Prepare for Home Ownership

Welcome to The Thought Card, a podcast about travel and money where planning, saving and creativity leads to affording travel, building wealth and paying off debt. We are the financially savvy travelers. Hey there financial savvy travelers and welcome back to another episode of The Thought Card Podcast.

[0:27] Are you ready to buy a house? June is National Homeownership month and to celebrate, I've teamed up with Citizens for a two-part homeownership series where I'll share parts of my homeownership story and we'll dive deeper into the most common types of mortgages.

[0:45] As a disclaimer – this episode is part of a paid partnership between Citizens and The Thought Card Podcast. Any views expressed are not necessarily those of Citizens and any other products mentioned are not endorsed or sponsored by Citizens. Mortgages are offered and originated by Citizens Bank NA NMLSID #433960. All accounts, loans and services are subject to individual approval. Equal housing lender.

[1:20] Now in 2017 after house hunting for a few weeks, I found a property that I fell in love with. While the home was in distress, it had everything I was looking for: spacious rooms, an open floor concept and a decent sized backyard. It was the home that I could imagine growing into and raising a family one day. I put an offer on the house and so my journey to becoming a homeowner began. Since then, I've completely remodeled my home and I've paid off over $40,000 of my mortgage.

[2:00] Although becoming a homeowner was one of the best financial decisions I made in my 20s. If I'm being honest, the home buying process left me with a few gray hairs. There was a lot of paperwork involved, a lot of moving pieces and at times I felt unsure of next steps and you know, sometimes I questioned myself. I questioned if I was making the right decision. Decision fatigue is a real thing for homeowners. It's a real thing.

[2:30] Well, when you get a mortgage with Citizens Bank, you'll have access to a professional loan officer who is responsive and knowledgeable to guide you every step of the way, a streamlined online application process and competitive mortgage rates. Citizens also has a 4.96 rating on Zillow and over 2,000 reviews that you can look through. For more information check out the Citizens Ready to Buy a Home Hub which includes helpful articles and an easy to follow application guide to help you understand the ins and outs of the home buying process. You can find the link in the show notes.

[3:00] As a first time home buyer, the type of mortgage you get can have a long term effect on your finances. Purchasing a home is one of the largest financial decisions you will make. So, the more you prepare, the more well off you will be. Since there are a lot of different types of mortgages that suit different borrowers, today, we're going to cover the most common including fixed rate mortgages, adjustable mortgages, FHA mortgages, conventional mortgages and jumbo mortgages.

[3:45] Alright, so let's go ahead and start with the first one, fixed rate mortgages.

Fixed rate mortgages is the most common type of mortgage. With the fixed rate mortgage, the interest rate does not change throughout the life of the loan. This makes it easier for you to budget every month because your total mortgage payment, which includes your mortgage and your interest, stays the same. That means that you're also protected from mortgage rates rising over time. And fixed rate mortgages are typically offered in 10, 15 and 30 year increments.

[4:18] So next we have the adjustable rate mortgage. As the name suggests, the interest rate may change. It may either rise or lower as time goes on. With an adjustable rate mortgage initially the rate is set below market value, but then it increases over time adjusting to current market rates. Here's some pros – with an adjustable rate mortgage a benefit is that it's usually cheaper than a fixed rate mortgage for the first 3 to 10 years. So this is a good option for folks who are looking to sell quickly or refinance their mortgage in the near term. However, as a con it's harder to budget with this type of mortgage because your monthly payment changes. It's also more complicated than a fixed rate mortgage. So, if you are considering an adjustable rate mortgage, ask yourself can you still afford to make these mortgage payments if the interest rate increases. So, overall all mortgages fall into one of these categories either a fixed rate or adjustable rate mortgage. And this is really focusing on the interest rate if it's going to stay the same over your loan term or if it's going to change over time.

