Now that we’ve discussed how to apply and qualify for a mortgage, now we’re going to talk about what all the numbers mean and how you can look at your budget to realistically afford to buy a home.

We’ll go into detail about:

• Debt to income ratio
• Dream home versus starter home
• Upfront costs
• How to choose between a 15 year and 30 year loan term
• Budgeting and investment strategies
• How to use points and what that means for the interest rate

Don’t let the payment estimators online fool you. Make sure you talk to a loan officer before you really factor in your numbers because Zillow won’t do that for you.

Connect with Kyle:

Purchase Price Calculator: https://www.winthehouseyoulove.com/max-purchase-price-calculator

LoanClarity Advisor: https://www.winthehouseyoulove.com/advisor

On YouTube: https://www.youtube.com/c/WinTheHouseYouLove

Online: https://www.winthehouseyoulove.com/

We cover ALL of this in the “Get Your Finance Sh*t Together” self-study course at confidentmoneypodcast.com!

Now Open: Money Mavens group coaching program! There’s a special prize for anyone who signs up in the first week at confidentmoneypodcast.com.

Enter to win a free strategy session with me!  Leave a 5-star review and include your IG handle to enter. We draw the winner at the beginning of each month. 

FTC/Affiliate Disclaimer: By using some of these links, at no extra cost to you, I may earn a small commission or referral fee, which helps me continue to produce content like this, support my business, and my team.

DISCLAIMER: I am not a financial advisor and this is not financial advice. My podcast is for educational purposes and is my personal opinion only. To make the best financial decision for your situation, please do your own research and if needed, seek the advice of a fee-based, fiduciary.

Music credit: Neon Fairies by Wolves 

A Podcast Launch Bestie production

Hey, welcome back to confident money podcast.

I'm your host, Caitlin Magnuson.

And we have Kyle Seagraves with us to continue the series that we have been

doing for the last couple of episodes.

A little bit about Kyle.

If you're just tuning in, Kyle's a certified mortgage advisor,

licensed loan originator, and the owner of win the house.

You love a YouTube channel with over a hundred thousand subscribers.

Kyle, welcome back.

Uh, today we're gonna be chatting all about.

Budgets financing, renting versus owning and kind of the nitty gritty

of what the numbers look like when

Yeah, I think this is one of the more overwhelming pieces,

I think for a lot of people it's okay.

Can I get approved for mortgage?

But then number two is how do all of these numbers work?

Because there are a ton of different numbers.

and, uh, they can be really overwhelming because a lot of 'em are estimates.

And I think this is the, for most people, the largest purchase, they've ever made.

And so they've heard horror stories or, um, just not used to spending that much

money or seeing numbers that are that big.

And so, uh, it can be overwhelming, but it doesn't have to be, especially

if you have a good plan and you understand how everything works, it's

gonna make it a lot easier as you move, move forward with a home buying.

Absolutely.

And I think when we are talking about budget, I know earlier, when you had

mentioned, you know, qualifying for a loan, we had talked about, you know,

you normally have a certain amount of debt to income ratio that you

you could have and be approved for.

And I believe that can vary depending on the type of loan, but you know, what

is kind of the maximum that people are looking at when they're getting approved.

Yeah.

All loans are different.

And like we talked about in some of the other episodes they're all based on a

computer's decision most of the time.

However, a good rule of thumb is, uh, around 45% maximum debt income ratio.

And so what that includes is gonna be your monthly, uh, debt payments.

So things like, uh, and these are all minimum payments,

not what you actually pay.

So the minimum payment on a credit card, minimum payment on

a student loan on a car loan.

And then also that's going to include, uh, your future mortgage payment.

And that future mortgage payment is gonna be principle, interest,

taxes, and insurance as well.

So, um, what the easiest way to figure that out is to take your

monthly gross income and multiply at times 0.45 from there, subtract

your minimum monthly debt payments.

So maybe you have, you know, a hundred bucks on a credit card, 300

bucks on a, a car, take that away.

And then you have the max that you can pay on a mortgage.

to do it.

And.

I know that I get asked this a lot.

I'm sure you get asked this a lot, but let's say you're able to get

approved for a loan that allows you to have a debt to income ratio of 45%.

And you're happy with what that looks like.

It allows you to afford homes in your area with whatever your

personal debt situation is.

What is the general rule of thumb or the best practice when it comes?

And we're, I know we're gonna chat about this further in more detail, but.

When it comes to, should you go for a loan or move forward with a loan that puts your

debt to income ratio at 45% of your income of your, you know, household situation?

You get no prize for going all the way to the

maximum of how much you can afford.

and so that's where a lot of people talk about the difference between what you.

Should qualify for what the mortgage payment you should have versus the

mortgage payment you could have.

Um, most people are actually really surprised when they see how much

they could get approved for and on the good side, this is what a lender

would be willing to offer you.

And it's all based on risk.

So how risky do they think you are?

Uh, the less risky, the more money.

Going to be willing to lend to you.

So on the good side, that's where we're looking somewhere around the 45% range.

There are some programs that go up to 56.9, 9%, like where most

of your income goes to debt.

I wouldn't recommend going that high again, there's zero prize there.

And it's important to realize too, that a loan officer is not a financial advisor.

there are a lot of really great ethical professionals who can help you,

understand your budget, but ultimately they, they are not there to help.

