Smart Money Podcast: How to Own a Home: Strategies for Buying, Selling, and Improving
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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:
Get a comprehensive breakdown of strategies for buying, selling, and improving homes in our homeowners lightning round.
This Month’s Nerdy Question: What’s the best thing you spent your money on this month? Hosts Sean Pyles and Sara Rathner kick off a new segment by sharing some of their recent purchases, in a new segment designed to encourage you to think about your consumption habits.
Today’s Money Question: Should you shop around for a title agency? What are the pros and cons of owning a second home? What’s the ROI for home improvement projects? What are the financial implications of using retirement funds for home improvements? Housing Nerd Kate Wood joins Sean and Sara to delve into the complexities of the homebuying process, financing home upgrades, and leveraging home equity. They discuss the risks and strategies associated with using home equity for investing in real estate, the importance of an emergency fund when becoming landlords, and the alternatives to using retirement savings for home improvements.
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Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.
Episode transcript
This transcript was generated from podcast audio by an AI tool.
Sean Pyles:
When is a purchase more than just money spent, but a way to actually get what you want out of life? In this episode, we explore what buying the right thing can unlock for you.
Sara Rathner:
Welcome to NerdWallet's Smart Money Podcast, where we help you make smarter financial decisions, one money question at a time. I'm Sara Rathner.
Sean Pyles:
And I'm Sean Pyles. And as you may have gathered from my cryptic question at the start of the episode, today we are going to help you understand what a single purchase can do for your life. We'll also answer a number of your questions, dear listeners, about home buying in 2024, including how to use your home's equity to buy a second home.
Sara Rathner:
But first, back to that purchases thing. On Smart Money, we are staunchly anti over-consumption. It's killing the planet, after all, but sometimes you’ve gotta buy stuff, and the right purchase can just feel great or make your life better in meaningful ways. So we're going to kick off this month's Nerdy question, which is, listener, what's the best thing you spent money on this month?
Sean Pyles:
Our goal with this question is to encourage you to think about your consumption habits, share tips for making the most of how we spend our money, and also maybe brag a little bit about something fun or useful that you bought. Not every purchase has to be life changing, sometimes that extra large cold brew coffee can just make life worth living. But most purchases should be at the very least done with intent.
So Sara, what is the best thing that you spent money on this month?
Sara Rathner:
I was all set to respond another way with something fun, but the day we prepped for this episode a drain in my basement started oozing out sewage.
Sean Pyles:
Oh no.
Sara Rathner:
It was the stuff of nightmares. There was this clog deep in some 107 year old pipe behind my house. The $450 I paid a plumber to fix it same day was 1000% the best money I spent this month, possibly this century. And if you've ever bleached your own basement floor, you know what I'm talking about.
Sean Pyles:
I'm imagining you cleaning up the scene of a murder. That's what it sounds like you were doing down there.
Sara Rathner:
Basically, and this was a work day and I was in between meetings like mopping the basement floor after the plumber was done working. And I will admit that I cried several times that day. But again, we ended the day with a working plumbing system. We could flush our toilets and shower again, which we had to suspend doing while he was fixing the problem. And we were left with a clean basement. I mean, I left a box fan running down there for a few hours, trust me.
Sean Pyles:
That's a good idea. It's also a bit of a miracle that you were able to get this resolved within one single day. That money alone is worth it.
Sara Rathner:
I agree. If he came and said, this will cost you $10,000, I'd be like, I guess that's just what it costs.
Sean Pyles:
To have that out of your basement immediately, sure.
Sara Rathner:
Yeah. So yeah, people always joke about renting being throwing money away, but I literally lit $450 on fire last week and I regret nothing.
Sean Pyles:
Maybe it's less combustible than the methane gas that was in your basement, at least temporarily.
Well, I think I might know the answer to these questions, but what did this purchase leave you with, Sara? How did you feel after you made the purchase?
Sara Rathner:
It left me with a basement that wasn't a literal cesspool and I felt great. Like you said, I managed to find a plumber who was able to come out within a couple hours of us realizing the problem. It could have gotten a lot worse. Maybe we didn't get somebody out same day, we would've had to go stay in a hotel. You can't live in your home when you don't have working plumbing, and we have a child.
