My time as a mortgage banker was a learning experience about the financial industry and a glimpse into how differently people spend their money.
In a 15 minute phone call I would know more about somebody’s finances then their entire family. A learning experience indeed.
Mortgages are a simple financial product. Saying that, there are a number of questions people have about them. Instead of writing a number of small posts I thought it would be best to put the most frequently asked questions into one.
- How To Shop For a Mortgage
- Where to Get a Mortgage?
- Mortgage Banker vs Mortgage Broker
- Interest Rates – What’s Your Rate?
- Buying Down The Rate
- Paying Points
- Top 5 Reasons to Refinance your Mortgage
- Qualifying Factors – Lets Get You Approved
- The Underwriting Process and Reasons Why Your Loan Can Be Denied
- Why Collections, Judgements, Liens, Property Taxes, and Income Taxes Must Be Paid Before Closing
- Closing Costs – No Such Thing As A No Closing Cost Loan
- Appraisal – Put Away The Sex Toys
- Private Mortgage Insurance (PMI) – Its Your Choice
- FHA Loans – What They Really Are
- What Does The Federal Reserve Have To Do With Mortgages?
- Who the Hell are Fannie Mae and Freddie Mac?
- Don’t Be Rude
- Tips and Tricks: Lender Paid Credits
- Sellers Concessions
- But I Have A 3% Interest Rate – Why Refinance to 4% to Consolidate Debt?
- Fixed Rate Mortgage vs Adjustable Rate Mortgage
- Why First Time Home Buyers Should Get A 30 Year Fixed Rate Mortgage
- Home Equity Lines Of Credit (HELOC) and Second Mortgages
- Piggyback Mortgage – Its Not a Pig
- What Mortgage Should You Get At A Certain Age?
- Your Mortgage Made You House Poor
- Reverse Mortgage – Should You Get One?
- Negative Amortization Mortgage – A Truly Piece Of Crap Loan
- Why Self Employed People Can’t Get Approved On Mortgages
- Escrowing Property Taxes and Home Owners Insurance
- Why Foreclosure Is Not A Bad Idea
- Why Was My Mortgage Sold to Another Company?
- Mortgage Companies Do Not Want You To Foreclose
- **Bonus** – My Prediction for The Mortgage Industry
How To Shop For a Mortgage
When you are ready to get a mortgage (buying or refinancing) you need to do all of your shopping the same day. Mortgage companies update mortgage rates around 10am after the stock market opens. Commonly called a “rate sheet”, this is what mortgage companies use to quote interest rates.
Just like how the stock market goes up and down daily, mortgage interest rates go up and down daily. What you were quoted yesterday might not be the same as you were quoted today.
What you are really doing by shopping the same day is making sure you are hearing roughly the same interest rate (give or take .125%) and closing costs on every mortgage quoted. Peace of mind if anything.
You should be able to get all the info you need to make a decision over a 15 minute phone call. Calling more than 3 mortgage companies will only drive you insane.
There have been instances where rates changed in the middle of the day. Something major happened around the world causing the stock market to move. In my time of being a mortgage banker this happened four times and none of those times was it in favor of the borrower.
Where to Get a Mortgage?
You might be able to get a lower interest rate at a credit union. Due to the majority of credit unions having a non-profit status they can return some of those profits to their members.
We are not talking about a big difference, maybe .125% – .25%. When a person told me they had been talking to their credit union my success rate in getting them to go with me dropped in half.
I may be a bit bias towards using an online lender like Quicken Loans as I worked there and have family members (my brother if you need a mortgage) and friends who still work there. The reason I suggest an online lender like them is they are more of a technology company whose product is mortgages. This means they are in the business of making the entire process as easy as possible and most importantly closing the loan.
There is always your local bank. After buying our home and using Quicken Loans to get our mortgage we opened a Home Equity Line of Credit with the bank I have had my checking account with since I was 16.
The process of getting the HELOC was painstaking compared to going through Quicken Loans. The application process, documents, closing, etc. took twice as long as it should have. I’ll get into why we took out a HELOC at my bank instead of an online lender later but these same issues happened to my parents at the bank over the years too. Pricing and costs were the same between the two, but the online lenders process is so much better.
Mortgage Banker vs Mortgage Broker
A mortgage banker is somebody who works for a bank, credit union, or online lender who’s only job is to do mortgages. They help people get into the best mortgage available that the company offers. This is what I was.
A mortgage broker is somebody who either works for themselves or a company and like a mortgage banker only does mortgages. The difference is they do all the shopping for you. The brokers do not have programs of their own. They instead work with banks and online lenders trying to find the best deal and program for you. A middleman if you will.
The mortgage broker has to get paid. Maybe this is done with a finders fee through a bank or online lender. The bank gives up the interest to the mortgage broker they would have collected for the first month or two to pay them and collects after that.
