The Real Costs (and Benefits) of Buying a Home

[00:00:00] Jeb Smith If you're thinking you're going to want to become a homeowner in six months, a year, whatever it is, talk to somebody now. Have them run your numbers now based on your income now, looking at your debts and saying, Okay, based on this, this is what you could buy. And work backwards and say, Okay, well, I can actually buy something like that. That's what I could get.

[00:00:22] Jennifer Borget Buying a home is one of the biggest financial decisions many of us will make. But in today's market, it can feel downright impossible. Whether you're trying to figure out if you're financially ready or just trying to make sense of what you should be looking for, homeownership can bring up a lot of questions. Today, I'll be joined by Jeb Smith—he's a real estate pro, a podcaster and a YouTuber—to help demystify the homebuying process. We'll talk through what the current market looks like, how to decide what you can afford and what to consider before making your move. We'll also share new data from Northwestern Mutual on how younger generations are feeling about homeownership and how working with a financial advisor can help. When we're done, you can find a digital guide to homebuying and other planning resources at northwestermutual.com/podcast, along with links to our other episodes on making your money work harder for you. And if you've enjoyed this season so far, be sure to leave us a rating and a review.

All right, let's dig in. Jeb, thank you so much for joining us here. I am so excited to chat with you. Real estate's such an interesting topic to me, and I don't feel like I know a lot about it, but you hear so many people trying to talk about it. So first off, just tell us a little bit about yourself.

[00:01:40] Jeb Smith Twenty-plus year real estate veteran, have a background in mortgage finance as well, live in Southern California—one of the hottest markets in the country. And about five or so years ago I started talking about housing, finance, kind of everything housing related right during the middle of the pandemic, when there was a lot of chaos in the markets, and a lot of people just didn't understand all of the things going on. It just kind of added another layer to my business, and it's been something I enjoy talking about. It's what I read about, and it's really geared toward first-time homebuyers and helping people understand housing and how it relates to them and how they can benefit from it—all that good stuff.

[00:02:19] Jennifer Borget It's this thing that is looming and you're like, I don't know anything about this. I know when we bought our first place, it felt like everyone around me was buying property or buying a home, and everyone was talking about it. And I was like, Okay, we're behind; we need to jump in on this, too. Paint a picture for us. What is it looking like now?

[00:02:42] Jeb Smith It's tough, right? Affordability's at one of the lowest levels that we've seen. You know, house prices are high. Inventory is still not great depending on where you're located in the country. So even though you've got rates kind of bouncing up and down, fluctuating between 6.5 and 7 percent or so at the moment, it's tough. It's tougher for first-time homebuyers. It's tough. It's hard for everyone. Affordability is the toughest piece for most people. And there are only three things that affect affordability: house prices, interest rates and wages. So you need some sort of combination; the chance of you getting all three going in your direction to improve affordability is not high.

[00:03:21] Jennifer Borget Can you walk us through the costs that they should think about beyond just the sticker price of the house?

[00:03:27] Jeb Smith Buying a house is one of those things that people typically decide they're going to do, right? Hey, I'm going to buy a house. You're talking to your spouse, your significant other, your partner, what have you, and you say, We should own a house; let's go buy a house, and then you start looking at houses online. You're just going, Oh, this one's got an open house, let's look at it. And then you're in it, and you're like, Oh, this is the one; it matches everything. And then, all of a sudden, you're talking to a mortgage professional, you're getting pre-approved, you have no idea what's going on, and now you've got an offering on a house. I mean, it can happen like that. I think people should start a budget, like the basics—how much disposable income do I have?—or just write it out: How much money are you bringing in? What are you spending on groceries, childcare, date night, all of that stuff? And figure out, Okay, what am I actually comfortable spending a month? And then backing your way into the process. I think if you do it that way, you're setting yourself up for success versus failure. Or do you have relationship stability? Do you have financial stability? Do you have job stability? Are you going to be in the same location for the next five to 10 years? If not, then buying a house probably isn't the right move. I think in this market, you need to have a longer-term time horizon, probably seven to 10 for the most part. And that's not because I think prices are going to crash, but you do need some normalcy in the market.

[00:04:52] Jennifer Borget How can people avoid these kinds of mistakes or surprises or things like that when they're looking at this, which is already kind of daunting?