Sean Pyles:
Yeah. And a couple of weeks ago we were talking about the importance of having a fund for home expenses, whether it's just buying a new rug or repairing a busted 107-year-old pipe that spews sewage into your basement. And I bet you were really happy to have that fund when you covered this cost.
Sara Rathner:
Yes. We actually have separate funds for home decorations or furniture and home repairs, and then we also have a fund called renovations, and that's where we save up long-term for bigger cosmetic things we want to do that are nice to have but are not necessary to the functioning of our home. It's actually kind of a five-year goal of ours to finish our basement. And after this whole debacle was over, I looked at my husband, I was like, we are never installing wall-to-wall carpet in a finished basement ever. Because if that happens, you have to tear it up and get it replaced. And I said, only porcelain tile, that is the floor. We'll put down area rugs, but the floor has to be indestructible.
Sean Pyles:
I think that's a good call after this.
Sara Rathner:
All right, Sean, enough of my saga of my basement. I don't think anybody wants to hear any more about this because it's disgusting. What about you?
Sean Pyles:
Okay. I have two purchases and if that is cheating, so be it. It is a podcast that I host so I can do what I want, I suppose. So the first is also maybe a boring home related thing because as homeowners we make boring but important purchases. It's a washing machine. Technically my partner bought this washing machine, but let's just roll with it.
So we had this full saga where about a month ago, our washing machine, which was only about five and a half years old, simply stopped working. So we wanted to get it repaired because we thought this machine isn't that old. The world is full of broken appliances as it is. Can we just repair this and try to get a more affordable, less environmentally destructive way of having a way to do laundry in our house? So we had a huge back and forth with this repair person. They came, they didn't have the right part. Then they got the part, but it didn't work. And eventually at a certain point the guy said, you know what? I know it's been three weeks, but you should probably just buy a new washing machine.
So that was a bit of a frustrating journey because we do like to repair things, but sometimes it's worth going through the whole process, doing your due diligence, knowing that you tried to save money where you could but then eventually just ponying up and making the smart long-term purchase, which was the washing machine. So incredibly boring, but I am happy to say I can now do laundry anytime I want.
Sara Rathner:
And did you buy anything fun too?
Sean Pyles:
Yes. So the second thing I bought was the CD of Beyonce's new album, Cowboy Carter. I've been listening to this album on repeat on my headphones all weekend long, but I love to listen to CDs in my car when I drive around. I feel like it's a way for me to unplug and not be worried about what's happening with my Spotify and just be really in the music. So this was a purchase for my own personal joy and to celebrate what Black women have done in the country music space and just jam out while driving around. So I'm excited to get that whenever it comes in the mail.
Sara Rathner:
And you have a car that still has a CD player, which means that you are making an old car last a long time.
Sean Pyles:
I have a 2016 car and I'm going to drive this thing into the ground. I love it so much.
Sara Rathner:
Awesome. All right, well my same follow-up question to you is, well, two follow-up questions actually, how did these purchases leave you feeling? And then what amount of shopping around did you do for that washing machine?
Sean Pyles:
All right. So I did not shop around for this washing machine, but my partner did because he was the one handling all of this. And he spent many a minute, maybe even an hour plus, digging through all the different washing machines available. And we wanted to go with one that was very simple because a lot of appliances nowadays have multiple computers in them, and guess what? The more computers that are in an appliance, the more likely that something is going to break. So we got something that was pretty basic and I'm happy with it. I like that it seems like it's out of an old laundromat, it makes me feel safe. So that was good.
And the Cowboy Carter CD purchase just made me happy. It was all of $10 and then I guess $10 in shipping, so 20 bucks total for countless hours of joy and maybe annoying my partner by playing the same CD on repeat constantly.
So listener, let us know, what is the best thing that you spent money on in the past month? Why did you buy it and what did it bring into your life? Let us know and we might just share it with your fellow nerdy listeners on a future episode.
Sara Rathner:
And if it's just that extra large cold brew coffee, I'm in full support by the way, I haven't slept through the night in 10 months, please send help. And also tell us your favorite purchase by texting us or leaving a voicemail on the Nerd Hotline at 901-730-6373. That's 901-730-NERD. Or email us a voice memo at [email protected].
