NerdWallet's Smart Money Podcast - Credit Union Perks, and Getting Into the Housing Market

Episode Date: February 14, 2022

Where you bank can have a big impact on your community. To start off this episode, Sean and Liz talk about the benefits of credit unions, including how they can offer lower rates on loans and higher rates on savings accounts — while keeping your money local.  Then Sean and occasional co-host Sara Rathner answer a listener’s money question about how to get into the housing market. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend. Timestamps: This Week in Your Money segment: 0:00 - 3:46  Money Question segment: 7:08 - 24:30

Welcome to the NerdWallet Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Liz Weston. And I'm Sean Piles. Do you want the nerds to answer your money questions? Well, hit us up on the Nerd Hotline. You can call or text us at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdwallet.com. And to get new episodes delivered to your devices every Monday, be sure to subscribe. And if you like what you hear, leave us a review and tell a friend. This episode, our occasional co-host Sarah Rathner and I answer a listener's money question about getting into the housing market right now. But first, in our This Week in Your Money segment, Liz and I are talking about how where you bank can have a big impact

on your community. And we also want to share something that NerdWallet is doing to counter financial inequality. It is no secret that I am a big fan of credit unions. Last year, I made the switch from the large national bank I had been using for ages to a local credit union in the Pacific Northwest, largely because of the community aspect of the credit union. That and I was tired of my old bank charging me for using ATMs that were not a part of their network. That gets expensive. Yes. $5 a pop every time I want my own money. I was not having it anymore. So let's start by laying out the difference between credit unions and banks.

Essentially, a bank is a business focused on managing and making money from, well, money. And banks tend to have more branches and are quicker to adopt newer technologies like glossy apps and well-designed websites compared with credit unions. But the catch is that the money you put into a bank largely does not stay in your community. Banks tend to be owned by their shareholders. So that's where the money goes. Credit unions, by contrast, are owned by their members. So they exist to serve their community. And these communities are based on something called a bond of association.

So it can be that people work at the same place, that they have the same religion, or maybe they're just in the same area. And in general, they offer the same services as a bank. They'll have checking and savings accounts. They offer loans. And in fact, a lot of people first find out about a credit union when they go to get an auto loan. And one of their friends says, hey, you should check out the credit union. They've got great rates. So basically the profits are being returned to members in the form of higher interest on their savings, lower interest on their loans and other perks. Beyond regular credit unions, there are also community development credit unions. CDCUs, as they're called, are a more mission driven version of your standard credit union. And these credit unions are members of an organization called Inclusive. That's a nonprofit association of CDCUs. Their mission is to serve people who have historically been shut out of the financial system,

whether because they are low income or part of a marginalized group. And CDCUs are trying to solve a pretty significant problem, which is that in the US, 22% of adults are unbanked or underbanked, and they have little access to cash or credit. And this population has fewer options when they go to try to buy a house or start a business. So this is something that NerdWallet is really dedicated to. To combat financial inequality, NerdWallet has deposited $2 million with the Self-Help Federal Credit Union to fund personal loans, mortgages, and commercial loans for their members. And we're asking other companies across the country to join us.

If you are a business owner and interested in this, or you think your employer would be interested, you can learn more at www.nerdwallet.com slash social impact. And if you are interested in switching to a credit union yourself, you can use a credit union locator at mapping.ncua.gov. And now let's pivot to our no spend month check-in. So as we've mentioned before, we are doing a no spend month for the month of February, where we try to not spend money on things that we truly, sincerely do not need at all. And it has been, let's say, a challenge for me so far. So this past week has been a week of saying no, except for the

times that I said yes. And there were a couple instances where I said no one was proud of myself. One was this might sound a little bit weird to you, Liz. It was this Lego set that I've had my eye on for a while of a bonsai tree. Lego has this insanely beautiful series of Legos that are botanical themed. I have one that is a bouquet of flowers that I just adore and they sell out almost instantly. And then they are listed again on eBay for like twice the price that you would actually get it at from Lego directly. So I had an email alert from Lego saying, hey, I'm back in stock. Come and get me.

And I didn't do it. So that saved me like $50, I think. Wow. So I added that to the running list that I have of times where I didn't spend money that I wanted to spend. So I felt good about that. But that said, I did say yes to a few things. One of our friends had a going away party this past week. And we went out to a bar and I had a couple of drinks, but I didn't get the Cajun tots. That's usually my go to when I go out to a bar is buying a bunch of tater tots for the table. And I said no to that to try to find a middle ground between spending and not spending. Oh, good for you. Now see, I had the same trigger, but I came to the opposite conclusion.