[00:05:01] Jeb Smith You’ve got to have some money outside of your down payment and closing costs because things do happen in real estate. Your insurance—look at areas like Florida and Louisiana and some of these high-risk areas at the moment; insurance cost is up significantly because of the potential risk out there. There's no manual to show you this is how every single house works. Every little area works a little bit different. And unfortunately, taxes and insurance and HOA fees are some of those things that can adjust on top of maintenance for homes. I've seen studies that say you need to set aside so much per year for maintenance. I don't necessarily believe that you need to do that per se, but you do need to know that over time, you're going to have to replace the roof on the home, and you're going to have to paint. You're going to have to do some of these things, and you need to factor that in.

[00:05:49] Jennifer Borget Yeah, do you have a number or suggestion or anything? Or do you just keep in mind that the cost of home ownership can be more than just your mortgage and taxes and HOA?

[00:06:02] Jeb Smith You know, you don't know how much your insurance is going to go up per year. You don't know technically how much your taxes are going to go up per year; that's why you’ve got to have that budget and plan and not go in just leveraged to the max, hoping that something is going to work out in your favor. Hope's not a strategy when you're going through this sort of thing. I don't know that there's a bulletproof way to say, This is how you do it. You kind of have to look at what's around you, what's happened in the past, and kind of adjust accordingly. And I think having an agent in those markets that understands those markets and is able to have that conversation [is a good idea] because somebody in that market is willing to tell you what to expect.

[00:06:50] Jennifer Borget Jeb shared some really interesting things no one tells you about owning a home, like anticipating insurance hikes, surprise maintenance costs or HOA fees that slowly creep up. These are the kinds of financial blind spots that can sneak up on anyone. Next, we're going to talk with Jeb about what affordability actually means when it comes to real estate. But first, Northwestern Mutual's going to share the top three things to think about if you want to buy a home. If you're thinking about getting into the market, trust me, you're going to want to stick around.

[00:07:21] Speaker Buying a home is one of the biggest financial decisions you'll ever make. So if you're thinking about becoming a homeowner now or years from now, here are the top three financial things you should be thinking about.

One, have a solid financial plan in place. A plan helps you clearly define what you want and what you can realistically afford. While it's rare to find a house that ticks all your boxes within your budget, a financial plan can help you decide exactly what you're willing to compromise on and what you're not.

Two, understand how much it really costs to own a home, and set a realistic budget. Getting pre-approved for a loan can give you a sense of what you'll be able to borrow. But don't just use this number to set your price range. First, take a minute to understand the expenses that you'll be on the hook for outside of your mortgage, like property taxes, homeowners insurance, or HOA dues. You may also want to look at additional financial protection to make sure you or your spouse can cover the mortgage if something were to happen to either of you or to your incomes. Chances are, when you take all these things into account, you'll actually want to look for a home that costs less than the amount that you were pre-approved for.

And three, keep your long-term vision in mind, too. It's easy to look at what your needs are today, but things change. Some of these things are within your control, while others aren't. Finding the right home comes down to finding something that balances your situation today with what your life will look like down the road. No matter where you are in your home buying journey, it's never too early or too late to start preparing. Together with your financial advisor, you can make sure you're financially ready to buy a home, from assessing your overall financial health to making a plan to improve it. With a clear financial plan, you'll be able to reach major milestones, like buying a house, and keep other long-term savings goals, like retirement, on track. Visit northwesternmutual.com/podcast for a digital homebuying guide and to connect with your advisor to get started.

[00:09:16] Jennifer Borget What are some of the benefits that are non-financial that people might not consider when they're looking at the cost of the home? And then how do you balance that with looking at cost?

[00:09:29] Jeb Smith I think it's setting a foundation. There are studies out there that say home ownership builds community. It gives kids stability in their life, and that stability plays into everything that they do.

[00:09:42] Jennifer Borget So the idea of stability and building roots.

[00:09:46] Jeb Smith I think the idea of being able to do it earlier in your life is the benefit, and the reason for that is the sooner you can lock in a fixed mortgage payment, a 30-year fixed mortgage payment—yeah, there might be some changes with taxes and insurance and so on and so forth—the better off you're going to be long term because if rates go down, in theory, you can refinance and can continue to take that payment down. If rates go up, you've kind of locked in what the worst-case scenario is going to be with that mortgage payment.

