HerMoney Podcast Bonus Mailbag #23: Real Estate And Refinancing 

Jean Chatzky: (01:14)
So, what do we have first?

Kathryn Tuggle: (01:16)
Our first question comes to us from Ashley. She writes, hi Jean. I started listening to HerMoney about six months ago and I absolutely love it. I feel a sense of empowerment and confidence when it comes to my personal finance that I never did before. But lately I’ve felt a little distraught as I’m supporting my family while my husband attends school full-time for the next two years. Through his program, he’s guaranteed job placement and will have a starting salary earning about $85,000. Right now, I earn about $100,000 with potential for as much as $175,000 with commission, but it’s never a guarantee. Right now, with childcare expenses, two car payments, a mortgage and all our other expenses, we’re going in the hole by about a thousand dollars a month. I have an emergency fund of about $30,000, but I have to dip into it every month. I currently contribute 10% of my paycheck to a Roth 401k with no matching dollars and $50 a week into a 529 plan for my one-year-old son. My husband and I are 37 years old and together we have about $75,000 saved for retirement via 401ks and IRAs. All that said, my question today is about real estate. I still own a condo I bought before I was married. A few years back. I refied to a 15 year loan at 3%. I still owe about $144,000 on the mortgage and it’s worth about $225,000. I have a renter living there now, who’s a woman in her seventies, and she is wonderfully low maintenance. I charge her $1,750 a month in rent, but my cost with the mortgage and condo fees are actually $1,914 a month. So, I’m losing about $164 a month. I was thinking about selling it so I can have more of a cash cushion until my husband gets back to work. But should I sell? Having the extra cash would relieve an enormous amount of anxiety I’m feeling, but I don’t want to lose out of the future value of the equity in my condo if I keep it. I was thinking about increasing the rent, but as a retiree on a fixed income, there’s the potential my renter would move out if I did. I’ll feel much better about my financial decision with your advice. What should I do? My primary concern is keeping my head above water until my husband is back at work. Thank you.

Jean Chatzky: (03:25)
Yeah, I’d sell it. I think for both emotional reasons and financial reasons I would sell it. If you sell this place, you are going to clear about what $75,000, maybe a little bit less after the cost of the transaction. You can invest that you could put it in your retirement. You could supplement your emergency fund for as many months as your husband is going to be in school, that you think you’ll be coming out of pocket for living expenses. In fact, I think that is what I would do. I think I’d sell it. I think I’d take $24,000. Put that into your emergency fund so that the thousand dollars a month that you know you’re going to need is there for you. And then I would put the rest into retirement or toward your other goals. I don’t see any reason, despite the fact that you sound like you are perhaps the loveliest landlord on the planet, for you to a. lose money on this, and b. be distraught. It’s just not worth it. You agree, Kathryn?

Kathryn Tuggle: (04:33)
I agree. I also wonder if maybe option a. should be to go to her renter and lay all this out and say, I’m going to have to start charging $2,000 a month or I’m going to have to sell.

Jean Chatzky: (04:46)
Yeah, she could certainly do that. But the question about losing the equity in her condo. She’s got about $75,000 in equity. So, the question is, where are you going to get the best return on that money? If she was making more money on renting it out, then I might say continue to rent it out. I mean, you’re right that one thing to do is to take a look at the true market rent for this place. If the true market rent is closer to $2,300, $2,400, and then you’re actually really cash positive on this, then that’s something to consider. But keep in mind, the tenant may be wonderfully low maintenance, but the condo itself is not always going to be low maintenance. Sooner or later that air conditioner is going to go. Sooner or later, you know, the pan underneath the shower is going to go and need to be fixed. And that’s going to be a $10,000 repair, right? You gotta be, I think, very careful about balancing the fact that it is an asset worth something with the fact that there are costs involved in maintaining this property.

Kathryn Tuggle: (06:12)
Yeah, that’s a great point. A really great point. And if this woman did move out, you could have months of no rent coming in, which you really can’t afford right now, given your situation.

