Ep 007 - Stay on Top of Home Finances

Welcome to Be a Smarter Homeowner Podcast, where you'll discover strategies to save money, save time, and be better organized in managing your largest financial asset and biggest expense, your home. Your hosts, John Bodrozik and Beth Dodson, who are co-founders of HomeZada, have been supporting homeowners for over 20 years. They are here to share with you their tips and suggestions, as well as interviews with industry experts, with the goal of helping you become a smarter homeowner. Now, here's your hosts, John and Beth.

Welcome to another episode of Be a Smarter Homeowner podcast. My name is John. I'm with— here with my co-host Beth, and we're going to talk about home finances. And we're going to go through lots of different aspects of what home finances mean. Clearly, most people think about home finances about what it takes to actually buy a home. We're gonna talk about that. We're gonna also talk about the importance of managing your finances when you're in your home. And—

You know, most people actually think home finances is yucky.

It can be a serious subject, right? But if you stay on top of it, it's—

I love how you changed my word from yucky to serious.

It can be a serious subject, but as long as you, you know, tackle it with a plan, it doesn't become as onerous.

Okay.

As it could be. And let's face it, everybody talks about your home being your largest financial asset and your biggest expense. And there are 2 financial words in there that are key. Asset, meaning is your home appreciating and how much of it do you own in terms of equity? We're gonna talk about that. And then there's the expense side, right? Which is what are all the expenses that we as homeowners have to plan and budget for in order to make sure that we're maximizing or minimizing our expenses and maximizing our asset value? So, uh, Elizabeth, why don't we, um, talk a little bit about home finances as it relates to what most people think of it is, which is all the things you have to do as a consumer to be able to buy a home. And I know we've just recently had that discussion with some friends and family who have never bought a home. And so why don't you sort of kick us off in that direction?

Yeah, I think one of the first things that people look at is How much of a home can I afford? That's the first thing, which means it takes into account how much they make, how much they have saved, because they may need to put a down payment down on the home. So that's the other thing. The second thing that they look at is how much mortgage do I want to incur? Because if I incur so much of a mortgage, then I may not have be able to have as much fun or do some other things. So how do I balance that? What do I need to get from a credit score perspective in order to be approved for a mortgage? Because the majority of homeowners in this country are given the opportunity to secure a mortgage in order to buy a house. Some people can afford to pay outright cash, but that's very rare for a first-time homeowner. And I think the other thing that looks at is when it comes to buying a house, and I think this is also Some people go into this knowing, some people don't. What are the closing costs I'm going to have to incur as well in order to buy a house?

Can you tell us what closing costs mean for those people who may not know what they mean?

Yeah, so, uh, there's a lot of different components to closing costs. You may have to get an appraisal, you have to get the processing of closing that loan, meaning recording your documents in the local county and cities. It also means potentially paying for inspections.

Title insurance.

Title insurance, etc. And title insurance is important. Most people don't understand this because you want to protect the property that you're buying, and title insurance actually does do that. It helps identify the long history of where the property was once purchased and who actually purchased it along a series of lines. Meaning the succession of that property, but also where the lines of the property reside as well, all the different elements of it. But closing costs involve a lot of different elements that helps with processing of the overall loan. That's a brief overview of that.

Yeah.

And so the, the whole— just to add on that, the home finances piece usually gets down into what is your annual income? How much money do you make a year? And how much debt do you have, right? Do you already have—

That's another good point.

Do you already have debt because you've got a car loan or do you have student loans or you've got some other personal debt, right? So a bank is gonna evaluate you based on your credit score, your income, and your debt, and they're gonna come up with what do they think that you're qualified to secure as it relates to a mortgage loan, right? So maybe depending on what your income level, you'll be like, Oh, you qualify for $200 grand. Or you've got higher income, lower debt, maybe you qualify for $500 grand, right? So there, you can get prequalified by a lot of financial institutions over how much of a mortgage you can qualify for. And then clearly, there's the flip side of the finance piece, which is what's the price point of the home that you want, right? And this goes back to the what you like versus what you can afford are oftentimes 2 different things.

Boy, is that the case.

In conflict with one another.

They are.

Right? And so you're trying to marry how much you can, get prequalified for the mortgage versus what the house is going to cost. And then invariably there's this, there's this word called down payment.