You have a really sturdy budget.

They're there to help you get a mortgage.

Um, and so it's important to keep that in mind not that they would

push you into something, but they're not keeping tabs on your budget.

Like you are.

You're the one who lives in that day in day out.

So maybe we don't take advice from the person who isn't living inside of our

budget, on what we feel comfortable with.

Right.

Just because we could qualify for something according to a lender

doesn't mean it makes sense for us because there's more that goes

on in our budget than just debt.

There's also savings goals.

Uh, maybe you have, I mean, Million other things that we're spending

money on that we care about than just, you know, our credit card payments

and car loans and things like that.

So then that brings on the question of what, uh, what

mortgage payments should we have.

And obviously the lower is better there.

No one really just wants to have a higher mortgage payment for the sake of it.

and so this is where it's hard though, to figure out like what's a good rule

of thumb because this changes for people depending on their situation,

depending on their income, um, someone who is making $200,000 a year, A lot

more discretionary income than somebody who is making 40 to $50,000 per year.

And so using, uh, percentages is, um, not the most ideal, but can help us

get a good framework to begin with.

So usually what I recommend to people is looking at 28% of their gross

income, um, is a really ideal maximum.

Now someone who has a lower income might have to have a higher that's income.

Um, to find safe housing that works for them.

Whereas somebody who makes higher income might be able to reduce that.

And also with how home values have been increasing sometimes for a lot

of people, those ratios are increasing as well because it's getting more and

more difficult to find a home that could fit in that, uh, more affordable.

Absolutely.

And I think I know that you and I chatted about this, but it also is dependent

upon what your personal financial goals are or what matters to you.

Right?

So are you just looking for a place to rest your head at

night and you don't really care?

Maybe if you have a backyard.

Or if you're in a super walkable neighborhood, or if you're in a certain

school district, there are different factors that are so individual, you

know, for, for me, I, our neighborhood has a walkable score of zero because we

don't have sidewalks or public roads.

Um, but for someone else that had kids that you know, was looking to.

, you know, maximize a really great school district for them.

Their priority may be finding something that's there.

And that may mean that they're paying a little bit more out of pocket

or, you know, they're able to do that as well as when someone lives

in a higher cost of living area.

You're normally going to see a higher percentage of their overall

income spent on their housing expense because they're housing expense

because that's, it just is what it is.

It's more expensive to live in those area.

Yeah.

And I think of the budgeting conversation too.

A lot of people forget that, uh, you don't have to buy the dream perfect home right

now, especially if this is your first home, like let's throw away that idea.

I think the idea of a dream home is stupid because like, if I think about

what I liked, not even just with housing, just with anything, a, a paint color in

this office two years ago, I liked it.

And now I'm like, ah, I could change it.

So like, same thing happens with, with a house, with everything that you buy in.

Your preferences are gonna change over time.

And I think it's a really big mistake.

We set ourselves up for emotional failure.

When we say I have to buy the dream home and it has to fit into this budget.

Well, you're expecting this, like in, in our mind, we're like we want the

lifelong home to fit in with maybe our income in a career that we just started

our business that we just started.

Or we're not, we're in like growth phase, but over here,

we're in permanent, lifelong

Right

and they're not match.

Yeah.

Uh, and so we don't have to have the dream home just yet.

Uh, the way most people buy homes, what works really well is actually

kind of like a stepping stone.

We buy the first home, what a lot of people call a starter home.

What's something that can fit in our budget that meets most of the

goals that we have for the house.

Maybe the school district that we want, uh, maybe it's not, doesn't have the

perfect yard, but has a good enough yard.

And we live in that home.

It builds up appreciation, and then we can either sell or rent that.

Use money to then buy the next home.

That's even better and work our way through a stepping stone rather than

trying to fit this lifelong goal into our budget that might not be

able to accommodate it at the moment.

No, I couldn't agree more with that.

And I think, especially when you're looking at down payments and

increasing home prices, I know that for us, the house that we're in now

was so much more accessible because we had purchased that starter home.

That was.

It was what it was at the time I loved it.

I was very excited.

It served its purpose.

And I think that a lot of us get so emotionally invested in the house

that we're looking to purchase versus looking at it to an extent

from a numbers perspective, right.

Because it is it's, it's a huge purchase and it's someone that you're

gonna spend a lot of time, but it also doesn't have to be permanent.

absolutely.

Yeah.

Yeah.

It doesn't have to be the perfect home right away.

Exactly.

And maybe you make it your perfect home.

Maybe it becomes your perfect home, but you know, give it five to 10 years

and maybe your taste will have changed.

I know mine certainly did.

And my budget was able to change during that time as well, both due to increased

earning power, as well as having, you know, equity established in the house

that did it made a really big difference.

When we're looking at that and when we're looking to buy.

What are we looking at for a lot of loans for, you know, monthly and

upfront costs, once someone gets established and actually, you know, has

a loan goes through the home purchase process and they're, they're in it.

What does that look like for them?

I.

Yeah.

So these, this is one of the hardest parts to go through with an estimate on, because

there's so many different variables, depending on where somebody's at the

loan program that they're looking at.

Um, I do have a tool that I call the max, uh, purchase price calculator,

where you can put in your income and your debts, and it will show you.