[5:40] Okay, next we're gonna talk about the FHA mortgage. The FHA mortgage is insured by the government, the Federal Housing Administration and it's only available for primary residences, meaning no investment properties, no second homes, no vacation homes. This has to be for your primary residence where you're going to live; primarily. FHA mortgages are usually for folks who have a lower credit score and you could qualify for an FHA mortgage for a credit score as low as 580. In addition to having a lower credit score, you also have a lower down payment requirement. So the FHA mortgage, you're required to put at least 3.5% down payment and this is lower than the conventional mortgages which will cover very soon. If your credit score falls between 500-579, you'll have to make a 10% down payment. If your credit score is at least 580 and up, you can make a 3.5% down payment. This type of mortgage is actually the most affordable option for first time homebuyers. Now, with all those benefits, here's a con – with an FHA mortgage, you have to purchase private mortgage insurance, a.k.a PMI which stays with you for the life of your loan unless you make a 10% down payment in which the PMI would be on the loan for 11 years. So just be mindful that there is an additional charge that's private mortgage insurance that you have to cover because your down payment is lower with this mortgage.

So I want you to keep in mind that credit score requirements may vary by lender and your credit score may need to be higher than the FHA credit score guidelines. Many lenders impose their own rules on top of the FHA guidelines to protect themselves from costly foreclosures.

[7:40] So as a first time home buyer, this is the type of mortgage that I actually got into. This was very attractive to me because my down payment primarily did not have to be 20% like the conventional mortgages, I could put down 3.5%. So that was a lot more affordable for me. However, I am very mindful now that the private mortgage insurance that I have, it doesn't fall off. It can't fall off because of the smaller down payment that I put on. So it is a charge that I see every single month. Again, it's something to consider if you are considering an FHA mortgage. Outside of that, the only way to get rid of your PMI is to refinance into a conventional loan. Again, be mindful that there are lots of benefits to this mortgage type, but there are some cons just be prepared for those cons.

[8:34] Alright, so conventional mortgages. These are mortgages not insured by the government, but they're available through private lenders. With a conventional mortgage you can use this mortgage for your primary residence, investment properties, second homes, vacation homes. So the range is a lot wider here. However, your minimum credit score has to be 620 and up and there's no PMI with a 20% down payment. There is a PMI if you put anything below 20%, so that again is important to know.

[9:07] Similarly the PMI falls off once you've reached that 20% equity or you paid off 20% on the house. So overall the conventional mortgage has more stringent requirements. You have to have a higher credit score. However, you get to open up your selection to a lot more different types of properties. You have your investment properties, your second homes or vacation homes. So there is a benefit to this.

[9:33] Now lastly we have the jumbo mortgage. If you want to purchase a house that costs half a million dollars or more, you're probably going to go with the jumbo mortgage. The jumbo mortgage is for financing that exceeds limits set by the FHA, the Federal Housing Agency; jumbo mortgages vary by state and county. And this year's limit for example was set to $647,200 for most of the country. So that means if you're looking at a property that costs more than $647,000 most likely you're going to be looking for a jumbo mortgage. So here's what the jumbo mortgage typically requires. It requires an excellent credit score of 700 and up, a low debt to income ratio, 10- 15% down payment. And typically these mortgages are for high earners. These loans can be used for your primary residence, your second homes, investment properties, vacation homes, etc.

Keep in mind credit score limits may vary by lender.

[10:41] So whether you're just starting out looking to purchase a home soon or you're wanting to learn more about mortgages and home ownership in general. I hope you enjoyed this episode.

[10:51] For me, my biggest takeaway when I was hunting for my first home is that I didn't understand mortgages; how they worked and I didn't understand the pros and cons of each one. I was simply just, I applied and they were offered me one type of mortgage which was the FHA mortgage and I was just too happy to have a mortgage and be accepted. But if I did a little bit of more research I really feel like I could have qualified for a conventional mortgage and a conventional mortgage would have been a lot more in my favor because I actually did have the 20% down and my credit score was higher than what FHA loans required. But I didn't know. So, I went with the FHA mortgage and as a result I have a PMI charge that I cannot get rid of unless I refinance my mortgage.

[11:50] So, overall it's really important for us to understand how mortgages work and see which ones we qualify for and their pros and cons. Each one of these mortgages has pros, it has requirements and it has cons and making sure we understand how these mortgages impact our finances in the long run because most mortgages are 15 and 30 years. So our decision that we make when we're signing the contract and signing the mortgage can have really long-term effects. So just again, I hope that this episode is helpful to help you with doing a little bit more research and understanding these types of mortgages outside of your primary residence, even if you're ready for investment properties down the line, these are all important things to know.