Yeah.

What is the down payment defined as and what are the— what, what, what are some rules of thumb as it relates to what down payment you have to come up with in order to buy the home?

Are you asking a question?

Yes, I am. Okay.

Sorry. Yeah. So when it comes to a down payment, it depends on the type of home you're buying. And this is going to get into a lot of complexity, and I don't necessarily know if this is the episode for it. Exactly. Down payment is: Do you need to put a specific amount of money down to show that you were vested into buying this house? It could be five percent. It could be ten percent, twenty percent of the purchase price of the home. And it's important to understand this because it's also important to know how much you have to. Save to put a down payment on a home, but also what your closing costs are. And also, just as for those people out there, there are down payment assistance programs that banks offer. And a lot of banks may not know exactly what all the programs are, but there's also third-party systems that can help you identify If you qualify for down payment assistance. But before you get there, you have to understand that there is a cost, hard cost to go in and buy a house.

Great. So let's segue into what I call— most people, when you hear the phrase home finances, they think about all the things that we just sort of summarized at a high level.

Right.

And there's lots of content available on the internet searching for, you know, mortgage, down payment, prequalification. You can get all that other information.

Lots of it.

What I'd like to do is kind of segue into, most people think that once you've overcome this hurdle, right? You've secured your loan, you found your house, you put your down payment in, you got the keys, you're moving in. They think that home—

Woo!

Woo, party time.

Exactly, I bought my house, it's so exciting.

Yeah, time to have—

I was there.

Time to have a housewarming party.

Yes, exactly.

That could be another good episode, by the way.

Yeah.

Just dedicated on housewarming parties. Anyway, People think that home finances is done. Like, all right, I'm done. I don't have to worry about home finances anymore. And what we're trying to do here is explain that it's not done. It's an ongoing process.

That's correct.

Because going back to the, for most people, your home's your largest financial asset and your biggest expense. So tracking your asset is something that we're going to talk about next, right? Which is Um, you bought a home in a neighborhood, and let's just say you bought it for $400,000, right?

That's an expensive home.

Well, yeah, but I mean, the markets have gone up all across the country. Okay, $250,000.

Yeah, it's better.

Okay, but real estate dynamics never change— I mean, sorry, are never static. They're always changing, right? So if you've lived in your home 6 months or 12 months Could the value of your home gone up or down?

Yes.

And why does the value of your home go up or down?

Well, there's market conditions, there's value. Maybe you've put more into it. Maybe you've remodeled some things. Maybe you've actually updated it because maybe you are buying homes to flip homes.

That's a fixer-upper.

Yeah, fixer-upper. So you're making all these investments in 6 months. And you're showing that you made all these investments and you purchased this home for a lower rate because it was a fixer-upper and now you want to actually flip it.

Right. So the biggest thing I think is not only is the investment piece, we'll get to that in a bit because that's a huge, important part, but it's what I call the real estate dynamics. Right. Did you buy into a hot neighborhood? Are people wanting to get into your neighborhood? If more people want to get into your neighborhood and less people are selling, obviously, probably the home prices are appreciating, which is a good thing. And then there's the sort of long-term trend. We've gone through a period in the last 12 to 18 months where, let's face it, real estate prices have pretty much skyrocketed all across the country. But if you're going to live in this home, whether it's 1 year, 3 years, 5 years, 10 years, the real estate market around your house and the neighborhood that you live in and the zip code that you're in is going to be constantly changing. based on the constantly evolving comps of what's going on in your house.

That's correct.

Right. And that's a huge important thing to sort of stay aware of because you want your home to appreciate, because if your home appreciates, then you're improving your equity, which we'll get into next. But you're basically— the old adage is, right, you want to buy something that's going to appreciate in value, and that's going in that direction. Absolutely. Now, The other aspect of what I call understanding the asset value is what I call the mortgage balance, right? So back to our example, you bought a $250,000 home, you got a $200,000 mortgage, you put $50,000 down, right? But you're paying that mortgage, monthly mortgage payment, right? What happens to your mortgage balance every time you pay that mortgage payment?

It goes down.

And what impact does that have?

And your equity goes up.

Exactly.