Sean Pyles:
And while you're at it, send us your money questions too. All right. Now let's get into this episode's money question segment after a quick break. Stay with us.
We are back and answering your real world money questions to help you make smarter decisions with your money. This episode, we are taking on a few of your housing related questions in a lightning round and we have housing Nerd Kate Wood joining us for this Nerdy journey. Kate, welcome back to Smart Money.
Kate Wood:
Thank you so much for having me back.
Sara Rathner:
All right, let's get into the first question. This one comes from Marc who sent us an email. Here it is.
When buying a house, we carefully selected a realtor, then carefully selected a bank to originate the mortgage. Then when the realtor draws up the offer paperwork, suddenly a new company in the mix, the company that will handle escrow and the title transfer. The paperwork will tell you that you don't have to use the title agency the realtor is recommending, but when you're getting ready to sign the paperwork, it's too late to step back and see if the title agency is a good one and if what they're charging is reasonable and competitive. On the last offer I made I even had to sign a disclosure that the realty company and many of its employees have a significant financial stake in the title company. I'd love for Smart Money to talk about this and how to shop around for a title agency in advance just like we do for other companies involved in the transaction.
Sean Pyles:
Buying a house is a complicated process in part because there are so many people and companies involved. Can you please quickly explain the role of the title agency in the home buying process?
Kate Wood:
Sure. So in a nutshell, the title agency goes through public records and they just make sure there is nothing fishy with the home's ownership. They're looking to see that the house or the home has a clear title, which means that it is the seller's house to sell. No one else can make a claim to it.
So when I was buying my home, actually the title agency found that there was a former occupant who owed a bunch of back taxes, which was a big yikes. Luckily for me, it turned out that that person had just lived there, they didn't have an ownership stake, they weren't on the title. But if they had been, I could have been dealing with the IRS and a tax lien and it would've been a lot hairier.
Sean Pyles:
Would not have been fun. No.
Kate Wood:
No, not at all. And so this is kind of what you're paying for with the title company.
The listener mentioned the company handling title and escrow. So title companies sometimes do escrow, which is just being the third party that holds onto your deposit during closing, but that is not always the case. Title insurance, which they don't mention and which is related, is something else that title companies are often involved with. And that covers any title claims or defects, anything that would come out after the initial title search is done. That way you can't have someone crawling out of the woodwork later claiming they're like a long lost heir of the previous owner and it's really their house.
And there are usually two separate title policies. Lenders generally will insist on lender's title insurance in order for the transaction to go through. Buyer's title insurance is more optional, but it's generally recommended.
Sara Rathner:
And how much does the title agency typically charge?
Kate Wood:
Title fees vary pretty widely because it depends on what's being included. So the home seller is actually usually going to pay for an initial title search, and that's pretty minor, that's like $75 to $200. What the buyer is going to be paying for is the title settlement, and that can cover a lot of different things. So as mentioned, that could cover escrow, which comes with a bunch of fees. It could cover notary fees, preparing the deed, real estate attorney fees. For me, that was the thing I paid the most with. And you might or might not see those itemized when you're looking at the bills. So depending on what's included and also the complexity of the search, that all could run to 1,000 plus dollars. Title insurance is separate. So again, there's a lender's title, insurance owner's title insurance. Getting both of them from the same company can sometimes save money. And the total cost of both those policies is usually like 0.5 to 1% of the sale price of the home. So say it's a $300,000 property, that's $1,500 to $3,000.
So all in, you're probably looking at a few thousand dollars. That's a decent chunk of your closing costs. But again, it's going to vary depending on the cost of the home, the complexity of the title search and what services are included.
Sean Pyles:
We talk a lot at NerdWallet about the importance of shopping around when making a financial decision, but the home buying process is so lengthy and can be so exhausting that many might not want to shop around for yet another person to do this relatively small part of the process. Do you think it's worth shopping around for a different title agency? What do people really stand to gain?
Kate Wood:
Saving some small amount of money, having some small amount of peace of mind. But very few people are shopping for the title agency for all of the reasons that you mentioned. So when you are looking at your loan estimate, you will see all the estimated title costs listed under the section that says services you can shop for. So it is like, yes, you can go out and see who you want to work with. But again, hardly anyone is shopping for these because once you've had an offer accepted, your mortgage application's been submitted, all of your incentive, all that energy is really going toward closing the deal. Just get to closing. And so taking the time to suddenly step back and research a title company or research something like a home inspector, these different providers that kind of show up during the closing process, you just don't have the time and you often don't have the energy.