In my experience you are better off going with a mortgage banker as you are dealing directly with the company. Both a banker and broker work on commission and maybe a base salary. But a banker is probably able to handle everything faster and in most cases offer everything a broker can because the broker is calling them with your info too!
Interest Rates – What’s Your Rate?
Interest rates (money) are a commodity. Orange juice, gas prices, etc., all commodities. What this means is the market (financial institutions) is buying and selling money in an attempt to hit their financial goals.
All of this buying and selling creates a market in which those institutions deem what kind of return they want on money they lend. If one place charges more interest then they will get less customers buying from them. If one place charges too little then they will not be profitable. The end result is an interest rate the market deems ok with lending at.
Do your best to not have your first question to a mortgage banker be “What’s your rate?”. Just don’t. It’s not their rate. It’s the markets rate.
Interest rates are the same regardless of the state you live in. I had a number of people tell me they could get better rates from companies in Florida, California, New York, Ohio, and so on. No – you can’t. Lenders get their rates from the same place. Where the company is located has no factor in determining the rate at which they lend. There is no “local mortgage rate”.
Buying Down The Rate
Your mortgage banker may mention buying down the rate. What this means is you can get a lower interest rate but you will have to pay for it. On any given day you can get 10 different interest rates for a 30 year mortgage (as an example). What you will probably hear quoted to you is the “zero point rate”.
Let’s say today’s zero point rate on a 30 year mortgage is 4%. But you can get a 3%, 3.125%, 3.25%, 3.375%, 3.5%, 3.625%, 3.75%, 3.875%, 4%, 4.125%, 4.25%, 4.375%, and 4.5%. You may be wondering why you would take the 4.5% and its something (lender paid credit) I will go over later in my tips and tricks.
Lets say to get the 3.5% interest rate you have to pay .5 points. Lets also say you have a $100,000 balance on a 30 year fixed rate mortgage.
$100,000 x .5% = $500. This is a cost added to your closing costs which we will discuss later. In exchange for paying $500 upfront to the lender they will give you a lower interest rate for the life of your loan. But is it worth it?
$100,000 mortgage at 4% = $477 monthly payment ($333 interest – $144 principal)
$100,000 mortgage at 3.5% = $449 monthly payment ($292 interest – $157 principal)
Savings of $477 – $449 = $28 a month. Break even is $500 / $28 = 17.8 months. If you plan on being in your home longer than 17 months then it makes sense to buy down the rate. Otherwise, save the $500 and take the higher rate.
We went over buying down the rate above. What you may not know is you might be charged points for other items when getting a loan and they are based on risk, not getting you a lower rate.
Escrow Waiver: .25% – You electing to pay property taxes and home owners insurance on your own.
Low Loan Amount: Up to 2% – Mortgages under $75,000 don’t make that much money for the company so they charge you a little extra up front.
Low Credit Score: Up to 2% – Credit Scores under 620 as you were riskier to lend to.
High Loan To Value: Up to 2% – Go over 80% loan to value and you’ll get charged private mortgage insurance (PMI) and a couple of points on the front side.
These were just a few of the ones we charged.
Top 5 Reasons to Refinance your Mortgage
- Lower your interest rate – In most cases it only makes sense to do refinance if you are lowering the rate by 1.5%. If the lender is willing to cover most of the costs than .5% to 1.5% might make sense too.
- Refinance from Adjustable Rate Mortgage to Fixed Rate Mortgage – Piece of mind knowing the fixed rate payment will not move.
- Shorten the Term – Go from a 30 year fixed rate to a 15 year fixed rate to pay off house faster.
- Cash Out Equity – Borrow against the house to pay off credit card bills, home renovations, pay for kids colleges, travel around the world, etc.
- Divorce – Refinance must be done to get the ex off the loan.
Qualifying Factors – Lets Get You Approved
To get approved on a mortgage you must have good answers to these questions or really good ones that compliment the not so good ones. The questions a mortgage banker asks will be about your income, assets, value of the house, and credit score.
Income – You need it to pay back the loan. Can come from a job, investment income, social security, spousal support, etc.
Assets – You need them, especially when buying a home. I had a few clients with less than $2000 in their name trying to refinance and we were able to help them. When buying, you need the down payment + closing costs + at least three months of reserves (money available after closing) in various accounts to get approved.
Value Of Home – Determines your Loan To Value (LTV), i.e your mortgage balance divided by value of the home. An appraisal must be done to determine its value.
Credit Score – Over 700 should be good enough to qualify. Make your payments on time, no bankruptcies, no foreclosures, no liens, etc., and you’ll be fine.
Debt to Income (DTI) – Your credit report will also show your debts. They add up your monthly payments on cars, student loans, credit cards, etc. along with anything else and use it to figure out your Debt to Income (DTI).
There were instances where we approved clients with a DTI of 55%. The only reason we did was because the loan to value (LTV) was 45%. They had a lot of equity in the home and the thinking is they would not foreclose, so it was worth the risk. 43% seems to be the highest DTI mortgage lenders are willing to go these days.
