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Episode overview
- Our stories, hear why people chose their living situations, [00:45]
- Sylvia Bartel, Real Estate Agent, [04:01]
- Matt Gehman, Vice President of Lending, Everence, [14:07]
- Car buying tips, [24:25]
Episode resources
Home loan resources
- Federal Housing Administration (FHA)
- Rural development loans (USDA)
- Veterans Affairs
- Fannie Mae and Freddie Mac
Vehicle purchase resources
Read the transcript
Trisha Handrich, host:
New car, new house, sometimes it feels like this stage in life requires a lot of new expensive buys. How do you approach these big purchases and avoid getting overwhelmed by the debt and expenses? In this episode, we talk with a real estate agent and the Everence Vice President of Lending for their advice on how to stay smart, plus real stories from real people about big purchases. I'm Trisha Handrich, and this is Smart Living, Simple Money.
Speaker 2:
Hi, I’m currently living in Michigan City. I'm 26 years old, and I am not married. I'm single. I'm currently renting my apartment. I decided to rent because of my student loans being really high. I didn't want to risk putting down a down payment when I still have loans to pay for. And also because of commitment; when I moved I wasn't sure if I was going to stay here for a long term, besides a year, so I decided to rent instead.
Speaker 3:
Hi, my name is Lizzy Diaz. I am 26 years old, and I am married to my partner Juan Sebastian. We currently rent a townhouse. We decided to rent at the moment because it's the only option that we had. We are really interested in looking at buying a home, but we are trying to save money for a down payment and wanting to make the decision to buy the house when the time is right financially for us.
Speaker 4:
I'm 26 years old, married and living in Chicago. We chose to rent our apartment because of the rent-to-buy ratios in Chicago and for the flexibility of being able to move as needed.
Speaker 5:
I'm currently 22 years old, and I'm living at home. I'm single, and I just graduated from college. I'm not technically renting, and I haven't purchased my home either. I grew up in Indiana my entire life, and so when it came to college I decided I wanted to move to Virginia. Once I graduated, I ended up getting offered a job back at home, which then prompted me to move home. After graduating, I knew soon I would have to start paying back my student loans, so moving back in with my parents was the best and the most economical option for me. I'm fortunate enough to have parents that are not charging me rent, and I have a basement apartment which has quickly become my home. By moving home, I have been able to save all the money I would have been paying for rent and instead use it to pay my college loans. And so in the last six months, I have been able to pay off all my student loans. Also, since I've been living at home rent free, I was able to buy my first car. I plan on paying that off in the next six months, and at that point, I will be completely debt free.
Speaker 6:
I am living in downtown Chicago. I am 25 years old, and I am married. We are renting our apartment here. The main reason why we're renting is because property in Chicago costs a lot of money. Price is the main reason why we are renting instead of buying here. Second, there are so many different neighborhoods in this city. Do we want to live near the lake? Do we want to live near Greektown? Near Streeterville or the hipsters, things like that. There's so many areas that have different cultures, different restaurants, different quirks. It was hard for us moving to the city to know where we wanted to settle down and call home. Then three, we didn't know how long we would stay in Chicago. We were envisioning this being kind of a three-year period and then keep exploring. We're in a phase of life where you want to keep moving, keep experiencing new things, and we didn't know how long we would stay here in Chicago.
Trisha:
First up I sat down with Sylvia Bartel. She is a real estate agent from Newton, Kansas. The first thing I asked her was, of course, to explain a little bit about herself and her personal story about big purchases.
Sylvia Bartel, Real Estate Agent
I am working as a real estate agent in Newton, Kansas, and I have been in real estate since 2004. So, I've seen some up cycles and some down cycles. Prior to that, I was self-employed as a medical transcriptionist. I have lived in south-central Kansas all of my adult life. I grew up in Colorado, but I bought my first house when I was 23 years old, so I got an early start. For us it was a good thing. We rented for about a year and a half in our married life and then went ahead and purchased. Back then ... I always tell my clients, interest rates back then were like at 18 percent, which is just unheard of. We're looking at really good rates still here at 3 and 4 percent. In spite of that, I think for us it was a good purchase. We lived there for 17 years and completely redid the house. So we bought a house that we could put some sweat equity into. The only downside was living in a construction zone in one part of the house or the other for almost the full time. As it turns out, financially anyway, that was a smart way to go. And that was really our only option at the time.
Trisha:
Well, it's neat that you have that background. Now, as a real estate agent and working with first-time home buyers who maybe want to put some sweat equity into their home. What are some of the tricks of the industry that first time home buyers should know about?