What was it? I make miniatures, like for dollhouse miniatures, things like that. And there was a specific item that came up that had instantly sold out the first time it was offered. It came back up and I just pounced on it because I was like, I have no idea when this is going to be back in stock again. My hat's off to you for saying no, because I was just like totally sucked in. The other thing was I completely forgot about our no spend month

when I agreed to have lunch with a friend. So yeah, that was another $40 I hadn't planned on. On the plus side, you know, there are a lot of things I've been saying no to, and I've been using your trick of writing it down in my phone. So I have a running list, the things I'm saying no to at the moment

and how much I have saved so far. And we're already into two, $300. So it's adding up. Yeah. It's like no small amount. I'm going to check mine right now. So I mentioned last week that I was about to win this eBay bid and I lost it. So I'm debating whether or not I want to count that as money saved because it technically was not even money I could have spent because I lost the bid. But if I had won that, I would have spent $80 on this thing that I didn't end up buying. So that made me feel good. So far, I have saved $65 on things I didn't buy. I canceled a free trial subscription that I was going to let lapse. So sorry, Apple TV, I'm not a subscriber.

I didn't get lunch when I wanted it and that Lego kit. So 65 bucks so far. I'm feeling good about it. I would feel good. Yeah, that's great. That said, I'm about to head to Florida and that will be the real test of my dedication to not spending money on things that I truly, sincerely do not need. Well, hopefully this little discussion here

will propel you forward. Well, thank you. I'm looking forward to checking in after my vacation. So I think that about covers it for now. Let's get on to this episode's money question. All right. Sounds good. This episode's money question comes from a listener's voicemail. Here it is. Hi, my name is Anne. Basically, I am somewhat priced out of the housing market of what I want. So my question is, should I move to a location that's less desirable or buy more of a sixer upper that might take a long time or might be more costly than I might understand?

I passed on a house that was maybe not in the best neighborhood, but now I'm wondering if maybe that's something that I should look at. I am in the Seattle area and I am single, but I do have a girlfriend who works up north. So the commute will be far if I move to the neighborhood that is less desirable because it's far. And I have a little dog, which is partially why I want to buy a house. Thank you so much.

All right. To help us answer Anne's question on this episode of the podcast, we are joined once again by our favorite mortgage nerd, Holden Lewis. Welcome back to the podcast, Holden. Oh, thank you so much. Holden, it's great to talk with you. I'm wondering what you think about our listeners' situation. It kind of touches on how hard it can be to balance different priorities when you're hoping to buy a house. What do you think?

That's exactly what it is. Anne is caught in a dilemma. And by definition, there are no cleanly good options. There's tradeoffs. Anything she does, it's an intensely personal decision. Needs to be made not by just her, but two people who are communicating well. So the first thing that runs through my mind when I hear this is that I have this philosophy, people before things. Now, I don't always live up to that. But in this case, I might modify it to

people before places. Long commutes, they're not helpful for relationships and they're not helpful for commuters' bodies either. The divorce rate is higher for people with long commutes. They can't be good for friendships. So my first reaction is that it might be better to prevent a long commute, even if that means buying a fixer-upper. Man, that is easy for me to say because fixer uppers are expensive and time consuming. And especially a fixer upper in the Seattle market, which is expensive no matter what you're looking at buying. And one thing I wanted to clarify is that a long commute is anything over 45 minutes.

I can't even remember where I saw this research, but that was kind of the dividing line. 45 minutes each way. And if you have a commute longer than that, then there is a measurably larger divorce rate. Our listener mentions that they are not married, but they have a girlfriend. So how I interpreted that is that they are single for the sake of filing taxes and buying this house that they want to get, but they are considering their partner in this entire process. Right. Yeah. That's the way I saw it too. If they are planning on moving in together in this house, then obviously there are other

things to discuss. Who pays for what? Who's on the title for what? Those are all conversations that are a little bit more complicated when it's not this cut and dry situation where it's either you're single and it's just you buying this house and it's by yourself, or you are in a more serious relationship or married and you know you're buying this house together. It would probably be a good idea for whatever situation they want for our listener and their partner to have some sort of written agreement for who has what amount of financial obligation for this house in terms of paying rent or a mortgage so that you can get things in writing in case things go south, which can happen.

Holden, you kind of touched on the whole idea of the fixer upper. And I know thanks to HGTV, it feels like you buy this house that looks like it's definitely haunted. And you make it your own. It's such an exciting process. And you're picking all the things and it's so fun, but like, what, what's the reality of buying a fixer upper? What are people signing themselves up for? Oh boy. Is it exciting? Well, you know, it's exciting the way like getting in a car crash can be exciting, I guess.