What happens over time is you tend to make more money. You tend to climb the corporate ladder, if you will, depending on your career. So, the smaller that piece becomes of your overall budget, the earlier you can do it in life. There's no such thing as a 30-year fixed rent payment. Rents continue to increase, on average, 3 to 4 percent per year. It may not make sense today when you look at the numbers, rent versus own, but when you look 10, 15 years down the road, which is very difficult for people to do because it seems like an eternity, you start to realize, Well, I just paid down the principal. I put this money into a forced savings account, my home appreciated, it's gone up in value significantly, and my payment hasn't adjusted every single year. So, there's all of those little pieces that make home ownership ... homeowners have 40 times greater net worth than those who are renters because of all of those things.

[00:11:11] Jennifer Borget People think, Oh, I'm just going to rent now. That seems to be something that a lot of this Gen Z generation is talking about: I'm going to rent, I am never going to buy, or I'm not going to be able to. They like the idea, I guess, maybe of freedom, of moving around. Are there pros and cons of renting versus buying? Is renting ever a better option?

[00:11:34] Jeb Smith If you need flexibility in your life, and that's what you're looking for, then renting is probably the right way. Renters can get the same benefits as homeownership outside of the rent stability piece over time. It's not quite as easy as having the forced savings account of every single month, you paying down the principal balance and that money, in theory, paying down the principal of that loan. You know that most people don't have the ability—I wouldn't say they don't have the ability to save. They don't save.

[00:12:04] Jennifer Borget I have younger siblings. I have a sister who's 27. And she's in this idea right now of Oh, I want to buy a place. I don't know if I'm ever going to be able to. I know that recent Northwestern Mutual research shows that more than half of people who don't already own homes think that owning a home is just never going to be obtainable for them. So, what advice do you have for these people who right now are already feeling priced out?

[00:12:35] Jeb Smith I think a lot of it's—honestly, it's going to sound very cliche, but a lot of it is mindset: If you don't think you can, then you probably can't. You're setting that bar for yourself. I think for most people, they don't truly understand what it means and how much they can afford because people just look at their salary and figure out, Well, this is what I make. There's no way I'm going to get approved. And they just do their own calculations without ever talking to somebody. For most people, what I tell people all the time—the question gets asked, how soon is too soon to start the process? Never, it's never too early. The earlier you do it, the more you're going to know about your financial position, what you can work on to be able to set yourself up for success. I think if you're thinking you're going to want to become a homeowner in six months, a year, whatever it is, talk to somebody now. Have them run your numbers now based on your income now, looking at your debts and saying, Okay, based on this, this is what you could buy. And work backwards and say, Okay. Well, I can actually buy something like that. That's what I could get. Okay, that makes sense to me. Whereas a lot of people just start the process when they think they're ready and that they had time to work on these things. They had time to save maybe a little bit more money for a down payment or maybe pay off a little of debt to get their debt-to-income ratio a little lower, the ability to go a little higher in price or do some things differently. The best one is work on credit. Credit affects your ability to purchase probably more so than anything else. A good credit score will drastically improve your interest rate, which improves your monthly payment, affordability, all of those things.

Start the process by listening to things like this, listening to podcasts, listening to things that you can do to set yourself up for success, and then going through a pre-approval, talking to a lender, talking to bank or whoever it is. Have that conversation, and then work backwards: Okay, I can't do it now, but I'm going to create a plan. I'm going to save 3.5 percent so I can do an FHA loan or 5 percent so I could do this, and I'm going to work on my credit. And now it improves your chances of being able to buy that home.

You know, buying a house is a big thing. It's a financial obligation and probably the biggest that most people ever make. And so I think, again, just taking the time, going through the process and not trying to rush it and thinking, Hey, this has to happen tomorrow because if I don't do it tomorrow, then I've got to sign a new year lease. Well, just sign the lease, but still work on the things you can work on while you can do it. And again, control those controllables.

