Welcome to BW’s Smart Money podcast, where we answer your real-world money questions. In this episode: Learn how to think about major homebuying decisions like shopping for title agencies, managing home equity, and when to buy a house with cash. How do you choose the right title agency for your home purchase? Should you buy a house outright with your savings or take on a mortgage? Hosts Sean Pyles and Sara Rathner discuss the pros and cons of these key housing decisions to help you make smarter choices. They’re joined by housing Nerd Kate Wood to demystify title agencies, offering tips on what they do, how much they cost, and why most buyers don’t shop around for them. Then, they discuss the risks and benefits of tapping into home equity or using savings to buy a house outright. They explore strategies for weighing mortgage options, the importance of maintaining an emergency fund, and balancing emotional and financial goals when purchasing a home.
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Episode transcript
This transcript was generated from podcast audio by an AI tool.
Welcome to BW’s Smart Money podcast. I’m Sean Pyles. Today we are reaching into the special Smart Money archival box. It’s acid-free and lined in gold. Just kidding. Our archives exist in digital only. And we wouldn’t waste our hard-earned and well-saved money on gold lining anyway, right? If you are a loyal listener, you would know that we would never do that. But this month we are bringing you some of the highlights from 2024, some of our favorite listener conversations and favorite coverage for a special series that is the best of Smart Money.
Today we’re looking back at the issue of housing. High prices and high interest rates have kept a lot of folks on the sidelines this year, but we followed all the trends and provided a ton of advice on how to navigate the market. So here’s a review of what we all learned and need to know about housing as we head into 2025.
Welcome to BW’s Smart Money podcast, where you send us your money questions and we answer them with the help of our genius Nerds. I’m Sean Pyles.
And I’m Sara Rathner. If you have a money question for the Nerds, call or text us on the Nerd Hotline at 901-730-6373. That’s 901-730-NERD. Or email us at [email protected].
Follow us wherever you get your podcasts. And if you like what you hear, please leave us a review and tell a friend. This episode, we are taking on a few of your housing-related questions in a lightning round, and we have housing Nerd Kate Wood joining us for this nerdy journey. Kate, welcome back to Smart Money.
Thank you so much for having me back.
All right, let’s get into the first question. This one comes from Mark who sent us an email. Here it is.
“When buying a house, we carefully selected a Realtor, then carefully selected a bank to originate the mortgage. Then when the Realtor draws up the offer paperwork, suddenly there’s a new company in the mix, the company that will handle escrow and the title transfer. The paperwork will tell you that you don’t have to use the title agency the Realtor is recommending, but when you’re getting ready to sign the paperwork, it’s too late to step back and see if the title agency is a good one and if what they’re charging is reasonable and competitive. On the last offer I made, I even had to sign a disclosure that the realty company and many of its employees have a significant financial stake in the title company. I’d love for Smart Money to talk about this and how to shop around for a title agency in advance just like we do for other companies involved in the transaction.”
Buying a house is a complicated process in part because there are so many people and companies involved. Can you please quickly explain the role of the title agency in the homebuying process?
Sure. So in a nutshell, the title agency goes through public records and they just make sure there is nothing fishy with the home’s ownership. They’re looking to see that the house or the home has a clear title, which means that it is the seller’s house to sell, no one else can make a claim to it.
So when I was buying my home, actually, the title agency found that there was a former occupant who owed a bunch of back taxes, which was a big yikes. Luckily for me, it turned out that that person had just lived there. They didn’t have an ownership stake, they weren’t on the title. But if they had been, I could have been dealing with the IRS and a tax lien, and it would’ve been a lot hairier.
It would not have been fun, no.
No, not at all. And so this is kind of what you’re paying for with the title company. The listener mentioned the company handling title and escrow. So title companies sometimes do escrow, which is just being the third party that holds onto your deposit during closing, but that is not always the case.
Title insurance, which they don’t mention and which is related, is something else that title companies are often involved with.
This ensures that any title claims or defects are covered, preventing unexpected issues from arising later on, such as someone claiming to be a long-lost heir of the previous owner. Typically, two separate title policies are involved, with lenders requiring lender’s title insurance for the transaction to proceed. While buyer’s title insurance is optional, it is generally recommended.
Title fees can vary widely depending on the services included. The home seller usually covers the initial title search, which costs between $75 to $200. The buyer is responsible for the title settlement, which can encompass various fees like escrow, notary fees, preparing the deed, and real estate attorney fees. The total cost of both lender’s and owner’s title insurance policies usually ranges from 0.5% to 1% of the home’s sale price, amounting to a few thousand dollars in total.