No, it's probably not that bad. Yeah. You know what? Actually I'm involved in a fixer upper right now. I just inherited a house and it has needed a lot of work and it's taking a lot longer than I expected it to. That's an inherited house, a little easier situations. And the first thing to think of when you're thinking about buying a fixer upper is how much it costs. And that's the price of the house plus the total of all the work that's done. And then you also have to factor in the cost of displacement. You might have to find another place to stay for a few days, several times during the whole process. Like when the

floor is sanded and refinished or when the windows are replaced. Take into account those costs and frankly the hassle. And you also have to be really careful about inspections for any house that you might want to get when it's a fixer-upper. Can you talk through the inspection process? Let's back up a little bit and talk about renovation mortgages because those exist and a lot of people, they don't know about them. So a renovation mortgage is a home loan where you borrow the money for buying the house and also for the cost of fixing it up after you buy it. And then that's all rolled up into one

mortgage. So it might work this way. Let's say you buy a house for $300,000 and it has $200,000 of work that needs to be done. Well, the house is only worth $300,000, but you can get a renovation mortgage and borrow the $500,000 to buy the house and fix it up. There are two basic types. The FHA insured version is called the 203k loan, and the non-governmental version is called the home style loan. Both are more complicated to apply for and qualify for than a regular mortgage. And if you don't know where to start, an FHA 203k loan might be better because it requires you to hire an approved consultant who will advise you. You asked about inspections. Yes. Well, that kind of fits into these things. I recommend doing the inspection work in two stages. First, hire a general and pest inspectors. And in the Seattle area, ask for an inspector who has expertise in doing a seismic inspection just to identify vulnerabilities from earthquakes. initial inspections, list the improvements you want to make, and then find an FHA consultant

or interview general contractors to give you estimates of the renovation costs. Is there anything that might come up in an inspection that for you would be a red flag that would tell you this house just is not worth it, even if you can get a renovation mortgage? Indeed, there are extensive termite damage, really bad foundation problems. Frankly, if it just looks like an earthquake would send the chimney through the roof and into your living room, that might be a case where, yeah, you could probably pay to brace it, but maybe you just want to pass and move on to a different house. Okay. Holden, one thing I wanted to ask you about, especially with fixer uppers or really any work that you need to do your home. And this

is something I'm seeing anecdotally I'm experiencing as a homeowner, but labor shortages and material prices going up. How is that affecting decision-making when it comes to taking on these massive home repair projects? Let's say you want to buy a fixer upper that you're not comfortable living in from the outset until some work is done. This could really push off the date when you can move in because, yes, there really are shortages of not only labor, but materials. Anything from doors and windows are short right now to just simply like electricians. You know, you call an electrician and they tell you they'll see you in three weeks. So those things are making it more expensive and more time consuming to get extensive work done. And I think that people might find that they would be willing to live with less than they would expect in terms of quality of a house.

When my partner bought his house in Portland a number of years ago, at this point, the house didn't have insulation. It barely had a functioning furnace. It didn't have more than two, three-prong outlets in the house. And those are things that we were expecting in a home, but we couldn't afford right then and there. And gradually we got them over time, over the past three or so years. But to begin with, it might be worth lowering your standards for what you would want or accept in a house just so you can get in. time over the past three or so years. But to begin with, it might be worth lowering your standards for what you would want or accept in a house just so you can get in. Even once you're in the house, I don't know if anyone's tried ordering furniture over the last year or so, but the backlogs are pretty intense at times. And you might have this house full of empty rooms to fill,

and all the furniture you ordered to fill those rooms, you're going to wait an extra six months. Oh gosh, and refrigerators, washers and dryers, dishwashers, oh, it's a nightmare. It is hard. If you've moved from another place, maybe just hold on to that rental furniture and other things that you thought you might replace once you were in your forever home.

You might want to use them for another year or so and don't give them away or donate them or sell them off until you receive your new furniture. And there's another factor to consider with fixer uppers and that you're facing a lot of competition. No matter if you're buying something brand new or something that needs to be fixed up. With a fixer upper, you might face competition from flippers, from people who really, really are experienced in figuring out how much a house is worth before the work is done, how much it's going to cost to fix it up and how much profit they can make when they sell it. You know, you're kind of swimming with sharks when you're in this situation.

But on the other hand, you might be willing to pay a little bit more than a house flipper because you're just looking for a place to live. You're not looking for a profit. So far, we've talked a lot about what might happen if they go the fixer-upper route. And let's say that the house that they're looking into that's a little further away is under 45 minutes for a commute and is still a feasible option. What do you think they should think about if they want to go that route and get a house that's maybe in the boonies? Well, you still got to think about commute times. And then if you're accustomed to living kind of where the action is, think about being farther away from that. I'm imagining living in Seattle. And then she's thinking about moving to Des Moines or Federal Way. You know, she might miss the cultural amenities of Seattle.