Sylvia:
First of all, I would encourage them to find a trusted real estate advisor who will educate them on the process of buying a home, help them walk through the process, give them ongoing advice, be able to pull all the pieces together. Most first-time home buyers are not really aware how the whole process works. If they can find either a lender or a real estate company that is doing a first-time home buyer's seminar, that's a great way to get started. What they need to realize is that there are two sides to every transaction. There's the buying side, and there's the selling side.
One of the mistakes that first-time home buyers often do ... They get excited. They'll drive around the neighborhood that's interesting, and they'll see a sign, and they'll just call the number on the sign, and that obviously is the listing agent. Especially as a first-time home buyer, you do not want to deal only with the listing agent. They are representing the seller. You need your own agent who’s going to walk you through that process and going to represent you in the transaction. That's one of the mistakes that a lot of first- time home buyers make.
Well, one of the first things that we will advise them to do, go in and get pre-qualified. Go in and talk with the lender. That's usually not a long drawn-out process, at least to start with. You need to find out what type of loan you're qualified for, and that also then tells the agent what price range you need to be focusing on. The other thing I want to make sure is that they go to a local agent. Going online looking for financing is risky. You want to have a loan officer who will work with your agent because there is a lot of back and forth and a lot of coordinating that needs to happen, so you need to have a good relationship between your agent and your lender.
Trisha:
I feel like you have a story with that. Anything specific that you feel that you could share with us about, you know a horror story about somebody using financing online and it just not quite working out.
Sylvia:
I'm not saying that all online lenders are not reputable, but there are some that aren't. I have had situations where the loan just did not come together like it should have, and we missed the closing date, and there were ripple effects. What we call a domino closing where one closing is dependent on the next closing which is dependent on the next closing, and everything down the line just fell apart. There are some critical things that happen with the lender. It's very important to make sure you've got a good fit.
Trisha:
Going back to some logistics about being a first-time home buyer and things that we might not know going into it. First of all, how much money should you put into a down payment?
Sylvia:
Well, obviously that's going to depend on your financial situation. There's different, obviously different types of loans. There's government loans, FHA [Federal Housing Administration]. There's conventional loans. There are zero percent down loans for ... Well VA [Veterans Affairs] would be one, but also there is one called rural development, and there again, depending on what state you're in, that makes a difference, too. Obviously, the more you put down, the lower your house payment will be. There are also some advantages for other expenses if you're able to put down at least 20 percent. It takes off what we call the PMI, which is private mortgage insurance.
Trisha:
Do you know of any loan programs that there would be for first-time home buyers?
Sylvia:
This is dependent on usually states have different types of programs, but here what we see more often than not is a grant program for first-time home buyers, and that's something that you should check into. Always ask your lender if there is something out there. The way that works is, there will be grant money available, but it's just a certain number, and it's first come, first serve. There are usually criteria that have to be met in order to qualify for that. Usually income, which means if you have a really high income, you're not going to qualify for it.
Trisha:
One more logistical question about escrow. I think that can be a really confusing concept for some. Is it better to pay escrow as a part of your mortgage or on your own?
Sylvia:
Well, for starters, depending on how much you put down, that will determine whether or not you are required to have an escrow. Just to clarify what an escrow is, that is an account that is set up at the time of closing with your lender that is there to cover the costs of your homeowner's insurance and your property taxes. It's money that is paid out of your monthly payment into that escrow account so that when those premiums come due, the bill goes to the lender. You just get a notice, which is very nice. That way you don't have to come up with thousands of dollars once or twice a year. It's all taken care of through your lender. Personally, I have done it both ways with our home purchases, and even though the last couple of times, we wouldn't have been required, I've chosen to do that. It's just nice to have that taken care of and not have to worry about it. The other side of that is obviously the money that's being held in escrow, you could be earning interest on that yourself if you're disciplined enough to make sure that you're not tempted to use that money for something else.
Trisha:
The ease of it outweighs everything else, I think.
Sylvia:
That's been my experience. I've done it both ways.
Trisha:
Sylvia, is there any other advice that you would give to first-time home buyers?
Sylvia:
Yeah, one of the things you need to realize is you're not going to find the perfect house. At the very beginning of the process, you need to sit down with your agent, make a list of things that you feel you have to have and a list of things that you would like to have. We talked earlier about sweat equity. Even if you don't have to do that, it's not a bad idea to find a property that you know there are a few things that you'd want to do to it to make it your own. If you are buying anything other than new construction, which most home buyers end up doing, make sure that you do inspections. It is an added cost, but it can be money well spent if there are issues that are found that were not disclosed in the beginning.
Trisha:
Well, thank you so much, Sylvia. I really appreciate your time and advice.
Sylvia:
I'm happy to do it.