[12:39] Also be sure to check out today’s sponsor Citizens Ready To Buy a Home Hub – their glossary for common mortgage terms will make sure you know what closing costs and pre-approval means. Get answers to frequently asked questions like – how much do I need to put down on a house or how much home can I afford. You can bust mortgage myths with their entertaining videos and ultimately feel confident in knowing what you need to become a homeowner.

So join me next time for part two of this homeownership series where I'll share practical tips for managing your money as a homeowner. See you next time.

[13:20] I hope you enjoyed this episode. But don't forget there's way more where that came from. When you become a supporter of the show, you'll get bonus episodes, additional tips on affording travel, real time updates, as well as strategies for building wealth and creating multiple income streams. Head over to thoughtcard.com/join to support. Also, be sure to follow me on Instagram. I'm @thedanielledesir, slide in my DMs and share with me your thoughts about this episode. What did you enjoy? What stood out to you? Let me know. I'd absolutely love to connect with you outside of the podcast. See you in the next one.

Welcome to The Thought Card, a podcast about travel and money where planning, saving and creativity leads to affording travel, building wealth and paying off debt. We are the financially savvy travelers. Hey, financially savvy travelers and welcome back to another episode of The Thought Card Podcast. I'm Danielle Desir Corbett and, I've teamed up with Citizens for a two-part homeownership series where in episode 103, the previous episode, we chatted about the pros and cons of the most common types of mortgages and how your mortgage can have long-term effects on your finances. Well today, I'm following up by breaking down how to manage your money as a homeowner.

[1:03] If you followed me for a while, you know, I am a big, big, big advocate for having multiple bank accounts like a travel fund, which we dived deep on in episode number two. As a new homeowner, I quickly realized I was financially responsible for a lot. Some would say that I was maybe a little bit over my head. There were tons of random expenses that weren't accounted for in my monthly budget. I wish I had access to Citizens Ready To Buy a Home Hub’s interactive checklist which highlights 21 Unexpected or Hidden Costs new homeowners often forget about.

One of the helpful tips I wish I knew about sooner?

Requesting copies of past utility bills from the seller to get an idea of what those costs would look like in the summer and winter for example. Links to Citizens Ready To Buy a Home Hub and the Unexpected or Hidden Costs checklist will be in the show notes.

So, I discovered that the easiest way to stay organized meant having multiple bank accounts. So how many bank accounts do you need to manage your money as a homeowner? Well, it depends of course, but I recommend three.

[1:50] In this episode, I will unpack why having multiple bank accounts as a homeowner is crucial and the three bank accounts I recommend.

[2:01] As a disclaimer – This episode is part of a paid partnership between Citizens and The Thought Card Podcast. Any views expressed are not necessarily those of Citizens and any other products mentioned are not endorsed or sponsored by Citizens. Mortgages are offered and originated by Citizens Bank NA NMLSID #433960. All accounts, loans and services are subject to individual approval, equal housing lender.

[2:34] Alright. So why does having multiple bank accounts matter when you're a homeowner? So here's the truth. I'm always going to tell you the truth. The truth is that commingling funds and overspending can happen even if you have a budget. Therefore, one of the easiest ways to stay on top of your finances is to have multiple bank accounts and having each of these bank accounts dedicated to one particular housing bill or a particular goal. Some of the benefits for having multiple bank accounts include avoiding commingling funds, at a glance you know exactly how much you have to spend for a particular purpose and it definitely avoids overspending and can help you avoid under-saving as well. So, here are the three bank accounts I recommend having.

[3:28] Bank account number one is a mortgage fund. A mortgage fund is a big account dedicated to your monthly mortgage payment. Keeping these funds separate ensures you never miss allocate them. So as a financial savvy traveler, I prioritize financially saving for travel. So if my travel savings and the money I set aside for my mortgage every month were in the same bank account, I'd be in big trouble. One of these financial priorities would suffer because I would maybe have to have a spreadsheet or I would use a piece of paper or even my notes app to have which money in this bank account was dedicated to my travel, which dedicated to my mortgage. And that's a lot of mental gymnastics and it's a lot easier for you to misallocate, for you to miscalculate, and for you too overspend. So to simplify, I have an account for my travel savings and I have a separate account for my mortgage.

