AAR23 - How to Get the Best Deal on a House

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2:55Andrew Sather:Greetings, everyone, and welcome back to At Any Rate. My name is Evan Rate, and we're here to help you make sustainable financial changes without breaking a sweat. In today's episode, which is actually excitingly inspired by a listener question from a listener named Michael. I'm joined today by the great Andrew Sather. How are you doing today, Andrew?

3:13Evan Raidt:I don't know about great, maybe like late bloomer. Late bloomer, okay.

3:17Andrew Sather:That would be late bloomer Andrew. At least bloomed. There's a lot of people out there that have not bloomed. So it's a pro to have bloomed at some point, even if it's late. So today I want to, this is going be answering a question again from a listener that it's based on a lot of factors and I just want to dive into it as much as possible to give as much as a complete of a picture as I possibly can. I'm never going to be able to cover every single detail about it, but I just want to give as good of a picture as possible. So today it'll be aimed a little bit at education, but it will be aimed, I would say, arguably more at just describing our experience and maybe Andrew's experience as well, and you'll see why, because of the listener question.

4:00Andrew Sather:So I'm going to go ahead and read that real quickly. Hi, I'm currently saving for a house, going from a beginner home to hopefully a dream home. You mentioned on the pod that you're able to get a 4 % interest rate. How? The rates I see are 6 % to 7%, and I've never heard of anyone being able to negotiate a rate. Please share info on this rate. Is it fixed, 30-year, a normal lender, etc.? Really looking forward to this answer as 6-7, no pun intended, versus 4 is a huge difference. And that pun, which I freaking love, is how I know that this person is younger than me.

4:35Evan Raidt:I never thought I'd see the day.

4:40Andrew Sather:It sucks when you feel like you're always the young person in the room. You're always that, and then now you're starting to realize, okay, maybe I'm not always the youngest person in the room. more. Well, hopefully you won't go crying too long after we record this. Yeah, it's not going to be good. My coworker's not going to be happy. So to kind of dive into it a bit, yes, like Michael said, we were thankfully able to get a 4 % interest rate on our home, whereas the normal market rate is usually 6 % to 7%. I know that when we were going through the application process, as is a good idea to do. We shopped around at different lenders and we went to different lenders.

5:21Andrew Sather:We were getting offered rates closer to like, I think we got six and a quarter and six and a half or something like that. Those were the rates we were offered. Maybe we had one closer to 6%. But ballpark, that's where we're looking. And we were able to end up at 4%. So to kind of just lay out how we got there. Our home, as I mentioned before in the previous podcast, our home was a new home and at the time it was under what they called a red tag event our builder was dr horton and they had a red tag event going on a few homes which we've since we've moved in we've seen it happen on just a couple more homes since then which essentially is their their marking of a home that they went under contract with somebody with and that person customized the home built it how they wanted and then they dropped out for whatever reason maybe they financially couldn't afford it anymore something changed with their credit maybe they even did too big of a misstep and the lender said nope you're not getting this anymore and so they no longer had the home and now the builder is left with a home that was customized for somebody that they were prepared to sell you know on x date that now they can't sell anymore and so they have much more urgency to try and move it and what this leads them to do is they'll offer for us they offered stuff like the lower interest rate, so to kind of lay that out as well, market interest rate, we're talking 6 % to 7%.

6:44Andrew Sather:Then they would offer for a conventional loan, they were offering, they offered us, I believe it was 5.5 % for a conventional loan. And the reason that they can offer a lower rate than the market rate is because you're working with a lender that's a sister company of the builder. So what that means is the same company, the same conglomerate is making money off of you twice, essentially. And so they're able to offer a discount because they know they're just raking in cash from you. And so they were able to offer a lower rate for conventional. And then if you went down to an FHA loan, which then they get some government backing, some government insurance for security so that if we back out on the loan, the government will help them.

7:27Andrew Sather:They offer as low as a 4 % interest rate. And the only downside really to an FHA is that you pay an additional insurance fee. I can never remember whether it's MIP or PMI because they just, they swap the acronym. PMI. PMI, okay, yeah. We pay PMI for that, which for us only worked out to about$110 a month, so nothing too crazy and easily, easily outweighed by the additional cost we would have paid for the noticeably higher interest rate. So that was a low cost to pay, and we have to pay that for the first 11 years of the loan, and then that would drop off, and then it would even completely level out.

8:06Andrew Sather:And the other bonuses that they offered us were closing cost help. So we got a good chunk of closing costs taken off. We got appliances included, everything from washer, dryer, fridge, all appliances included. We got blinds, garage door openers, stuff like that. And then also just with it being a new home, to kind of mention that, because it's a new home, we had lower or no upfront repair costs. We move into the home, everything is as it should be, and if you have any issues within the first year, stuff will be covered under warranty, which I can't remember what it was actually, but we had one minor thing that we had an issue with.