Jean Chatzky: (06:23)
Exactly. And just the word distraught in the third line of this email. No, you’ve got too much riding on you keeping yourself together for your husband and your kids and your family, until he starts earning again, for you to be distraught. Distraught is not okay.

Kathryn Tuggle: (06:41)
Yup. Good point. I would still talk to the renter though, because maybe she wants to buy it, right? Maybe it’s super one and done easy.

Jean Chatzky: (06:48)
Then you saved the real estate commissions and that would be fantastic.

Kathryn Tuggle: (06:51)
Exactly. All right. Our next question is from Gretchen in Los Angeles. She writes, dear Jean and the HerMoney team. My partner and I have been shopping for our first home. We are in our fifties, in the outrageous LA market where home prices never seem to go down. We put in an offer on a home just about five days before the COVID crisis hit. We were outbid and bowed out. However, now the sellers have come back to us and offered us the house at our asking price, which was $50,000 above list price. Ugh. We don’t know what to do. Our gut is telling us to hold off purchasing a home for a month, to see if prices come down for a bit. Any insights or advice you can share, if waiting is the best bet now. Thank you.

Jean Chatzky: (07:31)
Oh boy. It depends on where in LA I think you are. So, what we’re seeing trend-wise because of COVID is a little bit of a move toward suburbia. A little bit of a move out of the more densely populated areas, cities, like New York, for example, and real estate flying in the suburbs. I do think that you could go back to them and reduce your offer. I mean, they clearly lost all those other bidders. And that says to me that maybe this house is in more of a densely populated area. Holding off, I think is an okay thing to do if you’re not sure that you want to make the move during this uncertain time. I don’t know that real estate prices are going to come down. I think it’ll be very, very local as all real estate is. I do think city prices may come down a little bit. I think suburban prices may continue to rise a little bit, as people search for more space, as we continue to shelter at home and work from home, and realize that our houses need to be more than just a place to put our head on the pillow at night. The one thing that I do want you to pay attention to though, are today’s very, very low and attractive mortgage rates. If these mortgage rates are making you feel like now is a great time for you to buy a home. I do expect them to last for a while, but I don’t expect them to last forever. And if and when the economy starts to improve, I think we probably will start to see mortgage rates rise a little bit. So, holding off a little bit? I think you can’t lose by holding off a little bit. But think about your life. Think about where you want to be for the next five years. Think about the fact that, you know, hopefully, within another year or so, we will be past all of this COVID. Where are you going to want to be? What kind of a place are you going to want to live in? And can you get a good deal on that place now?

Kathryn Tuggle: (09:51)
Yep, absolutely. And reading between the lines, I don’t hear anything about how much you love this house. Because I think, if you loved this house, you lost it, and then you suddenly had a chance to buy it again, you just would’ve immediately said yes.

Jean Chatzky: (10:06)
I think yes. But I also, reading between the lines, don’t you sort of feel when you buy something, and then you heard that a friend like bought the same thing and then they decided they returned it, that you start thinking, oh, maybe I should return it too? Like, I do think there’s this, you know, in this measuring up world, I would be thinking, all right. Why did all those other people back out? What is wrong with this house?

Kathryn Tuggle: (10:38)
Yeah. Fair point.

Jean Chatzky: (10:39)
You know, I think we’re both getting to the same conclusion that maybe they don’t love it. And you have a nice opportunity to go back and offer a little bit of less.

Kathryn Tuggle: (10:50)
Yeah. Great point. Let us know what you do.

Jean Chatzky: (10:53)
Yeah, for sure.

Kathryn Tuggle: (10:54)
Our next question is from an anonymous listener. She writes, Jean, thanks so much for your work. I listen to your podcast, read your emails, and get so much from both. I really appreciate what you do and the guidance and service you provide to women everywhere. My husband and I bought a house two years ago. It’s a lovely place in our dream neighborhood, but it’s very small – about a thousand square feet – and we owe about $138,000 on the mortgage. Here comes the complicated part. We want to do IVF later this summer, which will be about $22,000. I can pay for that in cash, but it will drain my savings. Financing as possible, but we haven’t applied for anything. The second part of the situation is that we really need to make an addition on the house to have a room for a baby and a nursery. The construction estimate for the addition is higher than we expected at about $150,000. And now I feel like I have to choose between the chance of having a baby or having a comfortable space to live in and potentially raise that child. I don’t know that we can afford both. And I don’t want to drown in a huge mortgage if we were refinance and throw in the renovation. Our combined incomes for 2020 is around $120,000 a year. I have no idea what to do and I feel a bit lost in all of this, but I would love your thoughts and advice. Thank you.