A recommended maximum purchase price and help you estimate some numbers.

Um, but really for a lot of people, it's kinda like what we talked about in some

other episodes where the best way to get the most accurate numbers is to just

talk with somebody, talking with a loan officer and saying, Hey, I'm kind of in

the spot where like, I don't, I don't even know what these numbers look like.

Could you help me figure this out?

Because often what a lot of people do is they kind of do all the steps backwards.

They're like we wanna find a house.

So they look@homesonlikezilloworrealtor.com

and then they see the little monthly payment thing.

Well, the, the monthly payment that's recommended there

is the best case scenario.

That's if you're putting 20% down.

Uh, so there's no mortgage insurance, like we talked about on the loan

requirements, episode, you know, the taxes may not be accurate.

Uh, home insurance is always like ridiculously low.

And so people run off of that number.

And then they don't all they think about is the down payment.

So maybe it's 3% down on a conventional loan or three and a

half percent down on an FHA loan.

And so in their mind, they're thinking those are the only costs.

It's gonna be a low, monthly payment.

We can afford that.

And a low down payment, we can afford that.

And then they go through the mortgage process and realize, wait, okay,

well, we were only putting 3% down.

So that changed the monthly payment quite a bit.

Um, also.

The taxes now that we see that what the accurate ones are,

are higher than we anticipated.

And then also the upfront costs also have closing costs associated with

buying any home, whether we're buying with a loan or with cash, there's going

to be closing costs involved there.

And a lot of people get stopped in that moment.

This is where a lot of, kind of some beginner's bio remorse comes

in because they didn't do planning front to see what the numbers were.

They jumped in on a home before they were confident in what the numbers were,

and really we can, uh, guess and use like really good estimates all day long.

But it's not until we talk with somebody who can actually see our situ.

Show us examples of programs and lay out those numbers for us, that

we can get a really solid idea.

So when you do talk with a loan officer and you start to get

preapproved, they'll give you a quote.

And in that loan quote, um, we want several things.

We wanna know what kind of program, uh, they're gonna offer us.

Um, also the terms like, is it a 30 year loan?

Is it a 15 year loan?

And then from there, they're gonna break down the monthly payment.

So what we're paying on principle and interest for the loan, what we're

paying in property taxes to the county.

Also what we're paying in homeowner's insurance, they're gonna estimate

that, any mortgage insurance, if we're, uh, putting less than 20% down on a

conventional loan or we're using any type of government loan, other than

VA, and they're going to list all those out so we can see a total there.

And then for upfront costs, they're gonna show us the down payment, but

also they're going to estimate all the other costs with buying a home.

So things like, uh, getting your appraisal, um, title insurance, a

title report, any recording fees or taxes from the county that you're in.

and then also your escrow account, which is going to set up a small

account for taxes and insurance set aside upfront for you.

Um, so that quote is actually gonna show you both the monthly

payment and the upfront costs.

All together on one or two pages.

She can have a really solid idea moving forward rather than just, oh, we saw

this on Zillow and it looks good enough.

So we move forward with it.

No, I, I definitely fell into that trap.

I think when I was looking to buy my first house where I hopped on Zillow,

I was like, oh, this looks great.

And then yeah, you look into it.

And they're like, oh, this is a 20% down payment and everything else.

And I was like,

Yeah.

yeah.

okay.

So what I thought would be seven 50 a month is actually 1100 a month kind of

changes things, especially with the first

Yeah, I'm going through this right now with a house that I'm

buying, the lady who lives there.

Um, according to the county, she only pays a thousand dollars a year in taxes.

Uh that's because she gets a home set exemption.

She, because she's above 65, uh, also the home, when she bought it, was like

a quarter of the value that it is.

So it hasn't been reassessed.

So the moment that I buy the house for four times, the value that she

bought it years ago, all of a sudden that gets put in the tax records.

And then also I'm at above 65.

So I don't get that exemption.

so my taxes are probably gonna quadruple.

So it's even those things of, oh, I could look online and see, but if

you're not talking with somebody who can help you understand these things, it's

very easy for people to say, oh, taxes are only a thousand dollars a year.

Yeah.

Uh, and then you're gonna get a bill and it's 4,000 a year.

And like, oh my gosh, this is completely different.

How was this not caught?

Um, and that's why it's usually best to talk with a professional before we get

really comfortable with the numbers.

Absolutely.

Now I have thoughts on this and I'm interested to hear your thoughts

on this, but there are quite a few different loan terms, right?

We

Mm-hmm

year, 15 year, 30 year, like there there's a whole

variety of them and obviously.

My thoughts on this depend on, you know, what your personal financial

goals are, but I know that there can be a really popular thought we're

gonna say should again but that you should pay off your debt or you should

pay it off as quickly as possible.

again, depending on your personal financial goals, I disagree with that, but

I would love to hear your thoughts on, you know, the financing terms for mortgage.

Uh,

Yeah.

Um, so you're talking kind of more specifically like

the 30, 15 kind of how many

I would say more specif the 30, 15.

I feel like those are the two most common options that come about for people.

Yeah.

So that is a, a big question people have.

And if you're in that position where you can entertain the conversation

between a 30 year and a 15 year mortgage already, you're in a very good position.

