and why folks might be opting for them now?
Sure. I mean, one thing that I would qualify that with is that mortgage applications, as you would guess from what we’ve been talking about, are very low right now. We’re just not seeing very many people applying for mortgages because there aren’t that many people buying houses. So even 10% of applications is a relatively small number. Adjustable rate mortgages are actually the norm in a lot of other countries, but in the US they’re relatively uncommon because fixed rate mortgages are so robust in our mortgage market.
Adjustable rate mortgages are home loans that start off with a fixed interest rate that’s usually lower and that will last a certain number of years, and then after that period ends, the interest rate adjusts up or down along with prevailing interest rates. So you’ll sometimes see a five year ARM, a seven year ARM, something like that. The five, the seven, the three, whatever that number is, that’s usually the number of years that you’re getting that fixed lower rate.
So ARMs can be tempting when rates are high because the introductory rates do tend to be lower, and when you’re looking at loans, if you’re looking at an ARMs teaser or initial rate compared to a fixed rate loan, that can look darn good if it’s a percentage of point or two lower. But once an ARM starts adjusting, it can go up or down. When you’re applying for an adjustable rate mortgage, you’re going to agree to a bunch of guidelines about how often the loan adjusts, how much it can adjust each time, and what is the lifetime cap, what’s the highest amount that the loan could possibly adjust to? But you have to be able to pay it so long as you have that loan. One nice thing about ARMs is that if rates go down, ARMs will adjust downward on their own so you can actually get a lower interest rate without having to refinance to get it.
And that’s the hope right now, right?
That’s the dream is that you get an ARM, you start off with this low rate, and then, “Oh, my rate doesn’t have to go higher. Maybe my rate can stay where it is. Maybe my rate can even go down.” But ARMs also tend to have a floor that your rate won’t drop below, generally because even just from me talking through it, your head might be spinning, buyers do tend to avoid ARMs because they’re relatively complicated and usually buyers going into ARMs already have a plan that they’re going to sell or refinance. They kind of know they’re going to ditch the ARM before it starts adjusting, so they’re only going to stay for that three, five or seven years. They have the low intro rate. And then they’re either going to sell the home or they’re going to refinance, the hope would be, into a fixed rate loan that is at a rate that’s more amenable to them.
But then if they refinance, they would probably have to stay in that house for a number of years to hit that breakeven point that you described earlier.
Well, let’s talk about other ways that Nate could maybe make home buying more affordable. Do you have any tips for Nate or other first time home buyers in particular?
Absolutely. Something that I always push is that people who are first time home buyers should take advantage of state and city or county programs that are available. These are really helpful. They’re really underutilized. They exist in every single part of the United States, they exist in the US territories, they exist in DC, so it’s something that’s worth looking up. Eligibility guidelines vary. Usually the main thing is that you need to be in the area because they’re geared toward helping local people buy homes, so this isn’t something that you could always necessarily use to buy a home in another state or something like that. Sometimes you do need to meet income requirements as well, but these programs can help provide down payment or closing cost assistance in the form of a low interest or a no interest loan, which can be really helpful. In some cases, you may be able to get an outright grant, so that’s just free money to help you buy a home.
Yeah. I’ll add one note around the income requirements. We talked with a listener on the podcast earlier this year who is hoping to buy a house or condo in Oakland. And they made a decent amount of money and they were worried that because of that they wouldn’t qualify for any sort of local programs to help them buy this first piece of property. But given that Oakland is a fairly expensive area and there are some higher incomes in the area as well, they were able to actually qualify for a program and they just weren’t aware of it. So for Nate’s case, they’re in the Seattle area, it’s similar to Oakland in both of those aspects. I would say still look into that because you might be surprised what you qualify for.
Absolutely. Yeah, almost all of these programs are using median adjusted area income, so it’s not like they’re looking at the entire United States and saying, “This is the threshold.” They are looking at what is normal for where you live. Same with if you encounter a program that has guidelines about how much the property can cost, that is always going to be relative to the location that you are buying.
A lot of times when people think about buying a home, they think about buying a detached single family home. That’s just like what we have in our minds is, “This is what a house looks like.” But there are lots of different kinds of homes that our listener Nate and anybody else listening to this who’s in the market can consider. So how can they get creative in this regard, in a way that could maybe make home ownership more possible?
I mean, something that I try to really consistently emphasize is that if it’s got walls and a roof and it’s yours, you own a home. You do not need that American dream, detached single family home with a picket fence. You don’t need any of that. If you’ve got walls, you’ve got a roof, you own it? You are a homeowner. So if you are in a denser area like Seattle, a condo might be a more affordable option than a detached home. Something like a townhouse where you’ve got walls that are shared with other folks might be more affordable as well.
Another area that a lot of first timers don’t necessarily think to look to is new construction. There’s sometimes a bias that, “Oh, if it’s new construction, that means it’s going to be higher end or that it’s people making custom homes.” But actually new construction runs the gamut and depending on what you’re looking at in terms of, again, are you looking at detached homes, are you looking at condos, that kind of thing, you might be able to find some bargains in new construction. relative to existing homes there are actually a fair number of new construction homes on the market right now, and that’s not normally the case. Again, it just underscores how few existing homes are for sale. But again, something else worth underscoring that we mentioned earlier, builders are also more likely to offer incentives like rate buydowns. So in some cases, builders might be more willing to play ball with you than a home seller is.