Which means you have the opportunity to use this asset allocation for your future retirement needs if you need it, or anything else if you want it.

Exactly. So just for— maybe most people know this, but maybe some first-time homeowners don't— home equity is really a simple equation, right? What is the estimated value of your home minus the remaining balance on your mortgage? And that's the percentage that you own. Right? Yes. The other percentage the bank still owns because that's essentially what the mortgage is, right? So people aspire to be mortgage-free. That's when you own 100% of that asset.

That's correct.

But until you pay off that mortgage balance, that who owns the home is a split between you and your bank.

That's correct.

Right? And so the 2 most, um, important ways that you can increase your equity is you live in a hot neighborhood and the value is going up. And you're paying off your mortgage. And some people are gonna pay the minimum monthly payments. Other people may try to pay off their mortgage quicker.

That's correct.

By doubling the payments or—

Or by paying one extra payment a year.

Exactly.

Something as simple as that can actually go a long way.

Exactly. And if you look at sort of personal financial planning, there's another financial term called your overall net worth. Like, you know, what is your net worth as an individual or a couple? Oftentimes that incorporates 401 and checking accounts and other savings and investments. When they look at your house, they're going to look at your equity as the portion that's going to be contributing to your overall net worth, which is again, taking out the real estate value minus the mortgage balance. One other quick thing I'd like you to just point out, Elizabeth, 'cause you bring this up all the time as an asset, is all the things inside your house.

Yes.

And the need to take a home inventory and those kinds of things. Just briefly talk about that.

Yeah, so a lot of people think that the house is the only asset that you have. The equity in the house is the only asset. What you— what many people forget to understand is that all the contents within the house are also assets that you own, whether it's furnishings, whether it's artwork, whether it's house goods like forks and spoons. All of that actually has a material value. You spent money to buy it. And if something were to happen to your home, you would have to spend money again to replace it.

Yep.

So it's very important. All of those items that you own, they are also assets.

Exactly. So our action item, and I'm going to kind of do this as we go through this show, is to— you've moved into the house, you've had your housewarming party, but you got to be committed to tracking these things, tracking how your estimated value of your home is going up, hopefully. Tracking your mortgage balance, tracking your home equity. Um, maybe we'll even get into another show and have some mortgage specialists. There's a thing called the loan-to-value ratio, which is essentially the same thing of taking the amount of your loan divided by the amount of your estimated value and how much you could qualify using that home equity as a home equity loan.

Yes.

That's another aspect of why it's so important to track this, because people oftentimes will use home equity to pay for kitchen remodels or any other remodels, or they'll pay for vacations or unexpected healthcare expenses. So understanding what your home equity is, is a huge important aspect, and understanding how it's always sort of changing in that way. Um, uh, let's talk about the expense side of the equation.

The one that nobody likes to talk about.

Exactly. So there's a category For lack of a better term, I call it your regular ongoing expenses, right? It's those monthly checks that you're writing every month to a series of vendors, right? That is basically allowing you to live in that house. Can you talk about what are some of those monthly checks that you're writing every month to basically stay in your house?

Well, the first ones that we talked about is mortgage insurance and yeah, mortgage insurance. Big ones. And then you have utilities. So you may have gas and electric, you may have, um, internet, you may have, uh, water, um, you may have service providers that you work with. Maybe you have people who come and help with your lawn, um, because maybe you just don't have the skills to do that. Or maybe you have a maintenance contractor that comes every 3 months.

Yeah.

That comes and performs some of the maintenance tasks. But any kind of service provider is also an additional, like, monthly expense that you may incur.

Yeah, so it's, it's absolutely all those things. Uh, one that oftentimes gets people a little confused is what I call property taxes.

That's right.

Right? And this is kind of a dynamic over— sometimes your property taxes, um, depending on where you live and what county in the state, is usually assessed by your county as a percentage of what the county thinks your home is worth.

That's correct.

Not necessarily what the market thinks your home is worth.

That's correct.

Which is yet another reason to be able to track what the market thinks your home's worth versus what your property taxes are assessed based on.

It's important to check both.