While shopping around for a title agency may save some money and provide peace of mind, many homebuyers do not do so due to the exhaustive nature of the homebuying process. It is advisable to research and select a title company before reaching the closing stage to streamline the process and make informed decisions.
In instances where financial ties between real estate agencies and title companies raise concerns, it is acceptable to pause and reconsider options. Overall, while shopping around for a title agency is beneficial, it is not common practice compared to other aspects of the homebuying process like securing a mortgage.
Ultimately, the decision to shop around for a title agency varies among individuals. Some may prioritize convenience, while others may value thorough research. The title agent wasn’t something I had considered shopping around for, mainly because I was unfamiliar with the process of buying a home. Decision fatigue is real, and when I buy my next house, I may not prioritize shopping around for a title agent. Moving on to the next question, Amy is seeking advice on real estate investment. She is considering keeping her first home as a rental property while moving to Seattle for a new job. With the equity in her home increasing, she wonders if she can use it towards a down payment on a new home in Washington without selling. This investment idea is risky, as using home equity involves potential loan repayment issues. However, it’s not uncommon for people to use equity from one home to purchase another. Amy should have a substantial emergency fund before considering this option. She can access the equity through a cash-out refinance or a second mortgage like a HELOC or home equity loan. Each option has its pros and cons, so Amy should carefully weigh her choices before making a decision. The percentage-wise difference between a cash-out refinance and a second mortgage is not significant, but since the amount borrowed in a cash-out refinance is usually smaller (as it excludes the original mortgage cost), the total sum of interest paid is usually lower. With a second mortgage, you are essentially taking on a second loan on the same property, which typically comes with a higher interest rate due to the increased risk for lenders. When comparing a home equity loan and a HELOC within second mortgages, the main differences lie in the payment structure and interest rates. A home equity loan provides a lump sum payment with a fixed interest rate, while a HELOC offers a revolving line of credit with variable interest rates. Using home equity for investments or renovations that increase property value is generally recommended for financial stability. Purchasing a second home using home equity may strengthen financial position, but it also carries risks and requires careful consideration of budget, rental income potential, and lender requirements. But in addition, they would also have the responsibility of being a landlord, which comes with its own set of duties. It’s not just a financial decision, but also an emotional and personal one because it involves where you will live. Spending all your savings to buy a house outright is not advisable, as unexpected expenses can arise when owning a home. Maintaining a home, furnishing it, and handling repairs can be costly, and draining all savings just to purchase a home can be risky. It’s important to keep a decent amount of savings liquid for inevitable repairs that may come up. Making a substantial down payment with a mortgage can be a more secure option, as it allows for extra funds to handle unexpected costs while paying down the loan faster. When it comes to managing your finances, you may find yourself faced with urgent expenses like a plumbing emergency or long-term goals such as securing your retirement fund. The key is to strike a balance between addressing immediate needs and planning for the future while making the most of the resources at your disposal.
For instance, let’s consider Kate, a listener weighing the pros and cons of two options for purchasing a home: buying outright or opting for a 15-year mortgage. However, these are not the only paths to homeownership. There are alternative financing options worth exploring.
If your primary objective is to secure the lowest interest rate and pay off your home quickly, you could investigate shorter mortgage terms such as a 10-year loan. While this may come with a more favorable interest rate, bear in mind that the monthly payments will be higher due to the condensed repayment period.
On the other hand, a traditional 30-year mortgage remains a viable choice for many homebuyers. While the interest rate may be slightly higher compared to shorter-term loans, the advantage lies in the lower monthly payments spread out over a longer timeframe. This flexibility allows you to make additional principal payments when you have surplus funds or maintain manageable payments during leaner months.
By opting for a 30-year mortgage, you can benefit from having extra cash on hand due to the lower monthly obligations, providing a sense of financial security and flexibility. Ultimately, the key is to assess your financial situation, goals, and risk tolerance to determine the most suitable financing option for your home purchase.
In conclusion, exploring various mortgage options and understanding their implications can empower you to make informed decisions regarding homeownership. Whether you choose a shorter-term loan for rapid debt repayment or a longer-term mortgage for financial flexibility, it’s essential to align your choice with your financial goals and circumstances. If you have further questions or need guidance, feel free to reach out to financial experts for personalized advice. following sentence:
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