Jeff Shafer, voiceover:
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Trisha:
Welcome back to Smart Living, Simple Money. I'm Trisha Handrich, your host. Now we'll switch gears just a little bit and talk with someone on lending. Matt Gehman is the Vice President of Lending at Everence, and I started out our conversation by asking him a little bit about his story around lending and big purchases.
Matt Gehman, Everence Vice President of Lending:
In my role, what I do is I'm responsibility for Everence's lending area. I've been in banking about 12 years, and most of my time has been in lending, a lot of commercial lending primarily. My parents used to give me about two dollars a week for an allowance, and what I would do is I'd put one dollar in my piggy bank to save, and then I would quote/unquote invest the other dollar into baseball cards, which didn't actually end up paying for itself, but I think the concept was good. Banking always came naturally for me, and I just love in my job helping to see both individuals and businesses thrive, and playing at least a small part in that.
Trisha:
Tell me a little bit about your first big purchase. What's the story?
Matt:
Our first big purchase was a home, which I think is a lot of people's first big purchase. My wife and I purchased our first home in 2011. Prior to 2011, we rented for two years after college, and what we really made a priority in those first two years was saving as much as we could, in preparation of a purchase of our home. During the two years leading up to our purchase, we were actually able to save about half of our take-home pay, which was kind of our goal. What we were doing is we were trying to get a whole 20 percent down so that we would keep our mortgage amount down and also avoid having to pay private mortgage insurance or any of those penalties you have to pay if you don't put the full 20 percent down. At the end of it, we were able to put the 20 percent down, and we were able to negotiate with the seller to pay for our closing costs, which enabled us to still put the 20 percent down.
Trisha:
What are some of the questions that you asked yourself while you were making those decisions on making your big purchase?
Matt:
The first question I usually ask myself, or we asked together, if the purchase was a want or a need. A lot of times purchases will have a little bit of both, but it's important to understand how much of a want versus a need it is. After identifying that, I like to evaluate how the purchase is going to impact my life and my family's life whether it be a positive or a negative way. And of course also including an evaluation of how the purchase aligns or does not align with our values. If there's any kind of debt involved, we always make sure that we understand what impact that will have on a monthly budget, so what the monthly obligation might be so that we know how we may need to adjust our budget.
Trisha:
What advice would you give to somebody who's making a big purchase? And let's break it down like with a home purchase versus a car purchase?
Matt:
One important thing to consider with a home is how long will the home be kind of useful for you? Do you see yourself growing into the home? Will it meet your needs if you're going to grow your family for example, which we were in our case. That's really important consider. Generally homes do not pay for themselves if you move within five years, so that's a good general rule of thumb.
With a vehicle, it's a little bit different. Generally the vehicle is a depreciating asset. It's not going to increase in value. Sometimes homes you're kind of hoping at least that it increases in value. Vehicles, though, the concept is somewhat the same. You want to make sure it fits your life now and again down the road because it's not good to just purchase new vehicles all the time because ultimately they depreciate, and you don't get the money back. Those are a couple different things to take into account for homes versus vehicles.
Trisha:
If you need a loan to buy something, I'm sure that there are different types of loans, and could you just expand a little bit on that?
Matt:
Yeah, generally loans tend to vary based on the collateral or security you have to operate. What collateral means is it's just what type of underlying asset you essentially pledge to secure the loan. The most common examples of collateral are real estate, your home, or a vehicle. Generally loans that you have some kind of collateral attached to carry the lowest interest rate and they carry the best terms. Generally real estate is the cheapest thing that you can borrow on over time, and vehicles would kind of be a close second.
Then there's other types of debt which would be considered not secured debt. Generally the three most common are student loans, personal loans, and credit cards. Any type of unsecured loan generally has a higher interest rate than what a collateralized loan or a car loan.
Trisha:
What are the advantages of financing your vehicle purchase through the dealer versus finding a loan through a bank?
Matt:
There are advantages and disadvantages to both. Certain dealerships do offer very competitive terms, and frankly will give you terms that are even more competitive than what you can find at a traditional bank or a credit union. However, in general, banks and credit unions tend to offer a little bit lower interest rate than what dealerships offer. If you're looking to finance a vehicle, what I would suggest is go to your local bank or credit union where you do your banking. Talk to them to at least get an idea of what interest rates they have, and then compare that to what the dealership's giving you. That way you can make the right decision for you.
Trisha:
Are there any advantages for people in certain situations, for example, first-time home buyer or college student?