Jean Chatzky: (12:07)
This letter makes me think of my mother. And it makes me think of my mother because well, for two reasons. My mom spent a really big chunk of the summer going through family photos. That was her project. And she gave us all these photo compilations on stick drives. And we were able to look at these pictures. And I think I’ve said before that my parents always said, if they had waited until they felt they could afford to have kids, none of us would have ever been born. But one of the things that I realized, in looking at these old family photos, was just how small the first house that I lived in with my parents and my two brothers actually was. I mean, I don’t think it was more than 1200 square feet and there were five of us. And my mother actually found a Zillow listing for the place that she grew up. It was a row house in a section of Philadelphia called Strawberry Mansion. She grew up there with her parents and her sister. It was 900 square feet. Which is not to say that you shouldn’t want more space. We all live in much bigger places than we used to. Many of us do, except for those tiny house people. Do the IVF. Get pregnant. Have a baby. Babies are really, really small. (Kathryn laughing) They really are. Like you can put a baby in the drawer of a dresser. You don’t need a nursery. You put the bassinet in your room. You can go ahead and have sex. It doesn’t matter. The baby is not going to notice. And it’s just, just have the baby, and then figure it out. I wouldn’t go crazy about having to do the addition right now. Maybe when the baby is, you know, really toddling and walking around, you’ll start looking at other places to live. Maybe, at that point, you’ll be able to think about an addition. But have the baby first, because the other thing I know, and we’ve done shows on IVF and IVF is really tough. I so do not want you to have to deal with a construction project while you’re going through the hormonal surges that IVF and pregnancy bring. It’s just awful. And what if it doesn’t work. Then are you going to feel bad living in this place that you created for a baby that you don’t have? And I hope that that doesn’t happen. I hope with my whole heart, that that does not happen. But if it does, I know I would. You know, and if it was me, I would just want out of there. So, have the baby, let us know what happens. And then we’ll talk about your house.

Kathryn Tuggle: (15:18)
I love this advice. It’s perfect.

Jean Chatzky: (15:20)
Yeah. Have the baby. Thank you, Kathryn. Before we take another question, let me just remind everybody. HerMoney is proudly sponsored by Fidelity Investments. Some of life’s important moments are planned for way in advance, while others we just don’t see coming. As always, Fidelity is here to help you navigate both the joyous and the unexpected events with confidence. Their resources, guides, and tools can help guide you through important financial decisions when you need it most. Visit Fidelity.com/HerMoney to learn more. What’s next?

Kathryn Tuggle: (16:00)
Our next question is from Susan. She writes, hi. I have been a listener since the beginning, and I’m a big fan. Thank you for the advice over the years. My husband and I are eight years into our 30 year mortgage at 4% and we’re looking to refinance since rates are so low right now. We’re looking to do some big remodeling projects, landscaping overhaul, kitchen, master bath, etc., in a few years, when our kids, now three years old and one year old, are in school and we’re no longer paying for two kids to be in childcare full time. A couple of questions. Can you give a brief overview of the different methods of financing large home projects. HELOC? A second mortgage? I’m kind of lost at the difference between them. Also, is it a bad idea to refinance now, knowing we want to do this project in about three to five years. Thank you.

