NerdWallet's Smart Money Podcast - How to Own a Home: Strategies for Buying, Selling, and Improving

Episode Date: April 8, 2024

Get a comprehensive breakdown of strategies for buying, selling, and improving homes in our homeowners lightning round. 00:42 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. 08:24 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.  In their conversation, the Nerds discuss: homeownership, smart home investments, title insurance, home equity, real estate investments, financial security, home improvement financing, title agencies, home disasters, buying a home, home equity loans, home equity line of credit (HELOC), cash-out refinancing, real estate game, emergency funds, home buying process, navigating title agencies, financial planning, home maintenance savings, intentional purchasing, home renovations ROI, anti-overconsumption, plumbing repairs, tax lien, closing costs, home buying in 2024, second property investment, becoming a landlord, IRA withdrawals, real estate attorney fees, escrow services, lender's title insurance, owner's title insurance, home value increase, property investment risks, buying second home, home buying expenses, mortgage application, real estate market trends, and decision fatigue. 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.

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. Welcome to NerdWallet's Smart Money Podcast, where we help you make smarter financial decisions, one money question at a time. I'm Sarah Rathner. And I'm Sean Piles. 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.

But first, back to that purchases thing. On Smart Money, we are staunchly anti-overconsumption. It's killing the planet after all, but sometimes you got to 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? 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 Sarah, what is the best thing that you spent money on this month?

I was all set to respond another way with something like fun. But the day we prepped for this episode, a drain in my basement started oozing out sewage. Oh, no. 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 1,000% 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. I'm imagining you cleaning up the scene of a murder. That's what it sounds like you were doing down there.

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. 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. 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. To have that out of your basement immediately. Sure. Yeah. So yeah, I, you know, people always joke about renting being throwing

money away, but I literally lit $450 on fire last week and I regret nothing. 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, Sarah? How did you feel after you made the purchase? 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. You know, it could have gotten a lot worse. We could not. Maybe we didn't get somebody out same day. We would have had to go stay in a hotel. You can't live in your home when you don't have 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. 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. And 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. I think that's a good call after this. 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? 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. And 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. And 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 this 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. And did you buy anything fun too? 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 and 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. And you have a car that still has a CD player, which means that you are making an old car last a long time. I have a 2016 car and I'm going to drive this thing into the

ground. I love it so much. 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? 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 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. And if it's just that extra large cold brew coffee, I'm in full support, by the way,

because 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 voicememo at podcast at nerdwallet.com. 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. Thank you so much for having me back.

All right, let's get into the first question. This one comes from Mark, 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 there's a new company in the mix and 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. 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? 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 have been a lot hairier. Would not have been fun. No, 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, you know, 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, you know, 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. And how much does a title agency typically charge?

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 something that was the thing I paid the most with. And you might or might not see those itemized when you're looking at the bill. So depending on what's included, and also the complexity of the search, that all could run to a thousand 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. You know, 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. 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? 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, you know, 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 has been submitted, all of your incentive, all that energy is really going toward closing the deal, just like get to closing. And so taking the time to suddenly step back and research a title company

or research something like a home inspector, right? These different providers that kind of show up during the closing process. You just don't have the time, right? And you often don't have the energy. So if this is something that you really want to do, you're actually much better off doing it well before you've reached this stage so that you're not holding things up so that you can research, you know, in the case of a title company, you're researching a company that's going to do research. So while you're kind of still in that like daydreaming phase, where you're just

like 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, right, 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. That's fair. But otherwise, for most people, this is going above and beyond the regular shopping around for a mortgage, real estate agent, that type of thing. Absolutely. 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? Nope. Not at all. As I mentioned, I did have a, you know,

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. 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. But hey, you got your house. I got my house and I'm happy and we refinanced later on. It was fine.