It is absolutely important to check both because they're oftentimes different. And a lot of times, again, there's 3,000 counties in the United States, so each county kind of does their own thing. And there are voters that have passed certain rules over how much their county can raise their taxes and lower them because they're also dealing with the Increasing and decreasing value. And it's usually somewhere between, on the low end, maybe 0.4%, 0.5%, 0.6% I've seen with some states. And some high property tax states are as high as 1.8%, almost 2%.

Yes.

Right. And back to the— that's an—

I'm going to interrupt you for one second. So for people who are listening to that, 0.4% and 2% may seem like a little bit of money, but it Depending on the property that you have or the size of the home you have, that can be significant in your annual budgeting. So it's really important to understand that and really important to understand exactly what the dollar amount is so that you can understand how to budget accordingly.

Yes.

And your property taxes usually falls into— how do you pay for them? Falls into 2 categories. Sometimes it's rolled into your monthly mortgage payment.

Correct.

Right, which is at closing, they figured out how much your property taxes were assessed that year and it's rolled into your monthly mortgage payment. Sometimes people have the option of not including it in the monthly mortgage payment. And based on our experience of talking to customers around the country, most counties will basically, it's 2 lump sum payments.

Yes.

Usually comes due around November and April-ish timeframe, but it's hugely important to track that because counties will increase your property taxes.

That's correct.

They will increase the value that it's assessed, and one year after another, your property taxes may be going up. Candidly, about 10 years ago when the market went to a downturn, there was a lot of people that argued with their local county that their homes weren't worth as much anymore, and they actually lowered some property tax values. Rare, but very rare, but it does happen, which gets back to that point of being able to budget for all these things. Yes, right, because it goes to what you always mention is What percent of your income do you spend on your expenses?

Yeah, well, for our homes, there have been some consumer expenditure reports that are suggesting we spend approximately 33% annually on our homes. 33%. That's a lot of money. And that has actually gone up 2%, I think, since 2018. And that's a significant portion. And it may seem— 2% may seem small, but it can add up significantly.

The, the question that I have is how should people go about budgeting for all of these expenses? Your utility expenses, your property taxes, your internet, your TV, your landscaping, your pool. How should people go about budgeting them? And is it important to track the actual expenses?

Yes, it's important to track the actual expenses. And part of the reason is because if you can track actual expenses, And you can adjust numbers that could be really a benefit to you financially. And one of those areas is gas and electric and even water. Your usage of those 2 services are what you get charged, and that's the fees you pay. But if you leave lights on in every room in your house, then you're going to get charged for usage. If you're not in those rooms, turn off the lights because you could actually make modifications. To reduce your spend on those those programs. Same thing if you are cleaning outside during the summer and you use a lot of water to clean. You hose things down. You may decide I want to sweep things and not hose everything down, or sweep things first and use less water to hose things down. All of this can impact. How you— how much you're spending on your actual spend, and you can make adjustments on your own. Now, when it comes to budgeting, part of the budgeting process means you need to start understanding all the different elements that you need for your home. That's the first thing— what do you actually need for your home? And then you need to start tracking the information about your local communities And your specific home.

Yep, you hit the nail on the head. It goes to the— what I— the utilities tend to be usage-based. They also tend to be seasonal, right? So your certain bills, depending on what heating and air system you have, may be higher in the winter and the summer because you're warming your house and cooling your house versus spring and fall. And it also has to do with, like you said, usage patterns.

Yeah, I'll give you this example. It was quite funny. So We went away on a trip and then we came back to 115 degrees here. 115 degrees in Northern California was kind of crazy. But my, um, gas and electric company called me and said, your usage is off the charts. And I go, well, that's because we came back to 115 and our house is really hot. So we had to turn on the air in order to get it to go down because that's another thing. When you're traveling, do you really need certain utilities on at the— as if people were in the home, or can you turn it down or up depending on where you are in what season to reduce your expenses?

Yep. And the other reason I think it's important to track these expenses on a different category, it's what I call— they're not usage-based, it's just an annual monthly fee or an annual fee.

Homeowners associations.

Homeowners association fees, home insurance.

Yep.

Service providers like, you know, if you have a pool service or landscape, right? It's important to track that information because let's face it, if you start to look back over previous years, if you've got the previous year's data, a lot of companies will try to increase their annual fee or monthly fee every 12 months and hope you don't notice.

Yes.