I had a similar scenario with somebody who had a 575 credit score due to liens and late payments on credit cards. They wanted to refinance out of their higher interest rate mortgage and include those liens and credit cards. If approved their new DTI would be around 35% when it was near 45% before. The good news for them was after paying those items off they would have a LTV of 50%. The loan was approved and we closed.
This is a great example of why you can still get a mortgage with bad credit scores. If all the other qualifying factors are really good then the mortgage company may look past the bad credit score. Refinancing will be easier than buying with bad credit but at least you know it is possible.
When refinancing, the most important factor outside of income was LTV. If there was a lot of equity the mortgage company would take a risk. What I typically saw was after paying off liens, judgements, and credit cards I would call them back in 6 months and ask if they would like for me to pull their credit report. In nearly every case their credit scores jumped 100 points.
The Underwriting Process and Reasons Why Your Loan Can Be Denied
Mortgage bankers will know upfront if they are going to be able to do a loan for you. If you do not meet the qualifying factors of income, having assets, a good credit score, low debt to income, and a loan to value that meets or exceeds guidelines then the application does not even get to the underwriters.
Underwriters are the people who go through the borrowers supporting documents, verify taxes have been paid, call your place of employment, etc. It’s quite a bit of fact finding. If all of those are the same thing as what you said on your application then your loan should close. Remember, mortgage companies want to close your loan, not deny it.
However, if any of these reasons pop up during the underwriting process then the loan will be denied.
- Low Appraisal
- Title – Maybe an ex-spouse is still on title
- Liens and Judgements not showing up on a credit report but is on file at the County Assessors office. These must be paid before closing.
- Missing toilets and sinks. Holes in roof. All major repairs must be completed before closing.
- Photoshopped documents – A big no no. Fraud departments look for this stuff.
- Mobile Home or Manufactured Home – Mortgage lenders do not lend to mobile or manufactured homes because you can move them. Local banks or even the company who sold you the mobile home will be the ones to contact about refinancing. Major mortgage companies do not on them as it is risky to do. Its a requirement for mortgage bankers to ask during the application process so tell the truth. You do not want to pay for an appraisal and get denied after the fact.
- Job – You no longer work where you said you did.
- Home Was Recently Listed For Sale – Home has to be off the market for six (or 12) months before a mortgage company will allow a refinance. They do check the MLS. You might be able to get by if you were doing it “For Sale By Owner”. Its a big risk to lend to someone who was trying to sell the home as they might be trying to pay off debts with the new loan and then will foreclose.
Why Collections, Judgements, Liens, Property Taxes, and Income Taxes Must Be Paid Before Closing
Mortgage companies always want to be in first lien position on title of a home. If you foreclose then whomever recorded the liens by date will get paid first when the house is next sold. Mortgage debt is usually the largest amount of all.
This is why lenders require all of those to be paid before closing a mortgage. With all of those being paid off, the mortgage rolls into first lien position in case of a default.
If you cannot pay those debts off when trying to refinance (not enough equity, etc) you might be better off doing nothing at all. Make your mortgage payments on time and try negotiating with the collections company, judgment holder, city, IRS, etc. Maybe you can get them to take half of what is owed and a letter from them stating a new agreed amount which the lender can now use to move forward with a new loan.
Closing Costs – No Such Thing As A No Closing Cost Loan
Closing costs are things you can’t shop around. What entails closing costs are title work (pay people to do the paperwork), state taxes, title insurance, etc. Some mortgage companies have a title company in-house. You can however hire a company of your own.
When you are quoted mortgage rates you will also be quoted closing costs. This is another number that should be roughly the same when doing your shopping.
Points paid from buying down the rate are additional to the closing costs. When buying a home the closing costs must be paid out of pocket from you or with seller concessions. When refinancing, the closing costs can be rolled into the mortgage balance leaving you with nothing to bring out of pocket.
Appraisal – Put Away The Sex Toys
One must be done when purchasing or refinancing a home. The mortgage company needs a value to determine if the mortgage is going to work. Remember, the mortgage company wants the value to come back at what you said on the application so they can close your loan.
If you are refinancing, make sure to clean up the house before the appraiser comes over. Oh, and if you have a “off limits room” make sure you put away what is in that room as it is not off limits to the appraiser. Yes – I have seen appraisals with sex swings in the pictures and sex toys left on night stands. There were even a couple of pot plants in closets. Do yourself a favor and put those things away before the appraiser comes over.
If the appraisal comes in lower than what you thought and the loan no longer works from a qualifying point of view then the loan will be denied. A low appraisal was the #1 reason why loans were denied and the only thing that can be done to close the loan is for you to bring in more money.
Private Mortgage Insurance (PMI) – Its Your Choice
PMI is charged when the Loan To Value goes over 80%. In the eye of the mortgage lender you are riskier to lend to with an LTV over 80%. To do the loan they want a little insurance you are going to make payments.