Most people can't entertain a 15 year mortgage because the monthly payment

is so much higher cuz we're only paying it off over 15 years rather than 30.

So if you're in that spot, I know sometimes we can get like, decision

paralysis, like you're in a really good position if that's the case already.

So just know like at this point it's more about how do we squeeze out a little bit

extra savings in our, our choices here.

so.

A 15 year loan obviously is gonna have a higher monthly payment than a 30 year,

cuz we're paying it off in half the time.

the difference in these though is that these are the required monthly

payments in that if you miss a payment.

It's going to reflect on your credit report and a mortgage late is a

huge deal on your credit score.

Having a late mortgage payment will completely derail your credit score and

is really difficult to recover from.

So in my opinion, I would rather have the lower required monthly payment on a 30

year and pay it as if it was a 15 year.

It's very easy to do.

So let's say the 15 year mortgage was, let's say $1,800 per month.

And the 30 year mortgage was, let's say, $1,100 per month.

It's very easy to pay the 1100 mortgage payment plus an additional $700 towards

the principal of the mortgage every month.

We're paying it the same monthly payment as a 15 year, and we're gonna pay it off

in just about the same amount of time.

Now, a 15 year loan is gonna have a lower interest rate.

Uh, not crazy.

Like significantly lower, but it will have a lower interest rate than the 30 year.

And so that's why people do have some interest in it.

But even if you run those numbers side by side, the savings that you'll get

on a 15 year, if you pay the 30 year, like the 15 is pretty negligible.

And if you wanna take it a step further, if you're kind of more into the investment

side, an even better decision, most of the time is to take the third year,

take that $700 and actually invest.

Into something like an S and P 500 ETF and earn an average 10% growth on that money,

rather than paying off the mortgage, you actually benefit a lot better by using

that strategy than going with the 15 year.

So that coupled with other things like, uh, the fact that

inflation actually eats away.

At your mortgage balance over time where it actually is beneficial to

hold a loan over a long period of time, because inflation is reducing

the balance of the money comparative to the cost of the dollar makes

me wanna lean more towards the 30.

And then one last practical piece I feel like is beneficial of the 30 year

is when things happen like COVID and you have either reduction in hours

or income or laid off from a job.

I would rather be able to fall back to a lower required monthly payment on the 30

year than have that high 15 year payment.

Absolutely.

I couldn't agree more with everything that you said.

So I understand that there's a psychological benefit to being

debt free for some people.

And I'm not discounting that in the slightest, but.

I cannot express how grateful I was a to be in a position.

Cuz you brought up it's it's a really privileged position when we refinanced

the house that we were in before we were able to choose between a 15 and a 30.

And for us at that time, I went with the 30, for exactly that reason.

It gave me more flexibility.

And then I, at the time I was paying more towards the mortgage, but in hindsight,

and what I'm doing now is we have a 30 year mortgage and the extra money that

I would like to be paying towards that is absolutely being invested right now.

Because if I have, let's say a three point something percent, you know,

interest mortgage, and I'm getting an average over 10 years of a 10%, you

know, per year return on my invest.

The negative interest that I'm paying is dramatically, you know,

overcompensated for by the interest that I'm earning on my investments.

And then if I get to a spot where I'm unemployed or I'm underemployed, or

there is a financial disaster that comes through, I have money in investments that

I can pull on and I'm able to use those to cover my mortgage or to do things.

But my monthly requirements are lower.

I think is really great to have, because at the end of the day, it is my

required mortgage payment is like what?

$1,500, less than it would've been,

which

is that that's a

big lifeline.

And what's.

Is, if you wanna pay off the mortgage, you can still do it in the same amount

of time with the investment strategy, because you're gonna have all this

money accumulating in an account actually quicker than if you just

it's gonna be earning interest versus, uh, you know, you paying interest.

So by the time it gets to your mortgage payment, if you still wanna

be mortgage free, you can pull it out of your investments and pay off your

home actually quicker than if you just put it straight into the mortgage.

Absolutely.

And I, I think the last idea that you had mentioned about, you know,

inflation, and I think that that can be a little bit convoluted for people, but

I think that we're seeing that right now, when you are able to borrow money.

So to speak at a lower rate than inflation.

I think not taking advantage of that if you're able to is unwise.

And that's the other reason that I'm personally not looking to pay my

mortgage off early at this point in my life, because that money is like

inflation was what, six or 7% this year.

So dollars that I have, you know, are becoming worth less.

But by having the home and not paying it off early, I'm actually making it

making out ahead because my dollars every year are worth more money.

Yeah.

Absolutely.

It aligns a lot with what you've talked about with the anti

budget of being able to automate

a lot of these things where I think , I've heard most people when they

talk about a 15 year they're like it forces me to save money, like, okay,

there is way better ways to do this than to get into a like contractual

obligation for 15 years on one payment, uh, where you can still have the 30.

Automate your budget with whatever tools you would recommend into saying, okay,

I'm gonna take that 500, 700, whatever that difference is, and invest that

into whatever, whatever account maybe it's funding an IRA to begin with.

Maybe you're putting into a taxable account into some ETFs or, whatever you

want in those becomes really easy to do.

And it's all hands free without you having to do that.

Every single.

No.

And again, you can automate paying your mortgage up at least with most lenders, if

that was your priority or automate savings goals or automate your other goals.