[4:34] with a mortgage fund – that mortgage bank account, you never have to worry. The funds will be there without any issues as long as you deposit those monies into that account, you know, it's air marked for paying your mortgage for the month.

As a bonus tip, I recommend having your mortgage fund automatically deposited to your mortgage bank account every paycheck or once per month. So when I was working full time with a 9 to 5 job, I had my mortgage payment just automatically sent to my mortgage fund. Half of it would be sent in paycheck one and then half it would be sent in paycheck two. So I never had to really be concerned like, oh my gosh, did I put the money aside, it was all done automatically for me. Now as an entrepreneur income is more in flux. So what I've done now is I just have a direct deposit that goes once per month into my mortgage fund and I really can just set it and it will just be there for when I need to make the payment. So overall I found that having a separate bank account for your mortgage is really, really helpful and like I said, you don't have to necessarily worry as long as the money is deposited in there and if you can use automation that will just again be like the icing on the cake.

[5:56] So bank account number two is a home emergency fund. So after creating a bank account for your monthly mortgage payment, I also recommend opening a separate account for unexpected home repairs. Similar to how your emergency fund acts as a cushion for unexpected or urgent expenses. Your home emergency fund or home maintenance fund will offer you peace of mind when the faucet leaks or a baseball comes flying through a window. These things truly do happen. You know, I've learned that as a new homeowner, I had to expect the unexpected, I had to stay ready. So I never had to get ready and I did not want to get caught slipping. So my emergency fund for my home was something that I put in place to really be prepared for the things that happened randomly because let me tell you, they do happen. Home emergencies include flooding, clogged toilets, which I've had many, frozen pipes, broken appliances, which I've had a few. So these are some of the things that your home emergency fund will help you cover. Check out Citizens’ interactive checklist and discover 21 unexpected costs of homeownership and how to mitigate them in the Ready To Buy a Home Hub which you can find again in the show notes.

Over the last five years of being a homeowner, I have been very grateful for having this home emergency fund when my toilet started leaking or when we found two extremely large wasp nests in our backyard, which actually cost us a pretty penny to have removed. So this is the account that we pulled from and it was very, very helpful. Both of these expenses, my leaky toilet and having these large wasp nest removed cost hundreds of dollars. But I was prepared. I had planned for emergencies and I had saved accordingly. So as a result, I didn't necessarily have to abandon my other savings goals or had to adjust my budget for this expense. This is really going to safeguard you and having some funds. So if something unexpected happens, you have a fund specifically set aside for those things.

[8:08] Speaking of unforeseen home related expenses and the stresses that come with that, check out today's sponsor Citizens Ready to Buy a Home Hub where you can access helpful articles, checklists, explore mortgage options and learn strategies for funding your home improvement projects.

Like the interactive experience where you click through to discover unexpected costs of homeownership homeowners often forget about. While scrolling through, I was nodding my head because I never thought about mortgage insurance, which we discussed in the previous episode, episode 103, lawn care or pest control, appliances, some furniture, and many more things. All of these items definitely add up and it would have been helpful to know what to anticipate. So I wouldn't have been caught off by surprise.

Citizens Ready to Buy a Home Hub also has informative videos that highlight mortgage myths and what comes next in the process after you've been preapproved for a mortgage, all resources that if I had access to, could have made my home ownership journey a lot smoother.

[9:41] The last bank account that I highly recommend for homeowners is your renovation fund. While your home emergency fund acts a backstop for when something urgent goes wrong, your renovation fund will help set money aside to enhance your home. A lot of us became homeowners because we want to not only use it as an opportunity to build wealth, but also to personalize and customize our living space. Remember renovations are not essential so they're not going to fall under the home emergency fund category because it is not necessarily something that's unexpected. It's not something that is unplanned that just happened. A renovation is usually well thought out. There is usually a process where you're getting an estimate from different kinds of contractors. So this is a great opportunity to put money aside for those home improvements and those potential upgrades that you want to work on.