There are insurance companies who step in and insure the loan in case the borrower defaults. When PMI is involved there are three entities: Borrower, Mortgage Company, and Mortgage Insurance Company.
If you default, the mortgage insurance company will pay the mortgage company off. You, the borrower, makes additional payments on top of your mortgage payment (included with monthly payment). This money goes to the insurance company.
Much like getting qualified for a mortgage, the additional payment depends on the Loan To Value, Debt To Income, and Credit Score.
In my experience I would see most PMI payments under $50 a month if LTV below 85%. Add $50 more a month up to 90% LTV. I remember one time seeing a client who had to pay an extra $190 a month in PMI at 90% LTV because their credit score was 585. It can be quite costly.
PMI goes away once you pay down the balance to 80% or if you refinance and the value of the house goes up putting the LTV under 80%. In some cases it might be worthwhile for you to bring money to closing to get the LTV to 80% which removes PMI from your mortgage payment.
FHA Loans – What They Really Are
FHA stands for Federal Housing Administration which as you can guess is ran by the U.S Government. What makes the FHA Loan popular is it allows for a low downpayment (3.5%) when buying a home, low closing costs, and lower credit scores. How all of this works is the FHA insures the loan so your lender can offer you something.
Basically, the mortgage company would not lend to you with one of their loans but will offer you a FHA loan as the government insures the loan in case you default. Essentially the mortgage company has little risk involved with lending to you with the FHA insuring the loan.
FHA loans have a little bit more paperwork than a conventional mortgage but should not be a reason as to why you should not get a FHA loan. Mortgage companies have technology in place to automate a lot of paperwork nowadays.
Piece of Advice – If you are trying to buy a house with only 3.5% down – don’t. Houses cost a bunch of money to own. Do yourself a favor and rent until you’ve saved up the money to put at least 10% down.
If you already own and you have to refinance into a FHA Loan, than so be it. There is nothing bad about a FHA Loan. In my eyes it does a disservice to most as it allows people to buy something they might not be ready for.
What Does The Federal Reserve Have To Do With Mortgages?
Quite a bit. “Federal Reserve is meeting tomorrow so we need to lock your rate today and get the documents out to you” was a phrase I used a couple of times. Our directors would have us use this as a way to encourage people to move forward today and not wait to hear what the Federal Reserve doing tomorrow. It wasn’t until my second year of banking when I Googled “What Is The Federal Reserve” and learned what they really are.
There is nothing Federal or Reserve about the Federal Reserve. They are a collection of banks who lend money back to the U.S Government and are allowed to via the Federal Reserve Act of 1913. It is well worth your time to Google the Federal Reserve to learn how manipulative they are.
When “The Fed” talks the market listens. Interest rates on mortgages bounce around when whispers of what The Fed has planned leak to the public. If you are shopping for a mortgage and have a loan which makes sense today, then don’t want oil tomorrow to hear what The Fed has to say.
Any sort of adjustable rate financial product (HELOC, credit cards, savings accounts, etc.) is tied into “The Prime Rate”. Banks borrow money from the Federal Reserve and add on a percent or two and lend to you. When interest rates are raised or lowered by The Fed your rate on a HELOC will follow.
Who the Hell are Fannie Mae and Freddie Mac?
You may hear your mortgage banker bring these names up during the application or underwriting process. Fannie Mae and Freddie Mac do not receive any U.S Government funding but are considered a “Government Sponsored Enterprise” or “GSE”.
Fannie Mae and Freddie Mac were created to help sell loans as bonds on the secondary market. They insure loans as bonds and take a percentage of the loan amounts as payment and put it into a reserve fund to make payments on loans in case home owners default on their mortgage. What this does is free up money for banks to make more loans.
Half of the mortgage debt in the United States is controlled by them. Mortgage companies who work with them (lets say all lenders) run your application through Fannie Mae or Freddie Macs underwriting computer to determine if either of those organizations will insure the loan in case of default.
In my eyes, these two organizations should never exist. There is no need for them. Lenders should have to make their own guidelines as to who they lend to and risk losing their money. With Fannie and Freddie existing, it lets lenders bypass most of the risk as the loans are insured.
Don’t Be Rude
Halfway point here. Wanted to take a little break and share some things.
I understand the shopping process can seem boring and repetitive. But do not call the third lender and be short with the person on the phone.
We already know to never ask a mortgage banker what their rate is. The next thing to never do is say something like this.
“I want two point seventy five interest rate. No questions.”
That is not how it works. What if the mortgage banker could give you 2.75% but is now not allowed to ask questions about your job, assets, the house, etc. They want to give you that rate but you will not allow them to ask questions. Your calling them because you need money. There will be questions.
Hey, can I borrow $10,000? What do you need it for? Simple as that.