Because what are they trying to do? They're trying to increase their revenue base. Sometimes it becomes a, do I need to switch?

That's correct.

Do I need to switch my current provider and go back to the marketplace and see if I can find the same level of service for perhaps a lower rate, right? And you've had experience in shopping for that. If you don't have the data, then you're—

That's correct.

You don't know what you're targeting.

I track every one of my budgets on my house because I wanna understand when things are gonna go up. And if I can either negotiate with the existing provider I'm working with, or if I can go find somebody else that may be more affordable.

Right. So an action item is to, you know, basically get our audience to commit to creating a budget for these irregular expenses, track the actuals, and then use that to make better, smarter decisions, right? Over can you get cheaper through either behavior over how you use your lights and water, to perhaps switching out vendors. Let's segue into another category of what I call expenses, which tend to be harder to budget because it's not like a monthly bill that shows up every month. It's the maintenance, repair, and fix-it type of expenses, right?

Mm-hmm.

And so we've talked a lot on previous shows about the importance of preventative maintenance, right? Things that you want to do to manage your house to make sure that it's operating efficiently. So how can you lower your, you know, utility usage bills? You wanna make sure that your hot and cold air is not escaping. Do you have weatherstripping around your windows and doors? Is your, you know, are you changing your filters? Are you cleaning out the dryer duct? All of these preventative maintenance tasks have a compounding effect. One is it can help lower your utility costs.

That's correct.

Which helps you save money. The other value is it preserves those assets so that they don't break down.

That's correct.

And you avoid the expensive fix-it-and-repair costs. And then the other part is those things do cost you some money, right? You have to buy air filters. You may need to buy caulking. You may need to, you know, buy certain things, tools to sort of do that. It's also a thing to essentially keep track of from, you know, a maintenance perspective.

And then once you track it on a regular basis, you now have predictive maintenance costs over time. That's one of the things I love. And in fact, that's probably one of the major reasons why Homesada was really important to me, because if I could track my maintenance costs, which is one of the issues I was complaining about all the time prior to having Homesada, is I couldn't figure out where the money was going. And now that I can track where the money's going, I can now budget accordingly. moving forward. Because let's face it, most people when they first move into a house, they don't realize that utilities aren't covered because maybe they were in a rental. Or what's maintenance? What do you mean I have to do maintenance? And so a lot of people get really nervous when things start costing things a lot of money. And that way, they can actually manage more of the details of those budgets moving forward.

Also, what about when you're hiring people to do what I call Periodic or not frequent maintenance tasks that could be either inside the house or outside the house. And can you share a story? I'll tee you up on this one, is pruning trees. Can you share your example over why you need to prune trees and your example over how you saved money because you tracked it?

Yeah, so I live in an area where we have potential wildfires. And I have to trim trees for 2 reasons: safety from wildfires, but also safety because if you're not trimming these trees, the branches could fall and actually hurt somebody, and I want to avoid that. So I hire tree trimmers.

Or damage the home.

That's correct. Yeah. Um, but most of my trees won't do that.

Um, the gutters?

That's true. I did have a tree damage the gutter. So, uh, yes. You want to avoid— you want to make sure it's safe, and you want to make sure it doesn't damage your home and cause more problems. So I had to hire a contractor to come trim my trees because I'm just not an experienced arborist. That's just not where I'm experienced. And this is a maintenance project that I need to do, but I also don't need to do it frequently. I need to do it approximately every 5 to 7 years. It's a weird number, but it's just— you can start seeing the trees and you can start seeing When they need to be trimmed, and so I use my HomeZada to actually mark that. Well, one of the things that I couldn't find initially in HomeZada was the previous arborist or tree trimmer that I had used because I wasn't looking carefully in the system, and I got some quotes, and the quotes were really expensive. And thanks to John going, "I'm not quite sure about that cost." Did you use the search functionality in HomeZada? I go, "Why didn't?" And he goes, you might want to try it. So I tried using search and I found my original tree trimmers or arborist. And lo and behold, I saved $4,000. Yes, I have a lot of trees.

You have a lot of trees in your house.

$4,000 on tree trimming.

Yeah.