So if this is something that you really want to do, you are actually much better off doing it well before you've reached this stage, so that you're not holding things up, so that in the case of a title company you're researching a company that's going to do research. While you're still in that daydreaming phase where you're just spending a lot of time scrolling through houses online, spend some of that time going through these different companies. Look into different title companies, look into home inspectors, look into these different service providers so that when it does show up, you kind of know what you're looking for or what you're not looking for. You can have some kind of preference when the different things are being suggested.
The one other thing that I would mention that the listener brought up was their example of the real estate agency and the title company having some kinds of financial ties, anything like that where there is that kind of conflict of interest, if that's coming up during any part of the home buying process that could possibly raise some red flags for you, it is okay to step back and be like, oh, hold on, maybe let's not go there, let's hit pause.
Sean Pyles:
That's fair. But otherwise, for most people this is going above and beyond the regular shopping round for a mortgage, real estate agent, that type of thing?
Kate Wood:
Absolutely.
Sean Pyles:
Okay, well I think we should all be honest here. You guys are homeowners. I'm a homeowner. Did you shop around for your title agents when you bought your houses?
Sara Rathner:
Nope.
Kate Wood:
Not at all. As I mentioned, I had a positive experience with my title company. Everything worked out for me, but absolutely, absolutely not. I don't remember who they were.
Sara Rathner:
Honestly, you have so much decision fatigue that I didn't shop around for one blessed thing. I just let the realtor lead me around like a confused baby lamb.
Sean Pyles:
But hey, you got your house.
Sara Rathner:
I got my house and I'm happy. And we refinanced later on. It was fine.
Sean Pyles:
I shopped around a lot for my mortgage. I got five quotes. It was also the pandemic, so plenty of free time on my hands. But the title agent wasn't even on my radar of things to shop around for, in part because I hadn't been through this process before. I didn't know that I would need to consider a title agent. And honestly, when I buy my next house, whenever that happens, if it ever happens, I don't know if I'll shop around for it because decision fatigue is very real. You’ve gotta prioritize the important things, not something that isn't as significant potentially.
All right, well let's move on to our next question in this lightning round, which comes from Amy who emailed us a voice memo. Here it is.
Amy:
Hi Sean and Sara. My name is Amy and my partner and I are looking for advice on real estate and investment. In February 2020 I bought my first home. All things considered, it's an older home, but it has worked for me and now for my fiance. The 3.75% interest rate has made it a great living situation for us and I even get to do some gardening, which I need and love.
Fast-forward to this fall when I was offered a sort of dream job in Seattle, Washington. Compare that to where I'm living in Albany, Oregon, which thankfully does not have Portland prices. The Seattle job's pay is technically better, but it doesn't quite make up for the cost of living difference. The dilemma we're facing is what to do with our first home. Ideally we would want to keep it as a rental home to allow the investment time to grow. The problem is that we don't have enough in savings to put money down to buy our next home, we're actually renting in Washington until we figure out our next steps.
So my question is this: since I purchased the home it has grown in value by more than $100,000. It's now worth almost double what I have left on the cost of the loan. Is there a way for me to use the equity in my home towards the down payment on another home in Washington without having to sell? And even if there is a way, is it even advisable? We decided to rent out our old home for the next year, then we'll reevaluate our situation and hopefully have a better idea of our home buying expenses in 2024, 2025. Saving has been challenging for us and because of this, we're looking at the equity in our old home as possibly the only avenue to afford a new home in Washington. While home buying is a major goal of ours, I also like the idea of keeping our old home as an investment for our future family.
So what are our options and which options make the most sense? Do we need to try to decide soon before rates go down and the market is flooded with buyers? All of these are questions that we have. Thank you so much for your help.
Sara Rathner:
All right, Kate, let's start at a high level. What do you think about Amy's investing idea? Is it wise or is it potentially risky?