Jean Chatzky: (16:46)
So, it’s not a bad idea to refinance now. You’ve got a 4% mortgage. If you take another 30-year mortgage, you could bring that rate down into the high twos, assuming rates stay where they are. That is a really, really big saving. If you want to stay on the same clock that you’re on, just make one additional mortgage payment a year on that new 30-year mortgage. That’ll cut a 30-year mortgage down to about a 24-year mortgage. In terms of paying for it, I’m a little torn here. I mean, one thing that you could do is just borrow all of this money while it’s so, so cheap. If you were to do a cash out refi now, and pull out the cash that you need for your renovation, you’ll be paying on a bigger mortgage, but you’ll be paying at a lower interest rate than you will likely get on that home equity line of credit down the road, simply because first mortgages are cheaper than home equity lines of credit. The question is, if you take that cash out now, where are you going to park it so that you basically stay whole with it? The other thing that you could do is just refinance the mortgage and simultaneously secure the home equity line of credit, knowing that the interest rates on HELOCs are variable, but don’t draw on it until you need it. And I would run some numbers. I would essentially look at the numbers on what it would cost you to carry that additional mortgage debt, if you do it in the form of a cash out refi, against what it would cost you for a HELOC, three years from now, assuming HELOC rates are relatively where they are right now. But refinancing now is a no-brainer. Refinancing into these incredibly historically low mortgage rates is something that you should want to do. And you may decide that you are looking to start doing those remodeling projects sooner rather than later. You know, if that would make your life easier, and you can actually afford to do it now, that may be something to consider too.

Kathryn Tuggle: (19:36)
Absolutely. Great advice. Our last question comes to us from Alexandra. She writes, hi Jean. I purchased my home in 2015 with an FHA mortgage. I refinanced in 2018 to a conventional mortgage to remove PMI. My current rate is 5.125%. I currently owe approximately $226,000. Should I refinance again? We want to lower our rate dramatically and pay off the mortgage. Should we? I have excellent credit and I plan on staying in the home for the long haul. It is suitable for our family now and will meet our needs once our two children move on. We’re currently 33 and 32. The kids are eight and nine, and we would love to be mortgage-free and travel often once the kids move on. We’re thinking about refinancing to a 15- or 20-year mortgage, but would love your thoughts. Thanks for your help.

Jean Chatzky: (20:24)
Yes. My answer is yes. Absolutely do it. You will save so much money. You’re going to cut your interest rate almost in half.

Kathryn Tuggle: (20:34)
I was thinking that.

Jean Chatzky: (20:37)
So, let me just run these numbers for you very quickly. Right now, your mortgage amount, as you said is $266,000. Your interest 5.125%, 30-year term. By my calculator’s calculation, that means that you have a monthly payment of about $1,450. And that doesn’t include your taxes. It doesn’t include your insurance. But let’s just bring that interest rate down to 2.5%. You’re going to say $500 a month, $400 to $500 a month. I mean, that’s just incredible. You’re going to save yourself over $120,000 in total interest over the cost of your loan. So, then, let’s plug in the new numbers. At an interest rate of 2.5%, if you do a 20-year mortgage, you’ll save yourself about $50 a month on your monthly payment. But you’re going to save yourself well over $100,000 in total interest, because you’re going to get out of that loan faster. If you bring it into a 15-year loan, your monthly payment is actually going to go up a little bit, because you’re paying it off so much faster, but only by a few hundred dollars a month, to about $1,800 a month. And then, you’re going to be out an additional five years early and still save yourself even more in interest. So, by all means, yes. Refinance, and get on the road and travel your hearts out. It sounds like a fantastic plan to me.

Kathryn Tuggle: (22:19)
Absolutely. Love it.

Jean Chatzky: (22:20)
These were great questions. We are going to do this again soon. Thanks Kathryn.

Kathryn Tuggle: (22:24)
Of course. Yeah. I can’t wait for the next one.

Jean Chatzky: (22:27)
Thanks so much for joining me today on HerMoney. Thank you to our wonderful listeners for these great questions. We love hearing from you. So, please keep writing us at mailbag@hermoney.com. If you like what you hear, I hope you’ll subscribe to our show at Apple Podcasts. Leave us a review. We love hearing what you think. We also want to thank our sponsor Fidelity. We record this podcast out of CDM Sound Studios. Our music is provided by Video Helper and our show comes to you through Megaphone. Thanks for joining us. We will talk soon.