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 got to 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. Hi, Sean and Sarah. 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 jobs 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. 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? 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. Yeah, that said, it's not totally unheard of. And Amy's situation reminds me of something that I heard Barbara Cochran 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 on to 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. And if I was in this listener 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? 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 gonna 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, you know, say $50,000 is usually a lower sum. So how else does a cash out refinance compare with a second mortgage? 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, 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 one-time lump sum payment that usually has a fixed interest rate. It's a 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 like a lengthy home repair where it's like,

oh, you know, something else comes up and now we have to pay for that too. You know, 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. 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? Like what's their budget for housing?

Do they wanna be landlords? All those types of questions. 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. So 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, you know, a home renovation, something where you're working to increase your home's property value rather than something like, you know, going on like a bucket list vacation. Right. And buying another house could be a move that puts Amy and their partner in a stronger

financial position. Oh, I mean, potentially, yes, absolutely, right? 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 kind of where my hesitation's coming from here. So even if you're keeping the first home

as an investment property, and the second home is 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, right? 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 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, you know, having cash

on hand from accessing equity could definitely help with that. And, you know, because they'll already own the first home, right, that they're keeping, that home, which also might now have two mortgages on it potentially, right, 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, you know, 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. You know, like this is kind of what rentals are going for. This is what we're going to be able to get, hopefully. And it'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. Absolutely. There are so many sort of do you want to be a lawyer in their questions? You know, 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 in your mouth, but reading between the lines here, it seems like you are a little wary of this idea.

I'm not trying to be discouraging. I just want to be realistic that this isn't, you know, just like an, oh, easy money kind of thing, right? No matter what you might have seen from like 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, you know, even though your first home was an inexpensive home, once you're borrowing against it, that inexpensive home is now more costly, right? 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. Yeah. 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 on to 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 adultiest 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. Please do. Taxes are not my area. 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. 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. And, you know, they could be missing out on tens or even hundreds of thousands of dollars of growth by withdrawing the funds early.

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. Yes. And not knowing what other retirement savings Emily has. This is all part of a larger picture. And we're scared. 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?

Well, the good news is that there are a bunch of different options that you can use to pay for home improvements. And, you know, it really depends on the cost and the scope of the project. So, you know, is this something that you want or need to do immediately? Or is it something that could take years or you know, maybe some combo 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. 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. Yeah, but- Sometimes you gotta. 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? 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, home improvement is, if I can 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 like the least sexy and not

really things that you would think of as like adding a lot of value. So replacement garage door almost always at or near the top of their list. And even that's like, it's so boring, right? New garage door. But that even though it usually is like 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 like mealy or subzero. But also, you know, 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. And that said, these remodels are also extremely expensive. Yes. We remodeled our bathroom here. It costs like $18,000. Don't think we're going to see that back dollar for dollar when we eventually sell this house, if we ever do. I don't want to promise you, but like I can almost promise you, yeah, you won't. And I know I did say like at length that I don't want to talk about them. Really, the aesthetic stuff that tends to be the focus on TV is like your lowest ROI. People are going to rip that shiplap straight off of your walls. If you really want to make like 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 like putting in marble counters, and you're on like a linoleum street, when it's time to sell, right, you know, people is what is going to fit in with your living room. So if you are like putting in marble counters and you're on like a linoleum street, when it's time to sell, right? You know, 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. 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. Like 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? I'm 100% on board with that. Like, one, don't get me started on house flippers, but also just yes, 100,000% agreed. Is your home part of your wealth? Yes. You know, for a lot of people, this is 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 it's 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, you know, if you're going to love having this like chef quality kitchen with the nice appliances and a pot filler installed above your like ginormous range, you know, go for it, right? But do it for you, not for your home's hypothetical future owner. 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. 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. Yes, it's especially fun if maybe a previous owner tried to DIY some stuff they shouldn't have and then you get to fix that. Know that way too well. All right. Well, Kate, thank you so much for coming on and talking with us. No, thank you for having me. Always a pleasure.

That is all we have for this episode. 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 podcast at nerdwallet.com and visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate and review us wherever you're getting this podcast. This episode was produced by Tess Bigland and Sean. Sarah Brink mixed our audio, Mary Makarushka helped with fact checking and a big thank you to NerdWallet's editors for all And with that said, until next time, turn to the nerds.