Kate Wood:
Anything involving home equity is inherently risky because we're talking about loans where failure to repay could result in losing the home. But if you are on the wealth building side of TikTok, you might be hearing this and thinking using equity from house one to buy house two is something that people do all the time.
Sean Pyles:
Yeah, that said, it's not totally unheard of. And Amy's situation reminds me of something that I heard Barbara Corcoran from Shark Tank say one time, and it's that one of her only regrets in her career is selling properties that she could have held onto. Because you have this asset, you might as well make it work for you. But that said, it is quite risky, as you pointed out, Kate. If I was in this listener’s situation, I would want to make sure that I had a really, really beefy emergency fund before I did this enough to cover all of my expenses, including this additional debt for at least six months.
Well now let's turn to the main part of Amy's question, how to tap the equity in their home. What options does Amy have?
Kate Wood:
Pretty much the standard options for accessing equity. So one is to do a cash-out refinance, so that's where you refinance your original mortgage for a larger sum and then you get the difference between what you owe on the original mortgage and that larger mortgage in cash. The other option would be to take out a second mortgage. And so second mortgage wise, we'd be talking about a home equity line of credit, commonly called a HELOC, or a home equity loan.
The biggest difference between doing a cash-out refi and doing a second mortgage, whether it's a home equity loan or a HELOC, is that with a cash-out refi you only have one loan. But interest rates have gone up a lot since 2020 and Amy's going to lose that 3.75% mortgage rate, since prevailing rates are higher now. Cash-out refi rates also tend to be higher than purchase mortgage rates, since cash out carries more risk for the lender. So it's going to be a higher interest rate on a larger loan amount. With a cash-out refi, you are going to have refinance closing costs as well, that's usually 2% to 6% of the amount that you're borrowing. So that's that total larger amount again.
Closing costs with a second mortgage with a home equity loan or a HELOC are usually lower, they're about the same percentage wise, but because you're borrowing a smaller amount of money since the cost of your original mortgage isn't included, so 2% to 6% of say $50,000 is usually a lower sum.
Sara Rathner:
So how else does a cash-out refinance compare with a second mortgage?
Kate Wood:
Well, with a second mortgage, as the name implies, you now have a second loan. So in this case, Amy would be keeping that original mortgage that has the low interest rate but would now also have another loan on that property. And that loan would probably have a higher interest rate, both because prevailing rates are higher and because lenders consider second mortgages inherently riskier. So again, they tend to have higher rates too. Like I said before, that interest is on a smaller sum of money, so there's some math to consider here. In terms of, if we're looking within second mortgages the differences between a home equity loan and a HELOC, a home equity loan is like a lump sum payment that usually has a fixed interest rate. It's pretty much a straightforward loan. The biggest difference is that it's secured by your house.
A HELOC is a revolving line of credit, and so that's usually more meant to be used over time. You have a credit limit, you borrow money as you need it, you repay it over time. And HELOCs usually have variable interest rates, so that can kind of fluctuate as the market goes up and down. Because of the sort of like, oh, pay as you go or take money as you need it, people most often use HELOCs for big renovations or a lengthy home repair where it's like, oh, something else comes up and now we have to pay for that too. That kind of thing. Whereas home equity loan, you're saying upfront, okay, this is how much I know I want to borrow and I'm borrowing all of it right now.
Sara Rathner:
So Amy could use something like a HELOC for a down payment on another house. And I mean this sounds like, I don't know, it could be potentially a savvy financial move, but again, also risky. And this is not something I've ever done myself, so it's a total mystery to me other than the stuff I see on TikTok.
But what questions should Amy and their partner work out before they make this decision? What's their budget for housing? Do they want to be landlords? All those types of questions.
Kate Wood:
So there's definitely a lot for them to consider because I just went through a whole bunch of stuff, but that was just how can you access the home equity? And that might actually be the easier part of the equation here compared to using it. I was mentioning renovation and usually with a cash-out refinance or a second mortgage, because you're home securing the loan because there's that foreclosure risk, at NerdWallet we do tend to recommend using liquidity from home equity to accomplish goals that put you in a stronger financial position. And so things like a home renovation, something where you're working to increase your home's property value rather than something like going on a bucket list vacation.
Sean Pyles:
Right. And buying another house could be a move that puts Amy and their partner in a stronger financial position.