Matt:
Definitely. Particularly first-time home buyers definitely have some advantages over second-time home buyers. Generally there are special programs to help first-time home buyers. The eligibility varies a lot, and it all depends on the situation you're in, but some of the most common examples are special programs by the Federal Housing Administration, FHA, or USDA, Fannie Mae and Freddie Mac. A lot of those programs will allow for assistance if you don't have, for example, a full down payment. It's also important to check your local county or state for additional grants or programs they may have. Some states and even communities have special programs that do help first-time home buyers, so that's a good place to check, too.
Trisha:
If you're a young person with no credit history, what are some things that you need to get a loan?
Matt:
In many cases, if you don't have credit history, you're going to be required to get a cosigner, not all cases because every institution's policies vary. But a lot of times, you will need to add a cosigner. You'll almost always be asked questions related to your job history and your income, but I always suggest that establishing credit at a young age is a good idea. Whether that be in college or right after you're in college, or even earlier, that's a really good thing because one thing that impacts your credit score a lot is how long you've had credit and how old is your oldest credit, so the earlier the better. Of course, the key is to then use that credit responsibly.
Oftentimes people establish their first credit by way of a credit card, so one thing to pay attention to is something called your utilization rate, which what that simply means is how much of your monthly balance on your credit card you have divided by your total credit limit. For example, if you have a $1,000 credit limit, and you charge $300 on your card in a given month, that would be 30 percent utilization rate. 30 percent is the golden rule as far as the maximum you want to go. So, that's one thing to pay attention to. I've talked to a lot of people before that can't figure out why their credit score is so low, and they may be paying their credit card balance off in full every month, but if their utilization rate is very, very high, that often really has a negative impact.
Trisha:
What are other types of lines of credit? You named a credit card, but what would another type be?
Matt:
Another type would be a personal line of credit we would call it. So that's simply an unsecured line of credit, but it's not necessarily attached to a certain card. A lot of times those are good ideas to establish and attach to your checking account in case you would ever overdraw your checking account. What ends up happening is it pulls from a personal line of credit which carries a much lower interest rate than the fees that you would accrue for actually overdrawing your account. That's one type. Another common type of line of credit is what's known as a home equity line of credit, which again because it's secured by your house tends to be a cheaper way to borrow. That can definitely have a lot of advantages, too.
Trisha:
I just want to ask one more thing, kind of going back to the beginning of our conversation. What do you wish you would've known when making your first big purchase?
Matt:
The one thing that I wish I would have done differently is I tend to err on the side of being too conservative with large purchases. I always advise people to be conservative because you can't go wrong that way, but I tend to be a little bit too conservative. When we bought our first home, we took out a traditional 30-year mortgage which is by far the most popular. I actually wish that we would have taken out a 15-year. At the time, we would have been able to afford it. It would have really stretched us, but being still early in my career, I didn't have a good understanding of my income potential. What ended up happening is in a couple years after that, we refinanced into a 15- year and had to pay all those closing costs over again.
So, if you are looking to purchase a home, I do really encourage you to look at a 15-year mortgage. If you are looking at that, take a look at the total interest you'll pay on a 15-year mortgage versus a 30-year mortgage. The other thing that's really important that separates a 15-year from a 30-year is the interest rates on 15 years tend to be about half a percent or even up to a percent lower than what a 30-year would be. For example, if you do just kind of some simple math, if you have a mortgage for $100,000 and your interest rate's 1 percent lower, that's going to save you $1,000 a year, which is really significant.
Trisha:
Well, thanks Matt. I really appreciate your advice.
Matt:
Thank you.
Trisha:
Thank you. I've found that buying a car can seem quite tricky. They lose value over time quickly. It also makes sense to make careful decisions about what kind of car you need and want. I found that some of these quick tips are helpful when deciding to buy a car. Number one, check Consumer Reports for reviews about the cars you may be interested in. You need to figure out which car has the most problems and what kind of problems. If you're buying a used car, check the Kelly Blue Book for fair assessments of used cars and their current values. Also, if you're purchasing a used car, make sure you get the VIN number from the car dealer or current owner, and also get a background check with services like CARFAX or the Department of Motor Vehicles report. Look for a lot of turnover in owners, or if it was owned in a location that might have had major flooding or disasters. If you need financing for a car, shop around for the lowest interest rates in your area. It is OK to take your time deciding where to finance your purchase – car dealers, credit unions, all offer loans, so take your time. Do your research, and make the best purchase for you.
Smart Living, Simple Money is a podcast of The Mennonite and Everence. I'm your host Trisha Handrich with executive producers Hannah Heinzekehr, Madalyn Metzger and Sheldon Good. Our producer is Sara Alvarez. Voiceover by Jeff Shafer, sound producer by Norm Sohar. Thank you to our intern Jace Longenecker. Graphic design by Jena O’Brien, and thank you to Greg Yoder for our music at the beginning and end of the podcast. All recording is done at Everence.