8:41Andrew Sather:Submitted a warranty claim, they sent somebody out within a couple days, they got it fixed, and it was all set, all done. Whereas if we had moved into a resale home, first off, if that issue occurred, we would have paid for it, but also you're more than likely going to have something that the previous owner didn't deal with that you're now going to have to deal with or argue that into the deal or whatever happened. But one pretty important detail of all this is that our interest rate was a fixed interest rate. Andrew, do you want to detail what a fixed versus variable interest rate is?

9:14Evan Raidt:Yeah, fixed versus variable. variable interest rate was something that got really popular during the 05, 06, 07 housing boom. Basically, if you follow interest rates at all, like a stock market nerd like I am, they can fluctuate quite a bit and it fluctuates based on how the economy is doing, based on inflation. And so because if you do an adjustable rate or variable rate, because you're exposed to that risk of interest rates could go up a couple percentage points in a very short time period, those tend to be cheaper. I haven't looked at the numbers, but depending on how much risk you're willing to take, you can get a lower rate to start on your adjustable.

10:03Evan Raidt:Not something I've ever recommended anybody does. I've heard a lot of horror stories of people get the rates adjusted higher at the exact same time the economy goes through something troublesome. So now not only do you have job uncertainty, you also have a higher mortgage you're having to pay because the rate is adjustable. So that's kind of the big differences. Fixed rate, you know what your mortgage is, you know it's going to stay there. A variable rate, you could usually get a lot cheaper of an interest rate, but you take a lot of risk.

10:40Andrew Sather:Yeah, that's the perfect explanation to me. And so our rate was thankfully fixed. So we don't have to worry about any of that. And the way I kind of see a variable rate is for me, it's like trying to pick individual stocks, but with much less control over things. If you pick an individual stock and you want to make a decision about what to do with that stock a week later, you can do that. With a variable rate, there are things like having to get the home reappraised at times. There's a lot of stuff you have to do to refinance, to lock in a rate or something like that. And you're just riding it with much less control over when you get off the ride.

11:16Andrew Sather:And so you might look at it and say, oh, well, I could get a nice low variable rate right now. But when you actually look at what could happen less than a year from now, a year from now or something, that you could be in a drastically different situation. And I think, like we talked about before, I talked about last week with Dave, stuff like this can turn a home that was an okay deal into a really bad deal or something that was a great deal into just an okay deal now. And that can be financially ruinous. It feels like an unnecessarily complicated word to use. But that can be financially devastating for anybody who went into this assuming that they had some sort of a fixed cost on things.

11:57Andrew Sather:Especially with homes, the way that people discuss homes, they tend to discuss it as, hey, your mortgage is locked in, it never changes. And first off, I think that that's a misleading way to talk about things, but that's even more so misleading if you have a variable interest rate because things can jump around like crazy. Now, I know that you decided to get a new home as well when you purchased your home a few years ago. What led you to decide to purchase a new home instead of a resale home?

12:27Evan Raidt:Yeah, I had never even considered it. And I always thought it was just a ridiculously expensive option. And then there's actually my sister and brother-in-law moved in just as renters to a brand new build. And they started telling me about the benefits of like, think about this, you move in, you don't have to do hardly any maintenance. And if you buy a resale, you're going to have to maybe you replace the roof within a year or two when you move in, or maybe you got to get a new HVAC. And those are the type of things where usually when you're buying a home, you're kind of feeling already maxed out on all your expenses.

13:10Evan Raidt:And then how easy is it going to be to have money squirreled away at that point to be able to pay for some of these bigger expenses. And then also for home is a very personal decision and there are other factors at play. So for me and my wife, we wanted to start a family when we bought the new home. And so if you think about how much time and energy do you have to fix up a home when you also have a newborn and you're having to deal with newborns and toddlers and all of those things. So there are a lot of... It might sound trivial until you actually come through it. Like you said, having a warranty for a year, that was awesome because it takes a lot of that pressure off.

13:56Evan Raidt:And then just not being a handy person in general, having that new home and knowing that I'm not going to have to learn... You learn the little things of home ownership, but not having to learn some of the bigger projects is definitely a value add. And then if you work a lot, maybe you don't even have time when you get home from work or in the weekends to do the projects that happen when a home is falling apart. So all those kind of reasons. And then also the way a lot of the new homes I've seen is the kitchens are super nice. so we've talked in the past previous episodes about kind of knowing what's having that discussion with your spouse of like what's important versus you know what can what what's not so important when it comes to buying a home so for my wife having like a brand new kitchen was was something that was like a really cool thing to to shoot for and when we were looking at resale homes we were looking for those that were remodeled.