Tips and Tricks: Lender Paid Credits
Remember when I mentioned “lender paid credit” in the buying down the rate scenario? What this means is the lender can pay you back if you take a higher rate. Why would you do this?
Lets say you have the same $100,000 mortgage. The lender paid credit at 4.5% is -1 point. What this means is the mortgage company can pay you back $100,000 x 1% = $1000 if you take the 4.5% interest rate.
The mortgage company doesn’t write you a check but what they can do is credit the $1000 towards your closing costs. Most people choose to roll their closing costs into the loan (only if you are refinancing) and by doing so increase the balance of the loan. Effectively you pay interest on those costs since they are in the loan.
By taking the higher rate your balance will be $1000 less.
As an example: $100,000 loan with $3000 in closing costs on a 30 year fixed rate mortgage.
$103,000 (loan + closing costs) at 4% = $494 payment ( $343 interest + $148 principal)
$102,000 (loan + closing costs) at 4.5% = $517 payment ( $383 interest + $134 principal)
$23 more a month or $276 more a year. Breakeven point $1000 / $276 = 3.6 years.
If you plan on being in the home longer than 3.6 years than the lower rate makes sense. If shorter than 3.6 years than the higher rate as you build more equity.
A home buyer can ask the seller to cover some of the closing costs of the loan. In most cases a mortgage company will allow up to 3%, i.e $100,000 x 3% = $3000. If the seller agrees it allows the buyer to put down more money (or not) on the loan.
In most cases I saw the seller agree to concessions if there were no other offers on their house. If the only person who wants to buy your house is asking for seller concessions than sometimes you have to go with it.
But I Have A 3% Interest Rate – Why Refinance to 4% to Consolidate Debt?
If you refinanced or bought a home from 2011 – 2017 there is a good chance you have a mortgage with an interest rate around 3%. Giving up that loan to get into one with a higher interest rate goes against everything you believe to be true about mortgages.
Lets say you own a home worth $300,000. You have a 30 year mortgage of $150,000 at 3% and you are thinking about consolidating some debts which are:
Mortgage – $150,000 at 3%
Credit Card – $30,000 at 15%
Student Loan – $60,000 at 7%
This is where the concept of a Blended Interest Rate comes in. This is not an average, i.e adding those interest rates up and dividing by three. No – those balances and rates are weighted.
In this scenario, with a total of $240,000, your blended rate is 6.125%. (Google “Blended Interest Rate Calculator”)
If you were to consolidate those debts into one mortgage at a rate less than 6.125% you would be saving money. Giving up your 3% mortgage to get one at 4% including those debts would save you 2.125% interest. That is a lot of money.
$240,000 at 6.125% on 30 year fixed = $1458 monthly payment ($1225 interest + $233 principal)
$240,000 at 4% on 30 year fixed = $1146 monthly payment ($800 interest + $346 principal)
$1458 – $1146 = $312 a month savings or $3744 a year.
To be fair, I do not know what the payments on the original mortgage, student loan, and credit cards are. Experience tells me the combined payments on those are closer to $2000 a month versus $1458.
If looking at just interest its $1225 – $800 = $425 a month savings in interest or $5100 a year.
Would you feel comfortable giving up the 3% interest rate now?
Fixed Rate Mortgage vs Adjustable Rate Mortgage
The 30 year, 15 year, and 10 year are the most common fixed rate mortgages with a 20 and 25 year available too. The 30 year is the most taken of those as it offers the lowest payment.
A 15 year fixed rate mortgage is usually .5% lower than a 30 year fixed. You pay less interest with the 15 year loan but do have a larger monthly payment which pays the mortgage off faster.
Fixed rate mortgages are very straightforward in that your payment will be the same for the life of the loan. They offer greater piece of mind for borrowers when obtaining a mortgage.
Adjustable rate mortgages have interest rates locked for the first 3, 5, or 7 years of the loan along with lower rates than fixed rate mortgages (up to 2% lower in some cases).
The adjustable mortgages typically came in terms such as 5/1/5. What this means is the interest rate is fixed for the first 5 years and after the five years is up it can adjust up or down 1%(the 1 in the 5/1/5) every six months or a year (depending on the terms) but over the life of the loan it cannot go up or down more than 5% (the last 5 in the 5/1/5) from the original interest rate.
The rate at which it adjusts to is based off the LIBOR. Your mortgage company will send a letter ahead of time saying what your new rate and payment will be before this happens.
Each scenario as to why you would want a fixed rate over an adjustable rate is different. Some people like the comfort of a 30 year as they can budget accordingly. When they have extra money they can add more on each payment as if it was a 15 year and pay it off faster.
Some know they will not be in the house a long time and opt for the adjustable rate mortgage to save money on their monthly payments knowing they will sell the house before it adjusts. There might be some truth in that adjustable rate mortgages were created just for those sorts of people. It might make sense for a short term homeowner to buy a house with an adjustable rate mortgage (because ARM rates are typically lower than fixed rates) versus renting for a couple of years.