Kate Wood:
Oh, I mean potentially, yes, absolutely. Buying a second home, having that first home as an investment property could totally put you in a stronger financial position, but using your equity to buy the second home is like a whole other deal, that's where my hesitation's coming from here. So even if you're keeping the first home as an investment property and the second home's going to be your primary residence, to a lender when you're going to get that loan to buy your new home, that is still a mortgage for a second home. So that's more risk for the lender, that's a higher interest rate even though it is going to be your primary residence. This is not a distinction. They're not going to split hairs with you on this. This is a second home.
So you are going to be held to higher lending standards. You're going to need a higher credit score. Both people, assuming both people are going to be on the mortgage, both people are going to need really strong financials. The lender might require a larger down payment, so having cash on hand from accessing equity could definitely help with that. And because they'll already own the first home that they're keeping, that home, which also might now have two mortgages on it potentially, or one very large mortgage if they do a cash-out refinance, you're now carrying a lot of debt. And so in order to offset what might now be a fairly steep debt to income ratio, Amy might need to be able to show the lender that they can get significant rental income from that first home in order to offset that debt.
So ideally that would be something like a signed lease, which they might have because it kind of sounds like they were renting it out now. Could also be a rental appraisal of comparable properties in the area. This is kind of what rentals are going for, this is what we're going to be able to get hopefully.
Sean Pyles:
And that's a really good point about carrying a lot of debt. Amy and their partner could potentially have three mortgages if they go this route, and even one mortgage can feel like a lot to stay on top of. But beyond that, they would also be a landlord, which is its own set of responsibilities.
Kate Wood:
Absolutely. There are so many sort of “do you want to be a landlord” questions. Do you want people calling you in the middle of the night because something's gone wrong? Do you want to be driving back to Oregon to deal with a maintenance issue? Or do you want to be paying someone in Oregon to be the person who answers that phone, who deals with those maintenance issues, who does all that for you and then that's eating into the income that you're getting from that property?
Sara Rathner:
So not to answer for you, Kate, and put words in your mouth, but reading between the lines here, it seems like you are a little wary of this idea.
Kate Wood:
I'm not trying to be discouraging, I just want to be realistic that this isn't just like an oh easy money kind of thing, no matter what you might've seen from a finance bro on TikTok. Again, we're talking about maybe having two homes with three mortgages, a lot of money borrowed. We're also talking about a lot of interest. And so even though your first home was an inexpensive home, once you're borrowing against it, that inexpensive home is now more costly. Because you've got a larger loan and you're paying more interest. So really kind of doing that short-term math and that long-term math, figuring out what's going to work for you.
Sean Pyles:
And like you said Kate, this is not an easy route to go. And this could be a moment where Amy would want to consult with a certified financial planner, especially one who is experienced in real estate investing. This would help them get another person's perspective on what opportunities and risks are part of going this way. And we'll show them whether it's really feasible where they are right now or if they might be better off going a different route.
Well let's get onto our final question and this one comes from Emily who wrote to us via electronic mail. Here it is.
Hi Nerds, I love your show and super practical advice for those of us who aren't yet billionaires. My partner and I fortunately bought a home at the height of the market a few years ago, relocating from a super high cost of living area, New York City, to a much more modest one further upstate. Although this move has been great, it's also meant that we traded our big city salaries for ones that are considerably lower. That said, we've been making it work but without much cushion. Although I love my home, its value hasn't necessarily seen those 30% increases like the rest of the country has even though it's not in a bad neighborhood. I'm always stuck between making upgrades to the home so that we can love it or stacking cash in case we want to buy in a fancier neighborhood.
In discussing a big ticket upgrade, my partner floated the idea of cashing in an old IRA that has just been sitting for years from a previous employer. We are nowhere near retirement age. So I understand this could come with heavy tax burdens and penalties, but it could also mean creating a much happier space in our home.
My questions, A, how can we get a clear sense of the tax penalties and complications associated with cashing in an IRA? B, how can we decide if a major upgrade is worth it long-term for the value of a home? Thanks for helping us as we wade through all of the adult-ious things. Sincerely, a fellow Nerd.