[10:47] As the Corbett family, Kyle and I plan for one major home improvement or home renovation project a year. I found that as a homeowner there are so many things that I want to work on in my home, but not enough money to do all the things at once. So instead we really focused on one major innovation a year. So this allows us to continuously make improvements and increase the value of our home without feeling overwhelmed or discouraged that we haven't achieved all the things that we want to. So for the last couple of years we've worked on our curb appeal.

[11:26] So in 2019 we redid our driveway with brand new gravel that was like a huge project which I was really proud of to get done and that added an aspect to our curb appeal. Then in 2020 we had our walkway redone, we have a beautiful stone walkway, really really happy and it just again makes my home look so much better in terms of curb appeal. Last year, in 2021 we waterproofed our basement which was a huge project for us because it was a pretty penny. But also we had had flooding issues whenever there was a large rainfall Kyle and I unfortunately we had to get downstairs and have buckets and just be taking buckets of water out of our basement because we were flooded to our ankles sometimes even close to our knees. It was just really really bad. So being able to have a home renovation fund and put money aside for this particular purpose was so important to us and again it was separate from everything else. We could easily add a glance look at this account and know okay we are halfway there to reaching our goal. Let's go and start to get estimates from different contractors or we didn't advance towards our goals. Let's really rethink our strategy and how we could save more towards us. So having a separate bank account is super, super important.

[12:56] Now in 2022 we built out Baby K's nursery. So that was a kind of a smaller project because it really just needed to be painted so our room needs to be painted and we have like signs and other things like that to make it feel homey. So we worked on the baby nursery and then our big big big big project for this year is building out a patio and leveling our backyard. So I really want to make sure that our backyard, you know we live in Connecticut and it is cold out there for most of the year. So when summer comes we want to be out there grilling having family and friends over having little picnics and really having a backyard that is welcoming and inviting and also functional. So that is our big big big project for the year and we're working on saving for that and once that account is all set boom we can go ahead and get our patio in our backyard redone.

[13:52] Alright so in summary, each of these bank accounts I talked about today has a specific purpose that will help you organize your money so you know exactly where to go for a particular goal or a particular type of spend. Your mortgage fund, your home emergency fund or your maintenance fund, and lastly your home renovation fund together those three accounts have helped me, personally, helped me to stay organized and to get so much more done when it comes to my home and being a homeowner.

[14:24] Now I have way more homeownership tips to share with you. So if you are interested I recommend checking out my book, “Managing Your Money as a New Homeowner” for my biggest financial lessons which overall have helped me pay off over $40,000 of my mortgage in less than five years. One of our readers for this book Andrea says that “I did enjoy your book for new homeowners. I'd completely forgotten how home repairs and appliance replacement took us by surprise 30 plus years ago when we bought our home.” So I know that you are going to enjoy this. If you are a brand new home owner or if you are an existing home owner and you're looking for just strategies to be smarter when you're making financial decisions for your home.

[15:15] Alright, so whether you're just starting out or looking to purchase a home really soon or wanting to learn how to be a financially savvy homeowner, I hope you enjoyed this episode and take action to improve your finances and achieve your big, audacious goals. So, please share this episode with a friend and let me know what home ownership topics you would like for me to cover next on the podcast, fill out the episode request form which you can find the link in the show notes or hit me up on social @thethoughtcard on Twitter or @thedanielledesir on Instagram. Before I sign off, a special thank you to Citizens Ready to Buy a Home Hub for helping us stay informed and empowered throughout the home buying process. I will talk to you again in the next episode.

[16:10] I hope you enjoyed this episode. But don't forget there's way more where that came from. When you become a supporter of the show, you'll get bonus episodes, additional tips on affording travel, real-time updates as well as strategies for building wealth and creating multiple income streams. Head over to thoughtcard.com/join to support. Also, be sure to follow me on instagram. I'm @thedanielledesir, slide in my DMs and share with me your thoughts about this episode. What did you enjoy? What stood out to you? Let me know. I'd absolutely love to connect with you outside of the podcast. See you in the next one.