When in doubt, get the 30 year fixed rate mortgage. You will never have to worry about the payment changing and you cannot predict what interest rates are going to do.
Why First Time Home Buyers Should Get A 30 Year Fixed Rate Mortgage
First time home buyers will set themselves up better for all the unexpected events being a home owner comes with if they get a 30 year fixed rate mortgage. A 30 year will give them piece of mind knowing what the payment will be and will allow them to hopefully start putting money away for savings and retirement.
Savings will come in handy because you will probably do some home renovations to make it your own. Kitchens cost $25,000+, bathrooms $15,000+, roofs $7,500+, and so on and so on. Having the low payment from the 30 year fixed will allow to you get by on the months the big bills come around.
A 15 year fixed mortgage will build more equity but it might put a squeeze on your monthly budget. If there is money left over at the end of the month then make larger payments to the 30 year and treat it as if it was a 15 year. When money gets tight, then go back to the 30 year payment.
Let’s say you are in the home for only two years and you have a job offer in another state and you cannot sell your home. You have protected yourself with the 30 year fixed mortgage. Rent out the house while you are gone and hand it over to family or hire a property manager to look over the property while you are gone. The mortgage payment has not changed and if you are making a couple hundred dollars a month it might not be that bad to just hold onto the property.
Home Equity Lines Of Credit (HELOC) and Second Mortgages
I am a big fan of HELOC’s. It is my belief that when buying a house you should put down as much money as possible and open one up three to six months after closing.
A HELOC can be looked at as a credit card against the value of the home. Use it when you want or don’t use it all. I would rather have one and never use it all then not have one and not be able to get one in an emergency.
At one point we offered a HELOC to people buying a home. You would need to put at least 20% down to get it but what an awesome loan it was. Costs were low, payments were interest only for the first 10 years, and you could make as large a payment as you want with the option to borrow back against it. These loans went away but if they came back its the one I would get even with them having an adjustable rate.
Second mortgages are different in that they are just that, a mortgage. You cannot borrow with a second mortgage which is why I lean towards a HELOC. An advantage of a second mortgage is they come with fixed interest rates where HELOCs are adjustable.
Both HELOCs and second mortgages went away or were curtailed after the housing bubble burst in the late 2000s. When foreclosures happened you did not want to be the bank holding the note for a second mortgage or HELOC. Reason being is whomever holds first lien position gets paid any profits from the sale of the foreclosed house. Whatever is left over gets paid to whoever holds second lien position. When home prices plummeted it left many banks who held second lien position out of luck and were not able to get anything back.
At the time I was able to give people HELOCs and second mortgages up to 100% of the value of their home. When the bubble started to burst the company I worked for stopped doing them all together.
Consolidating credit card debt? Use the HELOC. Home remodel? Use the HELOC. Loss of job? Use the HELOC (must be opened before losing said job). Random expenses? Use the HELOC. Buying an investment property? Use the HELOC.
Of course I would recommend paying cash for things and never having debt in the first place but its nice to have when you’re a couple hundred or thousand short. Better interest rates than a credit card and the interest you pay is tax deductible.
Banks and credit unions are the only ones doing them right now. Most only go up to 80% loan to value. To get one you would have to have some equity built up.
Interest rates on HELOCS and second mortgages are usually higher than a 30 year fixed rate mortgage. In the eyes of the bank it is a riskier loan only because it takes a second lien position on the house. As stated above a second lien position is riskier in the event of a foreclosure. Due to the risk, this is why interest rates are higher.
The closing costs to do a HELOC are minimal, usually less than $500. In some cases the bank will cover all costs including the appraisal. The catch is if you close the account in two years you would pay those costs. There might be an annual fee ($50 or so).
Piggyback Mortgage – Its Not a Pig
You may have heard people say they used an 80/20 loan (as an example) when buying or refinancing their house. What mortgage companies would do to get around you paying PMI would be to make two loans. One up to 80% LTV with a second mortgage of 20% LTV.
This was common practice up until the IRS allowed people to include Private Mortgage Insurance as a write off on their taxes. You could choose between a second mortgage or a HELOC to close the loan.
Like I said above about HELOCs and Second Mortgages, mortgage companies do not really offer piggyback mortgages anymore. They instead do one mortgage up to 96.5% LTV (FHA) and you pay PMI.
What Mortgage Should You Get At A Certain Age?
It’s common for people who are 50 years and older to feel they need to get a 15 or 10 year fixed mortgage. Something about that whole life expectancy thing creeps into our minds. “No way I want to have a mortgage when I’m 80.”
Mortgage companies cannot discriminate on age. If all you can afford is a 30 fixed rate mortgage payment and your 60 years old then get the 30 year.
One of my most memorable clients was a 75 year old gentleman who lived in Florida. His house had been paid off for decades. He was a widower. His kids were in their 40s. He lived off of Social Security, a small pension, and some investments. He wanted to take $100,000 cash out of his $250,000 home and go travel the world.