And so it was really important that I make sure that I'm using the appropriate team, not to mention I think they're amazing. And then they come in and they get everything done so quickly because they're so experienced. I absolutely appreciated it. And saving $4,000 was really happy for me, but it was also happy for John.

Yeah. So it's basically the— if you're storing the previous service provider and tracking that, well, because let's face it, a year or 2 years go by and you're like, oh, I threw that receipt away. I can't remember who it was anymore.

Right.

If you just took the 10 seconds to basically take a photo of that and store it somewhere, it can really help you by basically knowing who to call in the future. One thing that I'd like to share with our audience is a lot of people oftentimes ask, how do you budget for maintenance, repair, and fix-it costs? And we've come up with a bit of a formula, which is between 1% and 4% of the total purchase price of your home.

Yes.

And why is it 1% to 4%? I like to give people kind of this rule of thumb. If you bought a home that's less than 5 years old, right, all of the equipment and the assets, the HVAC, the hot water heater, the roof, the windows, it's less than 5 years old, probably still has a long lifespan in front of it.

Correct.

So 1% is a good number when your house is less than 5 years old. But once your house gets to between 5 and 15 years old, maybe it's at a 2% number.

Why?

Because things are now 10 to 15 years old. You're going to have some things that may break no matter how good you are at preventative maintenance, and you're going to have to fix those things. If it gets into 15 to 25 years old, then you're looking at a 3% number to budget on an annual basis. And if your home is literally over 25 years old, then it's probably a 4% number because again, things like your roof, most roofs have 20, 25, 30-year warranties.

That's right.

They're just gonna need replacements. Your HVACs are gonna need replacement.

Right.

Your hot water heater, you're gonna end up spending more on replacement costs. That is a good rule of thumb over how to go about budgeting for these preventative maintenance costs. We talked about this on the previous show, but let's face it, another potential expense is projects and remodels and improvements. We don't need to go into that.

That's not a potential expense, that's a big expense.

Exactly. So we don't need to go into the details, but just to try and tie these 2 shows together, right, which is how important is it to track what you spend on improvements, because that's also an expense when you're looking at your overall finances of your home.

Absolutely. All of this ties to your overall personal budget. So it's not just your home expenses, but it's also— it ties to all your overall budgets. And it's really important to understand when you have all these expenses And if something unexpectedly comes up because you may not have been taking care of something, then you may be impacted and may not be able to take the family on vacation, or you may not be able to get a certain procedure done if you, if you need it for healthcare reasons, or you may have to postpone, um, a certain expenditure.

Yeah.

Maybe you can't buy that, I don't know, new boat that you want for the lake or something. I don't know. But all these different things can compound if you're not aware of what's going on.

So great summary there. And I'm just going to summarize for our audience as well as kind of give them some action items. Right. Again, thinking about the phrase home finances, absolutely. There's a huge number of issues over how do you get into a house, whether you're buying it for the first time or even buying a second or third home. It's planning all those things about mortgage, down payment, etc. But the home finances doesn't end.

No.

You really need to be committed to tracking these things when you're a homeowner because of the asset value. You've got to track how your home is changing because of real estate conditions, your mortgage balance, your equity, the different expenses between the usage-based expenses versus the monthly expenses, understanding, you know, are your costs going up because vendors are kind of growing these things? If you're committed to bringing all these things together, including the maintenance and repair costs and the home improvement costs, Then you're getting a holistic financial picture of your home.

That's correct.

Which is exactly what you said. That's a huge part of your life, but it's got to be balanced with the other parts of your life between, you know, healthcare costs and vacation costs and entertainment costs and food and travel and living, et cetera. And if you can obviously manage your expenses of your home and keep them lower, it gives you more financial flexibility to do something else. But at the same time, you want your home asset value to grow. Because that could be used in future retirement and, and those kinds of things. So with that, why don't you, uh, close us out, Elizabeth?

So thank you so much for joining us today. We hope finances wasn't as yucky or serious as we, uh, made it sound, but we do want to bring good valuable data to you so that you can better understand how to be the best homeowner you can be. And we hope you join us for more of our podcasts on Be a Smarter Homeowner. But in the meantime, will you please share this with all of your friends and family and rate us? Because we want to make sure that we are helping as many people as possible understand the dynamics of managing their home and being a smarter homeowner.

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