To lifestyle change. You saw a lot during the pandemic, people leaving cities entirely, but moving to smaller cities with lower costs of living, they're still able to live city center or close to it, just at a lower price. So they get those cultural amenities, they get that walkability, but without paying top dollar to live in one of the most expensive cities in the country. I don't know if that's a possibility for Anne, because there are many jobs that are not fully remote. They might be tied to the Seattle area for all of their work opportunities. Or family obligations. You know, we really don't know. Or just you love it there. Don't leave a place you love just to save money on a house in a city you've never been to. You talk about people over places. You are also one of those people to think about. If you're very happy where you are, then ideally you can find a way to stay that works for you. It just reminds me of that saying at the beginning of the pandemic,

where a lot of people moved from New York City to Florida. And the saying was, yeah, but then you have to live in Florida. I'm a Miami native. So I'm going to say that I give them one, maybe two hurricane seasons before they regret that choice. Just paying for flood insurance alone. Really fun. I'm moving from Florida to Texas.

And I really, really hope to make that move before June 1st and finally get out of Florida before hurricane season. Yeah. Well, I want to zoom out a little bit and talk about your general thoughts about buying a house in 2022, Holden. As we know, things are competitive, houses are expensive, and we are anticipating some interest rate hikes over the coming year. How do you think all of this factors into buying a house? It's not negative thinking to brace yourself ahead of time with the knowledge that it's going to be a frustrating journey. You're going to be driving in your car and screaming at the windshield at times in frustration. It's just, it's not very pleasant out there. And a lot of it has to do with

competition. You can expect to make offers on houses and not have them accepted. My advice is just know your budget and stay strong. Because if you don't succeed the first few times you make offers, you might be tempted to exceed your budget. And you know, when that happens, just stop making offers for a while. Cool down a lot easier said and done. You know, a lot of it really is just kind of regulating your emotions. Now, at the same time that I'm saying, oh, take a break. If you get frustrated, you're probably also realizing that mortgage rates are rising. Yeah. Time is of the essence, even beyond the interest rate hikes. If you sit out too long, the house that you might be able to afford could be off the market. That's right. It's not just

the Fed. It's just the mortgage market as a whole. The 30-year fixed is likely to reach 4% this year. It's been years since it's been that high. Rising rates, they're going to decrease affordability. People are going to have to revise their price ranges as rates rise. You might be looking at $300,000 to $320,000, and you might have to adjust that from $290,000 to $310,000. That's just to stick to affordable monthly payments. Anything good comes from rising rates. It might take some investors out of the market. So you might end up facing less competition from landlords and flippers. Do you think that would also mean that people would maybe be pricing their houses lower when they do go to sell them? That's not going to happen anytime soon. Okay. People are going to be stuck with considering what their house was worth a few months ago.

People are going to ask for the asking prices that they're accustomed to hearing about in their neighborhood. So that downward adjustment, if it ever comes, it's going to take a while for that to happen, probably after this year's buying season. So do we have any good news for our listener or anyone else hoping to buy a house in 2022? You know, house prices went up in double digits in 2021. That's probably not going to happen in 2022. They might rise five or six or 7%, but 13%, no, that's not likely. And a lot of that has to do with the rising interest rates. Does that mean you're going to get a big break on monthly payments? Maybe not. But hey, look, you got to look for any silver lining you can find. We need more houses. We need more houses. They need to build more houses. And there's just a lot of things that prevent that from happening. There's just

a lot of regulatory stuff. I wish there was an easy fix. I see that where I live. It's just like I'm a huge fan of mixed use development. And it's hard because people really do need different types of housing, not just housing in general, but different cities have different levels of demand for apartments for one or two residents versus families that might want to stay in the area. Therefore, you need two to four bedroom houses and things like that, or apartments or condos. It's nice to have a mix so people can stay in different neighborhoods, but that's just hard to find. Holden, do you have any final thoughts for our listener or anyone else that's hoping to actually get into the housing market

this coming year? When it comes to buying a home, so much of what you're doing is emotional rather than financial. Regulating your emotions because it's just an incredibly emotional time buying a house. And it can be kind of unexpected. The highs and the lows are just something that you have to learn to manage, to deal with. And knowing that going in, it's just really helpful. All right. Well, thank you so much for talking with us. You're welcome. With that, let's get on helpful. All right. Well, thank you so much for talking with us. You're welcome. With that, let's get on to our takeaway tips and I'll kick us off.

First up, explore your options. Two types of renovation mortgages exist for buying and renovating homes. One is FHA insured and the other is conventional. Next, be smart about inspections. Tackle fixer-upper inspections in two stages. Start with a general inspection and then have a contractor or consultant inspection. Lastly, keep an eye on the Fed. Mortgage rates will rise this year and already have risen. This harms affordability and you might have to adjust

your price range downward. And that's all we have for this episode. Do you have a money question of of your own, turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com and visit nerdwallet.com slash podcast for more information on this episode. Remember to subscribe, rate, and review us wherever you're getting this podcast. And here is our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but 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. And with that said, until next time, turn to the nerds.