All right, Kate, we've got another question from a listener about tapping money for housing goals, although of a very different sort, and I can take the IRA penalty question first.
Kate Wood:
Please do. Taxes are not my area.
Sean Pyles:
Okay, so Emily didn't mention what kind of IRA they have, a traditional or a Roth IRA, and that does matter when it comes to withdrawals. So for a Roth IRA, they can withdraw their contributions tax and penalty free because they already paid taxes on that money. But earnings are a different story. You could trigger a 10% early withdrawal penalty a few different ways, this is by withdrawing your earnings before you are 59 and a half years old, if you withdraw the earnings before a five-year holding period is over and if you withdraw the earnings for a reason that is not excluded from penalties, things like buying a house for the first time or paying for college.
For a traditional IRA, things are a little bit simpler, but I would say no better because you face a 10% penalty for any withdrawals and they will also be taxed as ordinary income. You can avoid the 10% penalty if you use the money for qualified expenses, but fixing up your house is not one of them.
Sara Rathner:
Yeah. And another downside to this route would be the lost growth potential that Emily would face if they cashed out their retirement account early and depending on how much money they have in their IRA, how long they have until retirement, they could be missing out on tens or even hundreds of thousands of dollars of growth by withdrawing the funds early.
Sean Pyles:
Yeah, I think of withdrawing funds from a retirement account for discretionary purchases as a not ideal solution to a short-term problem that could have significant and costly long-term effects.
Sara Rathner:
Yes, and not knowing what other retirement savings Emily has, this is all part of a larger picture and...
Sean Pyles:
We're scared.
Sara Rathner:
Yeah, we don't want to oversimplify it. But yeah, definitely want to give you some things to think about as you make this decision. So cashing out a retirement fund might not be the easiest way to get money for a home project as we implied. Kate, what other options do people have?
Kate Wood:
Well, the good news is that there are a bunch of different options that you can use to pay for home improvements, and it really depends on the cost and the scope of the project. So is this something that you want or need to do immediately or is it something that could take years or maybe some combo of the two? One or the other of these might work better or worse for you.
So one obviously, as we just discussed for quite a while, is borrowing against your home equity with either a home equity loan or a HELOC, that's a home equity line of credit. Rewind if you missed all of that. But these could help you borrow a larger sum.
A personal loan is another option. So personal loans usually have a higher interest rate than borrowing against equity, but you are not putting your home up as collateral, you aren't paying closing costs and you also don't have to wait to get the money. So this is actually what I used when I needed a new roof. I did not have the option of waiting. There was moisture getting into the house, I needed that money right away. And so a personal loan really worked for me. Sometimes contractors or smaller companies will also offer you financing, and those are essentially personal loans as well.
If you've got strong credit, a credit card could be an option too. Consider applying for a card that has a lengthy and generous zero interest intro period and use that to pay for improvements over time. There are cards that are geared toward home improvement or that could offer you added cash back at the hardware store or the home center, that could also be helpful. Generally though, unless your credit limit is astronomical, this is going to be something that's helpful for smaller amounts of money.
Sara Rathner:
Yes, all things I considered because I also recently dealt with roofing issues. Thankfully we ended up being able to patch it instead of replace it entirely for now. We just kicked that can down the road another couple of years, basically.
Sean Pyles:
Sometimes you’ve got to.
Sara Rathner:
Oh yeah, you do what you have to do. So speaking of which, let's turn to the home improvement part of this question. I think a lot of us have this impression when we watch those really addictive home improvement shows that you pour a bunch of money into a couple of improvements like, I don't know, putting in white subway tile and shiplap and all the things that are really trendy right now that look really dated in five years and suddenly our houses are worth a lot more money. So what sort of return on investment can people really expect from different kinds of home improvements?
Kate Wood:
Okay, so please do not get me started on home improvement shows and especially all the kind of cosmetic things that you just mentioned. We're going to set that aside for another day. But for now, if I tell you one thing let me emphasize, home improvement is not something where you can think, okay, for every dollar I'm putting in, I'm going to get a dollar out, let alone get more than a dollar out. That is simply not how this works. If you're really looking at like, okay, what's the ROI? What's the return on investment I'm going to get on this project? That varies dramatically. But it's something also that you can research, you can look up.