15:00Evan Raidt:And so you kind of had trade-offs at that price point of you lose some things because the sellers know the value's higher because they remodeled the kitchen for you. And remodeling's also, I've heard stories of just how stressful that can be and time-consuming and expensive where you're getting a quote and then the costs are just running up higher and higher and higher. So I think those are the main reasons kind of looking back at it. I'm excited to share our friends over at the Plink app released a major upgrade featuring a sleek new look, real-time insights, smoother trades, and tools that help you feel more confident with every move.

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17:47Andrew Sather:Yeah, I would definitely agree with pretty much all those. And to kind of double down on the remodeling situation, after just having done small home upgrades, mounting some stuff, painting some stuff, replacing some stuff, getting some quotes for things like a shower door and stuff like this, costs can definitely run up very quickly. And I know that if I, for example, this is minor, but say we want to get a shower door installed and we get a shower door installed, it ends up costing more than we want it to. If I was to then turn around and try to sell the home to somebody, I would definitely be thinking, well, I already overpaid on this freaking shower door.

18:22Andrew Sather:You're definitely going to have to pay more for the home to make up for that cost. You're just trying to, you know, the seller obviously has their own life, their own emotions, their own finances that they're trying to juggle. And you going into that situation also trying to juggle your own finances and get the best deal for yourself, but they're trying to fight for their lives to protect their financial future. It's a much messier situation. Obviously, it can be done successfully, but it's just not going to be nearly as smooth as a process compared to somebody like a builder who they know exactly what everything costs for them.

18:59Andrew Sather:I mean, they've done this thousands, tens of thousands of times, And so they know the total cost of everything and know what kind of margin they're looking for. And that's really all there is to it. And it's a much easier, simpler, more straightforward process where you're much less worried about somebody did a remodel or maybe they did a DIY on that remodel. And they kind of cut some corners that a company never would have been able to because of just liabilities, frankly, that an individual could say, well, I could save$300 if I didn't do X. and you never know what's going on behind the walls unless you literally tore the entire home apart yeah well we got we got to see what was behind the walls because we were checking out

19:41Evan Raidt:the home before they put the walls up so that was kind of cool yeah a pre-drywall inspection is

19:45Andrew Sather:definitely definitely worth it if you can that was one of the things that we sort of missed out on because we came into the deal for the home after it had already been built and that's why they were giving all these bonuses and everything. But if we had been able to, we 100 % would have done the pre-drywall inspection, at least where we still, of course, did the home inspection after the fact. But being able to see what's behind the walls and make sure they're not leaving Modellos or bushes and stuff behind the walls is definitely a good thing to check for.

20:18Evan Raidt:Were there other factors for you guys that went into your decision to do a new build?

20:26Andrew Sather:Yeah, they were giving away all these bonuses. Also, for the fact that, as you mentioned before, people tend to assume that buying a new home, you're going to be paying some exorbitant price for it. But at least in our situation, because I haven't done market research on every single city in the country. So for our city, for our area, or cities nearby, looking at new homes, the price per square foot had very little difference or even was a good chunk cheaper for us. And so that felt like a sort of no-brainer. I will say that a lot of the resale homes in the area, they have some more character.

21:05Andrew Sather:Maybe they were built a while back. Maybe they were built by a builder who does more customization than some mass builder or something like that. And so they definitely have some more characterisms, some more unique features that we would definitely be looking for in our next home to get something like that. But it just, again, for our personal decision, getting those little unique features. Like we'd love, I'm pretty sure it's called a bay window in the kitchen where you have a little window that sticks out of the kitchen. I'm not sure. You put like plants in it and stuff like that. Like herbs right on the other side of your sink.

21:39Andrew Sather:We'd love something like that. And with our current layout, we wouldn't be able to do it. The sink is in the island. But stuff like that just wasn't worth the tradeoff of the additional stress and, in this case, additional cost that we would have paid. One of the pros to me for a resale home, and this sounds so minor, but it's something that I've always been obsessed with, is just having an established neighborhood and developed landscaping. having massive oak trees you know covering the road or the houses and everything like that obviously we're ignoring trimming and having to deal with that sort of stuff but just appearance wise it feels so cozy and homey especially when it's you know 100 degrees outside in florida it's awesome to have a bunch of trees around and when you move into a new development it feels like you're you're in the middle of a desert because there's the trees are all tiny and they're all still growing and there's no shade whatsoever.

22:33Andrew Sather:So that would have been one of the pros that we would have liked to take advantage of, but just didn't end up being worth it for us.

22:42Evan Raidt:Yeah, I was shocked personally seeing the differences. And like you said, it's area dependent. And I would say probably also timing dependent. If you follow the stocks of these home builders, they have times where prices are higher and times where they're kind of giving away homes like you said this red tag event so whatever preconceived notions you have about how expensive a new build would be you might be surprised uh depending on what time and what place you are at uh for us another big factor was location and we bought at the time where nobody was really wanting to sell um so the fact that almost magically there was a little plot of land where they had started building in an area that was just already...