And I think that, and I, I have, I've heard that before.

Well, if it's the 15 year, then I have to pay it.

Right.

There's there's big consequences, but.

yeah.

I mean, having gone through COVID and having seen what a lot

of our clients experienced I definitely would advise against it if you don't have

to get a 15 year loan I mean, I don't know a circumstance in which you would

have to, but why, why would you do that?

Why would you put that pressure on yourself when, okay.

Maybe you save a hundred dollars less.

Maybe you get takeout, you know, a couple times a month because

you have a little bit more flex.

I don't think that's the worst thing in the world either so long as you're

still meeting your financial goals.

So with that Kyle when you're looking to, you know, get your loan and to,

to finance, and you're looking at the 15 versus the 30 and all these other

factors that come in, I know that a lot of people ask about points and you

know, what that kind of means for them.

And should they, you know, should they move forward with it and how to decide.

Yeah, I really don't like points that much.

I'll back up for a second.

What a point is, think of it like prepaid interest.

So most people think that a loan officer is going to give them one interest rate.

So for example, let's use 5%.

They go to a loan officer and the, the loan officer says, I'll give you

a mortgage and we'll be able to give you a 5%, uh, that that's gonna be what

you're gonna be paying on your debt.

5% interest rate.

And most people think that's it, but it actually, you can choose your

interest rate, and they have different points or credits associated with it.

So 5% might be $0 in.

However we could, lower the interest rate to maybe 4.8, seven, 5%.

So we're paying slightly less interest, but upfront it may cost

us, uh, let's say one point, which would be 1% of the loan amount.

So if we had a $400,000 loan, we might pay $4,000 up front to lower our interest

rate and we can actually do the reverse.

We can actually increase the interest rate and receive a credit back.

A lot of people don't talk about credits,

but that's what would be.

of.

We could get like a lender credit.

Um, and actually this is what I recommend for a lot of people who are

getting something like an FHA loan who have a lower credit score who

are going to refinance in the future.

We can actually take advantage of the fact that they're not gonna be paying a high

interest rate over a long period of time.

So I'll say let's use the bank's money against them.

Let's take a higher interest rate, give you a credit for closing costs.

And since you're gonna refinance, uh, in two years, you're not

going to pay more in interest.

Then the credit that they gave you.

So we took advantage of their money over a short period of time and used that.

Then we can do the opposite too.

We can say, well, could I pay more money up front to save

interest over a period of time?

And we can do that through points, all it's all as a

percentage of the loan amount.

So one point is 1%, two points, 2% of the loan amount.

and so then what we're looking at is what's the break even period between us.

Paying the money up front versus the money that we save in interest

over the term of the loan.

A lot of people do this wrong.

They will just look at the general monthly payment, but you only wanna look at the

interest payment to see the savings here.

and people also make the mistake of not comparing it against, let's say we

paid $4,000 up front in the interest rate versus adding $4,000 to the down.

So usually what ends up happening is the break even point ends up being

on average around six to seven years.

On average, though, people refinance their loan within a six year period

because interest rates tend to drop down below what they, initially had.

And so the problem here is if we pay points, especially a lot of

points, just to feel good about the interest rate we got up.

Statistically, what ends up happening is people will refinance before

they actually broke even on the investment that they made up front.

So they actually lost money over a period of time.

And so, unfortunately, I see a lot of people who pay points only

because they want the emotional connection of a lower interest rate.

And this is where, you know, we talked about, I think this is the first episode.

It was like, just don't talk about numbers with people.

because we, it starts to just put us in a bad head space.

We start doing things performatively for other people to say like, oh, I got a

3.9, 9% interest rate just to feel better.

It's like, you really

up with the Joneses, but interest were,

Yeah.

Yeah.

But you paid thousands of dollars to like stunt on your

friends, like who, who cares?

So I think paying up to one point is fine beyond that.

I think you really need to start running a lot of D.

financial scenarios over a period of time to see which one is better.

Um, and the loan clarity advisor calculator have does do that.

You can actually compare, mix and match different scenarios

and see which one's better.

But under a point, I think you're fine, uh, to do so more than that,

we really wanna make sure that the break even period makes sense for

how long you're gonna be in the home.

And that you're really confident.

You're not gonna refinance before then.

It's not the end of the world.

If you do, you.

Will likely end up having a net cost that those points didn't

do anything for you, over

No, that makes total sense.

And I think that that's something I know when I was buying my first

home, uh, my loan officer at the time had sort of advised me as he was

walking me through the whole process that the loan that we went with.

It wasn't my favorite at the time, it was an FHA arm way back in the day,

longer period of

to be able to get us to a certain loan amount that I was looking

for, because I was a 20 year old kid.

I had a really, really small budget and that dropped her a payment

by a hundred dollars a month.

And there were some, you know, really strict.

Parameters around, you know, how much it could go up by.

And he, you know, advised me.

He's like most people will refinance within the first five or six years.

Anyways.

He's like, that gives you time to build your career up, to build your income up.

He's like, you may decide you want to move.

And then in that time, your rate wouldn't have gone.

I think when we looked at it, it.

The chances, it would've potentially gone up above what the fixed rates were

at that time, I think in year four.

So there was potentially a one year opportunity cost.