Remodeling.com does an annual cost versus value report that you can find online. It's super interesting. You can look at national numbers, you can break it down by region and see average cost and the return on all these different projects. And usually what they find is that the projects that have the best ROI are almost always the least sexy and not really things that you would think of as adding a lot of value. So replacement garage door? Almost always at or near the top of their list. And even that's, it's so boring, new garage door. But that, even though it usually is very close, it's not the top item this year but it's near the top, you make the money back.
The projects that tend to have the worst ROI on their list are a lot of ones that you might think would be a lot higher. So things like an upscale kitchen remodel, like on one hand these are things that are going to lose value because of wear and tear. So appliances aren't appreciating over time, even if they're Miele or Sub-Zero. But also, these are rooms, like your kitchen, your bathroom, these are spaces that are really personal. And so one person's lovely tasteful kitchen is another person's hard pass, I don't want to buy this house.
Sean Pyles:
And that said, these remodels are also extremely expensive.
Kate Wood:
Yes.
Sean Pyles:
We remodeled our bathroom here, it cost like $20,000. Don't think we're going to see that back dollar for dollar when we eventually sell this house, if we ever do.
Kate Wood:
I don't want to promise you, but I can almost promise you, yeah, you won't. And I know I did say at length that I don't want to talk about them, but really the aesthetic stuff that tends to be the focus on TV is your lowest ROI. People are going to rip that shiplap straight off of your walls. If you really want to make a cost-effective improvement, upgrade your HVAC. Energy efficient upgrades that will increase your comfort and will eventually save money are a win-win. If you're thinking about resale value, it's something that shoppers tend to be looking for.
The other thing that you want to consider, which this listener does mention, is what is going to fit in with your living room. So if you are putting in marble counters and you're on a linoleum street when it's time to sell people always say, oh, don't buy the most expensive house on the block, you don't want that to be your home. You want to be relatively comparable, relatively in line with your area.
Sean Pyles:
And in general, when it comes to home upgrades I'm of the belief that unless your job is to be a house flipper, you should make these changes that you enjoy. Go ahead and paint that wall pink or get checkerboard tile in your kitchen. And if you're worried about what the next buyer is going to think about something, you're kind of selling yourself short and you're selling your time in your home short. When we upgraded the bathroom we weren't concerned about resale value, we just wanted a functional bathroom that wasn't dingy anymore. So we put the money into it to make it like that. How do you guys think about upgrades to your own homes like that?
Kate Wood:
I am 100% on board with that. One, don't get me started on in house flippers, but also just yes, 100,000% agreed. Is your home part of your wealth? Yes. For a lot of people this is a large part of their wealth, this is their largest asset. Is it an investment? Yes, it's an investment, but it's also your home. You live there and you should enjoy living there. It should be comfortable for you. So if you are someone who's super into cooking, if you're going to love having this chef quality kitchen with the nice appliances and a pot filler installed above your ginormous range, go for it. But do it for you, not for your home's hypothetical future owner.
Sara Rathner:
Yeah, there's nothing sadder than spending years renting and not being able to personalize your space to finally buy your own home and then paint the entire thing millennial gray, because you're afraid that if you painted the walls blue or something, some proverbial future buyer in 25 years is going to have a problem with it. It's like, first of all, you're probably going to paint those walls a couple of times over 25 years and trends change, so you might as well have a little fun with it.
Sean Pyles:
And additionally, as a home buyer, there's something really fun about making fun of the previous owner's choices and then correcting them to your own taste.
Sara Rathner:
Yes, it's all especially fun if maybe a previous owner tried to DIY some stuff they shouldn't have and then you get to fix that.
Sean Pyles:
Know that way too well. All right, well, Kate, thank you so much for coming on and talking with us.
Kate Wood:
No, thank you for having me. Always a pleasure.
Sean Pyles:
That is all we have for this episode listener. Listener, remember that we are here for you and we want to hear your money questions. So call or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]. And visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you're getting this podcast.
Sara Rathner:
This episode was produced by Tess Vigland and Sean. Sara Brink mixed our audio. Mary Makarushka helped with fact checking. And a big thank you to NerdWallet's editors for all their help.
And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.
Sean Pyles:
And with that said, until next time, turn to the Nerds.