What I have written below is close to what he said to me on the phone:
“Brad, all I care about is the lowest payment possible. I am not interested in paying this house off again. Like hell I’m making it to 105. If I die somewhere around the world then my kids still get the house and $150,000 in equity from it. But FUCK IT, I want to see some shit. I’m old.”
And that’s what we did. We give him a regular old 30 year fixed rate mortgage. I never heard from him again. Hope he had a good time.
Point being that there isn’t a right or wrong mortgage to take at a certain age. It’s all about what your financial goals are.
Your Mortgage Made You House Poor
House poor is when you make enough money to make payments on your things: house, cars, boats, student loans, and credit cards but cannot save any money for retirement, a trip, kids college funds, money to go out for dinner, or money to see a ball game.
Everything looks good on the outside. You have a big house, nice cars, boat (maybe) but you are one missed check away from total financial disaster. If you were let go from your job tomorrow you would be screwed. Smart financial people would rather take a smaller house with a smaller mortgage payment and have money left over to play with.
Being house poor is something first time home buyers might go through as they now feel what its like to own versus rent and for those who move to a bigger home or both. When you buy a bigger home you bring on more debt and expenses. Bigger home loan, bigger utility bills, more costs for upkeep, etc.
Homeowners who feel the pinch of being house poor either have to decide to stay in the house or cut expenses elsewhere if they ever want to get ahead.
Reverse Mortgage – Should You Get One?
Designed for those over the age of 62 who have paid off their house or who have a lot of equity. It allows the borrower to take a lump sum or monthly payments using the equity in their house as collateral.
I am not a fan of reverse mortgages. At some point the mortgage company will not send you anymore money and there is still a loan on the house which needs to be paid back. The home owner is not obligated to pay back the loan until the home owner dies or house is sold.
If you are in a pinch then go ahead and get a reverse mortgage. Its amazing how somebody thought up the idea of a reverse mortgage.
Negative Amortization Mortgage – A Truly Piece Of Crap Loan
Hopefully the Negative Amortization Mortgage never comes back. Also known as an “Option Arm”, this loan was one of the culprits of the Housing Bubble of 2008. The sad thing is it was the loan many unscrupulous lenders would use to get business as they would sell you on the payments and also how “home prices always go up”. Here is how it works.
Choose between 4 monthly payments: a 30 Year Fixed, 15 Year Fixed, Interest Only, and the Neg Am minimum payment. As long as you make more than the minimum payment you do not get any mortgage lates on your credit report. The Neg Am payment is based on whatever you rate is minus 3%.
Here’s an example of what the 4 payments, commonly called “Pick A Payment” would look like with a $200k loan at 7%. 30 Year Fixed – $1330. 15 Year Fixed – $1797. Interest Only – $1166. Neg Am (7%-3%=4%) = $666(That’s funny huh). Take Interest Only – Neg Am which is $1166-$666=$500 and you roll this on to the loan. So your balance the next month on your mortgage will now be $200,500 and so on and so on.
The kicker is your rate is never fixed. If you make the minimum payment, the difference between that and the interest only gets put onto the balance of the loan and your loan gets bigger. Yippie, more debt. You defer this money until it reaches 115% of the original mortgage and then it resets, i.e – you must start paying the principal back. When this happens, monthly mortgage payments double.
You can see how somebody could get sold into this loan when a payment of $666 on a $200k loan is mentioned. It is too good to be true. Negative Amortization loans should have never been invented in the first place.
Why Self Employed People Can’t Get Approved On Mortgages
Self-employed people love their write-offs as it reduces their income taxes. This is true but what it also does is lower how much income you show.
Lets say your business brings in $75,000 in revenue but after write-offs, self-employed retirement accounts, and expenses you show $30,000 in taxable income. Congrats, you will not pay a lot of taxes.
Unfortunately, you will not be getting approved on all that much of a mortgage. In the eye of the mortgage company you show:
$30,000 / 12 = $2500 in monthly income.
However, the $2500 can be whittled away if you are showing car payments, student loans, and other miscellaneous payments on your credit report. Before you know it the mortgage company is trying to qualify you on $1000 of monthly income. Strictly guessing here, but that will not qualify you for a mortgage over $40,000.
Showing two years of self employment is another big qualifying guideline. Do not think you will be getting approved on a mortgage if you just started working for yourself. Maybe an exception will be made if you’ve been self employed for a year, have good credit, and a decent LTV.
Escrowing Property Taxes and Home Owners Insurance
When buying or refinancing your home you have the option to escrow your property taxes and home owners insurance with the mortgage company.
I lean towards not escrowing and the reason is simple. I set aside those amounts each month in a savings account and earn interest on that money. When its time to make those payments, I withdraw the money and pay them.
When you escrow with the mortgage company, they earn interest on your money. I know savings rates are basically nothing right now but something is better than nothing.