But in that time I was also saving 150 or a hundred dollars a month

on my payment, which for me was really a make or break at the time.

And I think helped me make the decision to stop renting, cuz I hated living in an

Mm-hmm

And I think that that's something that everyone

is like, oh, I wanna buy a house.

You.

Renting is throwing my money away.

And, you know, with the house I can build equity and everything else.

And I know you and I were chatting about this the other day, but I wanna

talk about, you know, the comparison financially between renting versus owning

and when that makes sense for someone.

Yes.

I do wanna throw in one thing really quickly that, uh, you jogged my

mind about with points is that.

A really quality loan officer is not going to give you an option

with a ton of points added to it.

Really salesy loan officers, uh, the ones that aren't gonna

be the best ones to work with.

And a company that does this a lot.

Is that a company I won't mention, but they're the one

that has like the spaceship.

You can kind of put that together.

They will, if the average rate right now is 5%, they'll go throw multiple points.

I've seen loan estimates with 12,000, 20,000, $30,000 worth of points, just

so they can have a lower interest rate.

And they use that as a pitch because they know their interest rate

is higher than everyone else's.

So they'll be like, we can get you a 3.99.

Okay.

But it's gonna cost you $25,000 up front.

That actually doesn't make sense financially.

but that's just something to be aware of when you are shopping, uh, for lenders.

So.

With renting versus buying.

I really think that, buying is just almost always a better financial decision.

I don't like the like renting is throwing money away thing.

cuz like I'm not a huge fan of everything Dave Ramsey says, but he has a couple

little things I like where he says like renting is buying patients.

I think for a lot of people, it's very true.

Like you might not be in a financial position where

buying makes sense right now.

Primarily if you don't have a lot of, uh, upfront cash, if you're kind of

really strapped for cash, um, and aren't able to build up even emergency fund,

buying may not be a good decision because you're going to have to pay for anything

out of pocket, where renting may better to help you build up that savings.

However, when you are in that position where your income is stable, you

have savings available as well, and you feel a little more, comfortable

in the location that you're at with saying, I really like this area.

I feel confident in like the growth of this area.

Then I think buying is a really good decision.

Um, Because it's almost always financially better because you are building equity

in the home with your payments and you're building appreciation in the home as well.

Um, I think renting can be really good again, like if you have some, uh, things

that don't feel as stable financially, and then also if you're new to an area, um,

I know a lot of people they'll, they'll move across, uh, you know, they'll move

to a different state for a job, or even just like maybe an hour or two away for

a job and they immediately wanna buy.

And I think it's so much better to rent.

Get comfortable with what neighborhoods feel like?

Where, where do you like living?

What neighborhoods you like, before you end up buying, otherwise you're

going in blind to a neighborhood and since real estate is so, dependent on

location, like even just a neighborhood by neighborhood, you don't wanna buy

into a neighborhood that you have no idea how it works, or you only heard about

the neighborhood and didn't experience the neighborhood before you bought into.

Absolutely.

No, I, I think that that's really important.

And I think that again, depending on your personal financial situation,

your personal goals and what's going on in your life that I don't, I don't,

I really don't think that renting is.

assuming that it aligns with what you're trying to do in your life.

I mean, I

yeah.

would've actually rented when we made this last move,

but there wasn't anything where I could have three cats and three

dogs and, you know, 10 chickens.

So buying it was,

and we were able to do a scouting trip ahead of time

and, you know, do what we could.

And there's been a learning curve with that.

I mean, had I been able to renting, would've been much more ideal

and I think that when people can.

Like you said, if they're moving to a new area, if they're needing time to

build up an emergency fund, because if you don't have an emergency fund

and you buy a house, that means that you're gonna be so much more stressed.

You're going to have any, you know, repairs potentially that

you're having to either fund out of pocket or with credit card debt.

And that's not a stress free to be jumping into, you know, potentially

the biggest investment that you make in your life with buying a house.

And so I.

Understanding that and making sure that you're making it for the right reasons.

And again, not talking about it with people around you until you've made up

your own mind, or maybe having talked with a professional first to decide what's best

for you financially and what you can do.

I think we're moving away from this to an extent, but I think for so

long success has been measured by getting married and buying a house.

And, you know, you've, you've thrived, you've gone out on your own and a that's

not accessible for everyone right now.

And it's also not what everyone's looking for.

You know, maybe you want a digital nomad and travel the world.

Does buying make sense for you?

Can you rent that out?

You know, there are all these different scenarios to run

through to decide what makes the

Yeah.

Yeah.

I know a CEO of a very large mortgage company who just rents To be fair.

He has several rentals all over the nation that he just travels between,

but that makes more sense to him.

And he has the income that supports him being able to kind of do whatever

he wants with his housing situation.

but it is not the pinnacle of success.

The ultimate thing that you have to do.

do you feel like there is a timeline that people need to have in mind

of like, they need to be in a home for a specific amount of time.

If they're going to make a buying decision.

Like if they're like, oh, I'm not really sure if I'm gonna continue living

here for the next three to five years.

Do you think renting is better in that situation?

I feel like if you think you're gonna be

somewhere for five years or more.

depending on the market prices, you know, rent versus everything else.

I think five years is kind of the break even point from what I've

looked at for it being justified.

And I mean, home, buying's a process.