[00:15:13] Jennifer Borget Now, one thing I wanted to ask you, because you talked about talking to a lender or talking to an agent or someone, and I just am thinking back to when I was a little younger doing this for the first time. I know that was a big, kind of intimidating step, because I felt like, Okay, if I'm talking to someone, then I'm committing ... either one, I'm locked in and I have to go through with this, or two, It's too early, and they're not going to take me seriously or not want to talk to me because I don't have a plan forward right now. So, what would you say to someone who's maybe worried that I don't want to get the ball rolling quite yet. I want to talk to someone and get some information, but I don't want them to kind of push me into something I'm not quite ready for. And then on the other hand, what if someone just brushes me off because they're like, “Well, you're not ready to buy. So I don't want to talk to you about this right now.”

[00:16:12] Jeb Smith That's a really good question. And, you know, there's a difference in professionals in every industry. There are salespeople and there are professionals, right? And I think the professionals understand that honestly, this business is like any other business. It's very relational. And it can be very successful when you build a relational business. So when you build a business from relationships, you're willing to help people without an immediate return. And I think that's where the professional piece comes into the puzzle versus the person that's just looking for the sale today and not interested in helping, not interested in educating, not interested in guiding. When you take that step back and you find the professional, the person that is willing to help—there shouldn't be any charge to talk to someone. You're not committed to anyone really at any point in the process until you have a home and are in the middle of it, right? I mean, that's when you're committed, but even then you could change if you wanted. You can move around very easily in that process. Yeah, it's very flexible.

What I would say is find somebody you trust. A good source is always to find a referral. Like, Who did Jennifer use? Was she happy with that person? Oh, you had a really good experience? Who did you use? I want to talk to them. Have that relationship. Maybe you didn't and you're like, Hey, don't use my guy. Call somebody else, you know? Have a referral of a source to have that conversation with, and basically just be upfront on what you're trying to do: Hey, I'm new to the process. I'm a year out, but I want to see this. The professionals will take the time, guide you through that, have the conversation, tell you what you need to know. That doesn't mean you need to apply for a mortgage that day, but it's the conversation that maybe it's a pre-qual versus a pre-approval in the sense that you're just having a conversation about how much you make and what your credit score is versus somebody actually looking at documents and running documents just to get a general idea of where you stand. And I think, again, there are definitely plenty of people out there that are willing to take that approach versus the sales approach. Finding somebody that builds their business like that I think is important. And I don't know if there's an easy way to find it outside of a referral of a source. You could always Google, but I wouldn’t go that route.

[00:18:50] Jennifer Borget That makes sense. Yeah, getting a referral, maybe getting a few. If you're saying there's no commitment, then you could probably talk to a few and see who you mesh with.

[00:19:00] Jeb Smith Yeah, but if you're early in the process, maybe just talk to one person, and just see where you stand. And then when you're ready, you can talk to a couple people, compare rates, compare fees, compare communication. Who do you jive with? I'm not for everyone, and not everyone's for me. And that's okay. But there are people out there that mesh with different people. So, finding those people, the people that you trust, to get you to the finish line—super, super important.

[00:19:28] Jennifer Borget Thank you so much, Jeb, you've been amazing. Is there anything else you want to add that I didn't already ask you?

[00:19:34] Jeb Smith No, I don't think so. Again, don't think this is out of reach. Don't think it's not in your wheelhouse because of the current circumstances. Things can change—create a plan, create a budget, stick to it, allow time to take care of itself. And I think with time, you can accomplish a lot.

[00:19:54] Jennifer Borget A big thank you to Jeb for joining us today. I love how he broke things down in a way that felt approachable, especially his point about looking beyond just the monthly payment. It's easy to fall in love with a house, but staying in love means making sure it fits your life and your long-term goals. If you're thinking about buying a home or even just starting to plan, a financial advisor can help you see the full picture, including not just what you can afford now but how you can do this and meet other future savings goals. If you're even thinking about buying a home down the road, head to NorthwesternMutual.com/podcast for our free digital guide to homebuying and more resources on how to save or how to get your financial plan started today.

[00:20:38] Narrator Northwestern Mutual is the marketing name for the Northwestern Mutual Life Insurance Company, NM, and its subsidiaries in Milwaukee, Wisconsin. Not all Northwestern Mutual representatives are advisors. Only those representatives with advisor in their title or who otherwise disclose their status as an advisor of Northwestern Mutual Wealth Management Company (NMWMC) are credentialed as NMWMC representatives to provide advisory services. Jeb Smith is not affiliated with Northwestern Mutual, and the views expressed by Jeb Smith do not necessarily represent those of N