And I actually bought a new home. I put down the deposit in 2020, and I closed in mid 2021, and the staggered home buying process of new construction made it a lot more affordable for me. I was able to put down a chunk of money earlier on and then I had nine or so months to save up all of my closing costs. And so that was a kind of creative option just to make home buying more feasible for me on my budget.
That’s awesome. The sort of two closing process of some construction loans. The other thing that I always recommend to people is to really think through what are your wants, what are your needs, and are there areas where you’re able to compromise or willing to compromise? And that doesn’t mean you have to give up everything that you want. It just means, “Okay, if this is my dream home, what are the things that I really genuinely do need to make it be my dream home and what are things where it’s like that would be nice to have, but I don’t have to have it?” So that could mean space, that could mean indoor space, outdoor space. It could mean your location, it could mean lots of things. But kind of anything that you’re able to do to widen your scope of potential properties or possibly get you into a lower price point could help.
I always think about if you draw a square on a piece of paper and in each corner you write space, location, amenities, and price. Pick two of those things. You’re not going to get all of them, but let’s say you’re willing to live in a smaller space at a higher price because you want a certain location, a certain set of amenities. Or you’re less tied to a certain location, you’re a bit more flexible in that regard because you want more space, so you’re willing to look in a lot of different places to get that, that sort of thing. So you’re never going to get all four corners, but if you can get two, maybe three, you’re in pretty good shape.
Yeah. Okay, so we’ve talked a lot about the current state of the housing market, maybe some creative ways to make buying a house more affordable, especially as it relates to interest rates. Now let’s get to the crux of Nate’s question. Would it be smarter to hold off on buying a house until interest rates go down? Or would buying a house now be the better call? Kate, what do you think?
Well, first off, no one can fully predict the market and that very much includes interest rates. Something I often tell people is that markets do not obey the laws of gravity, so this is not a what goes up must come down situation. Despite that, there are lots of folks who make predictions. Getting ready for this episode I looked at predictions from a range of economists at organizations that focus on the housing market and they were estimating that 30 year fixed rate mortgages might go into the 7% range, could even maybe drop to 6% by the end of 2024. That sounds pretty good if you’re looking at an 8% rate. But again, no one can predict the market. I looked back a year ago at what the same economists were predicting would be happening right now. They predicted that right now we would be in the 5% range. We are three percentage points above that. So any predictions that you’re looking at, take them with a grain of salt.
This is a little bit of a side point, but especially for Millennials, a high interest rate environment is a new thing, right? Low interest rates seem pretty normal, that kind of easy money, low cost borrowing seems pretty normal. And this can really be exacerbated if you feel like all your friends were buying houses when we were at under a 4% interest rate. But really that era was the outlier. Nate talks about waiting for this interest rate storm to subside, but from a historical perspective, what we’ve got now is fairly normal weather. This is not what I would characterize as the storm.
When in 2020 we had rates plunging to 3% and then 2%? Those were extraordinary circumstances. That happened because the Federal Reserve slashed interest rates to near zero in order to avert a major pandemic recession. At the same time, they started buying billions of dollars in mortgage backed securities and so that was allowing mortgage lenders to make loans at ultra low interest rates because they knew they would always have a buyer for those loans. Those were really extraordinary circumstances, and those aren’t circumstances that we should really necessarily want to have return.
Well, there are two things that I’m thinking about after the conversation we’ve just had and one is a piece of advice I heard early on in my personal finance career, which is that the best time to buy a house is when you are ready to buy a house, and that means you have your finances in a row, you can afford the house that you’re looking at, and you’re emotionally prepared for the responsibility of buying a house. Things are never going to be perfect for any of the circumstances around home buying, but if you feel like you are genuinely prepared to do this and you want to, then why not jump in?
So that’s one thing to think about. Another one is that not everyone has to be a homeowner. We do in America get so caught up on this narrative of, “Oh, buying a home means that I have made it. I am responsible. I am an adult.” And for many people in high cost of living areas, renting can be a smarter financial decision because it’s often a lot cheaper. You don’t have to do the maintenance on your apartment. And it just is easier for so many people.
Yeah, I mean, I understand the impulse to want to buy a home because for many people, their home is one of the greatest sources of wealth in their lives, not just their own lives, but it’s wealth that gets passed down to their children, their grandchildren. And so there is this deep yearning to tap into that source of wealth that is attainable to so many people but might not be attainable to you. And that’s really frustrating. So I understand that.
And so much of buying a home or really any major life decision, it’s partially financial and it’s partially emotional. And if you can get the financial ducks in a row, you can also tend to that emotional need and want as well.
I mean, it’s also worth mentioning that even when we are talking about getting an 8% mortgage, in the scheme of interest rates, that’s still a relatively low interest rate compared to looking at a credit card or a personal loan or other kinds of debt you might have. So in the kind of grand scheme of things, not that it’s terribly reassuring, but that debt is relatively low interest debt.
Right. Well, Kate, thank you so much for coming on and sharing all of your insights with us.
No, thank you so much for having me.
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