There are, there are pros to renting, right?

You have things that aren't your responsibility.

You potentially have a landlord or a property management company that can be

great and can handle some things for you.

And so I think for the most part, yeah, the, the three to five year.

I personally, I think would get really antsy by the three year

mark if I was renting somewhere and would absolutely want to buy.

But I think if you're not sure you're going to stay in an area for at least

three, if not five, that I wouldn't necessarily look to buy again, unless

it made really great financial sense.

Or is it something that would make a great rental later on?

You know, is it in a college town?

Is it somewhere that's in demand where even if you weren't going to be staying

there that full time could still pay off.

Yeah, absolutely.

I still haven't made up my mind on like the three to five year, but it's somewhere

within there that I'm like it's after three years definitely feels right.

But it's so hard to tell, like there's what, what is the actual break even point?

I think it just depends too a lot on like, the difference in your rental payment

versus your mortgage payment, because, for a lot of people, their rent is lower

than their mortgage payment might be.

And for others, it's the opposite.

Their rental payment is a lot higher than their potential mortgage could be.

Um, and it really, I think comes down to those personal situations.

But I think, yeah, three to five years, as long as you're not in a position

where you're like I could move out of state tomorrow or next year, then.

Getting to that point of figuring out.

Okay.

I think I wanna work towards buying a house, uh, within the three to five

year range is a really good decision.

Well, I think too, what you just touched on is, especially

if you are able to buy and it's significantly less expensive then for

you to rent depending on, you know, what

the area is that that can also lend to you, maybe making the jump sooner.

And on the flip side, if you can rent, you know, less expensively,

then you can buy and you're unsure of how long you're gonna be somewhere.

Is there as much financial incentive

Yeah, absolutely.

I think you had a really interesting take on this and

we were talking about this offline.

So sometimes people will look at renting as throwing money away, which

I think you and I both disagree with in the vast majority of situations.

However, when you look at renting is throwing money away and you look at

having a mortgage or buying a home as not throwing money away, you had kind

of brought up that the opportunity cost of both of them and that you're

looking to decrease your overall cost.

So essentially you were talking about how you're looking to decrease

your overall out of pocket expense.

And when you buy a house, let's say that you rent for 10 years or you buy a

house and you live there for 10 years.

What is your cost at the end of that timeframe and

comparing those.

Um, Yeah, so a lot of people.

For some reason well I know the reason cuz everyone wants to talk about the

good things in finance that happen to them and never wanna talk about the bad.

Especially with the way the housing work has moved over the past 10 years.

There's this thought that when you buy a home, it has to be profitable

and people start treating housing, like where I'm going to enjoy spending

my time and where my cat is going to Meow all around the house like that.

That is supposed to be an investment.

. And so I think people view when they buy a house that it has

to be, I have to make money.

and really for most people home actually still costs the money, even

over a period of 10 to 15 years.

the only thing that's better over buying a house than renting is not the fact

that you make money buying a house.

It's that it's so much cheaper than renting over that same period of time.

The main reason why is because the monthly payment that you're paying in part of

that goes towards your equity in the home.

So how much money you could get if you sold, and then also your

home grows in appreciation.

Whereas a rental payment usually increases over time, historically a

three year percent increase over time.

And none of that goes towards you.

And so when you actually look at the cost of a loan and then the potential

cost of repairs, along with the cost of things like property taxes and

homeowner's insurance, buying home even over 10 years, usually you have a net

loss, considering everything appreciation cost of the loan taxes insurance.

you usually actually lose money, but you lose less money than if you were

renting over the same period of time.

And when I run these calculations through, the loan comparison software

that I have most people, that difference is actually around $150,000.

So we're buying is $150,000, better decision than renting.

Over that 10 to 15 year period.

so you're still losing money buying.

Maybe you lost on average, like $10,000 over 10 years, but renting, you may

have lost a hundred thousand dollars over 10 years, uh, because you were

never able to get that money back.

So that's really the big thing.

There are instances in where people actually make money buying house.

If they have crazy appreciation that they're seeing, but it's not the.

People are way more willing to share.

Uh, it's the survivorship bias.

People are way more willing to share.

Hey, I made $20,000 by selling my house than I took a bath on my house.

right.

No one wants to share those stories.

Right.

Well, I think that was just such an interesting tape because I think so

many of us are looking at it yes.

As an investment, but it's, it's an it's investing in decreasing

our costs for most of us at the end

of the day,

Yeah.

which I think is a

really powerful takeaway.

And when people get a check when they sell their home.

And like that calculation that I use in the, loan comparison software, I have

considers the cost to sell that you pay for like realtors commission around 6%.

Like when people get a check back at closing, when they sell their

home over, let's say 10 years.

most of the time people are gonna get money and they be like, look,

I made money, owning a home.

When in reality, if we looked at all the numbers broken down, they

actually lost money over that time.

The money that they're getting back is the equity that they paid into the home.

And so they're getting it back so they didn't actually make money.

Even though you got a check, it was your money to begin with.

You still may have lost a little bit of money over a period of time, but you

would've lost way more, through renting.

Absolutely.

No, I, I do.

I think so many people focus on that last, the, oh, look, I got this.

I get to walk away with the profit and then yeah.

But what did you pay for repairs

and maintenance and.

it's cause no, one's like seeing how much they actually paid in.

Yes.

Yeah.

You're like, okay.

Let's do just a little bit of math here for a second, cuz that's great.

And I'm not trying to, you know, shit on your parade, but we,

we have to factor it all in.

no, I, I think that that's a really good way to look at it, Kyle, and I think that

that was a really unique perspective.

is there anything else?

Oh, did you wanna chat about the standard deduction?

Yeah, I think we can cover that a little bit.

and you might be able to shed a little bit more light on that

since that is definitely more your domain than it is mine.

But I do know, um, I think a lot of people get confused when they

talk with me and they're like, oh, I can just write everything off.

Right.

I'm

like, well,

that

You could, but you're gonna save more money

taking the standard deduction.

At least most people will than by itemizing, things

like their mortgage interest.

So could you maybe

share a little bit more about some of

those

differences?

Yeah, absolutely.

So from a tax perspective, and this is something that we check for everyone,

that's a homeowner that comes to us.

We look at, is it better to itemize or is it better to take the standard deduction?

And essentially the standard deduction has gone up quite a bit in the last few

years after moving incrementally up.

It is now at $12,950 per person.

So that's double, if you are a, you know, married household and with that, it's

basically a free reduction on income.

So if you are looking at, you know, my spouse and I make a hundred

thousand dollars, and when you get taxed on your income for income

tax purposes, The IRS says, cool.

We know that you have things that are deductions, that you've spent that

are not really part of your take home.

We're gonna give you a free subtraction on your income and you pay taxes after that.

So when you're looking at it and what's 12, 9, 5, 13, little

under it's 25 and some change.

So we're gonna say 26,000 on that a hundred thousand dollars of income.

So that means that you're actually paying income taxes on $74,000.

Instead of the hundred thousand dollars.

So it reduces what you get taxed on and then reduces your tax bill and what a

lot of people will do when they send over all their information for a lot of them,

including their 10 98 from their mortgage, they'll say, oh, you know, I didn't see

where my mortgage was taken on my taxes, where my expenses were taken on there.

You know, my interest, my property taxes.

And that's because for a lot of people, if you are not able to

get up to that standard deduction amount, or exceed it, then it doesn't

justify itemizing those deductions.

Let's say that with your mortgage interest and property taxes, you come up to $6,000.

We could claim we could itemize and claim that $6,000 in your taxes.

But that means you're now being taxed on $94,000 rather than $74,000.

And so it's always worth understanding unless you are purchasing.

A home that has a pretty large mortgage that you're gonna be using for it.

You're most likely, or you have some extenuating circumstances, right?

Maybe you make massive charitable donations or other

things that are going on.

You're not going to hit that standard deduction.

so it's better to take the standard deduction than to

itemize.

And that's why like, talking with somebody like

yourself is very helpful in, in tax planning, uh, to figure out which

one is better, because I think a lot of people get confused about it.

Um, or they think like I can, I get to add on writing off my

mortgage interest or other things.

On top of the standard deduction when it's actually kind of a, a cool

thing that the standard deduction got raised so much, um, because for

a lot of people, it used to be okay.

Either I can write off $6,000 or as a single person, the government would

actually say, well, we'll let you write off almost $13,000 for free.

If you want to,

I'm gonna take that all day long.

over taking

my itemized.

Yeah.

No, absolutely.

And I, I know I've seen people that have bought a house in the prior tax here and

they come to us and they're like, well, I thought this was gonna help me tax wise.

Yeah.

But we, we never had that conversation.

And like you bought a $300,000 house and the numbers on those, you

know, generally shake out to you being under the standard deduction.

So we're still gonna take the standard deduction and it's better for you.

It just didn't help you on the tax front necessarily.

Yeah.

Yeah.

definitely don't buy a house for the tax, uh, benefits, cuz

usually most people don't have

zero

tax benefits.

it's like having children for the tax benefit, right?

You're like, no, I had kids, I get a tax write up.

I

it's the, it's kinda like the same thing with people who like they

just started at LLC and then they're like go to a coffee shop and like don't worry.

It's a business expense.

All right off.

I'm like it's still a

$7 latte.

right.

You're still spending the money.

To stop, help the write off works.

Stop free.

Right.

It, it always, um, every single time it brings me back to shits Creek.

You know, it's a write off, it's a write off.

Well, who pays for it?

I don't know the government people.

Um, because yeah, I, I think if you don't fully understand, write offs

and how they work, like you're still spending that money out of pocket.

It's just that if it's a business deduction, you're, you know, potentially.

Getting a portion of that back or paying a portion of it, you know,

less, but you're not, if you spend $7, you're not paying $7 less in taxes.

Like it's a ratio or a percentage,

not

Yeah.

80% of a $7 coffee is still

what?

Six something

you're still

spending the

Yeah.

Five 60, I think.

Yeah.

Yeah,

yeah,

So you're still, you're still out the money that like you could

have just kept in your pocket and paid the

20% taxes on.

So.

Oh, well, thank you.

I think on our next episode, we're gonna be diving a little

bit more into self-employment.

So that was actually a perfect segue and chatting about the strategy around

buying a house and risk management.

So we'll catch everyone next week.

Make sure if you want to check out Kyle's calculator or any of the

social media, you check the notes.