While the company I worked for handled escrowing well, there were times when we were paying off other mortgages and during the process the escrow accounts were messed up putting the client in a bind to make a payment on their own.
It could also happen the mortgage company is not collecting enough and you get a call from the insurance company or a bill from the county assessors office saying you owe.
In some cases the mortgage company charges you .25 points to not escrow. On a $100,000 loan that’s $250 more in costs to close the loan. You have to look at it from their point of view. If you are making your payments including the escrow then they know the house is insured and property taxes are being paid.
In case of a natural disaster or emergency the insurance company will pay the mortgage off. If the insurance is not being paid than the mortgage company might be S.O.L but you can bet they will come after you. If property taxes are not being paid then foreclosure proceedings start to happen.
No – the mortgage company does not want your house. It is very expensive to send people to the home you stopped paying on, fix it if needed, re-list it, and sell. They want you making payments. That’s it.
Why Foreclosure Is Not A Bad Idea
**In 2017, this idea is probably not needed as home values have been up and we are not in a recession. My guess is you will not be able to get away with this as many people did during the housing bubble.**
Lets say you have a job and can pay your bills but you want to move closer to your job and or downsize. You walk out your front door and there are 14 houses for sale on your street with 8 of them going into foreclosure. This will bring down the value of your house. If you tried to sell your house you would have to bring money to closing which is something you do not want to do.
Your only option is to game the system. Continue to make all of your payments (mortgage, car, credit card, etc.) and get approved on a new home loan. Tell the mortgage company you plan to rent out your current home and make the new home your primary home. If their guidelines give you credit for what potential rents will be then this should give you the qualifying income for the new house.
If they don’t give you a potential rent credit but you qualify based on your income for two mortgages then this is good news. Find your new house and buy it. Make payments on both mortgages for two months. Going into the third month stop making payments on your old house and let it go into foreclosure.
This will destroy your credit and you will not be able to get approved on any sort of new credit. Make sure you have a car you plan on driving for awhile and credit cards open before you do this. It is important to consider any and all types of financing you see yourself doing for the next 5 years to be obtained before you do this. Whatever is established before the foreclosure (probably) will not be closed as those creditors want you making payments which you will be.
**I am not promoting you do this but when I was a mortgage banker I saw it a couple of times. It was a clever way for people who were trying to do the right thing but got stuck dealing with the housing bubble. In their eyes it was easier to mess up a credit report for 5+ years than to bring $50k+ of actual money to sell a house they did not want.
My gut tells me mortgage companies have added terms and conditions into the closing documents saying if you foreclose they are allowed to pull your credit report and if they see a new mortgage they can sue you. So beware.**
Why Was My Mortgage Sold to Another Company?
You have been successfully paying your mortgage for a couple of months or years and then a letter comes in the mail from a new mortgage company saying to make payments to them.
This happens quite a bit and it’s perfectly ok. If you have questions about why it happened then call your old mortgage company to confirm.
Why the mortgage was sold could be because your old lender needed to raise some capital to re-invest into the company, pay salaries, pay off company debt, etc. and sold the notes to do so. From what I saw it was common to ask for a 2.5% premium on each loan.
Example: Mortgage balance of $100,000 x 2.5% = $2500.
The mortgage would be sold for $102,500 to the new company but you still owe the $100,000 which is what they are collecting interest from. Your old lender passed on the interest it was earning of lets say $400 a month to get some quick money back at $102,500.
Lets say your original loan amount was $105,000 and you paid it down to $100,000. Your old lender is not profiting $102,500 but merely getting back what principal it lent which remains. In this case $100,000, a profit of $2500 from selling the note, and whatever interest you paid. Probably a profit of $6500 total on the original $105,000.
Your mortgage could be sold many times and there is nothing you can do about it. If the lender serviced the loan – you sent your payments to them – then there was a good chance they would keep the loan.
There was a tendency to keep loans where borrowers had low DTI, low LTV, and high credit scores. Basically, borrowers who were more than likely to always make their payment. In the eyes of the lender you want boatloads of those loans on the books to keep revenue coming in.
Mortgage Companies Do Not Want You To Foreclose
Mortgage companies are in the business of making and collecting interest from loans, they are not property managers. Miss four payments and the lender has the option to start foreclosure proceedings.
No – they do not want your house. They want you to make your payments. The amount of money it takes to sell a house a borrower just walked away from can get into the tens of thousands of dollars very quickly.
Money has to be spent to pay somebody to inspect, repair if needed, list for sale with a realtor who gets a commission, and maintain (cut grass, etc.) while its being sold so no fines or liens are placed against the house by the city.
Put yourself in the mortgage companies shoes for a second. A borrower who takes out a $200k loan at 6% will pay $231,676.38 JUST IN INTEREST over the span of 30 years. You will pay $431,676.38 total over 30 years to pay off your $200k loan if you make minimum monthly payments. Kind of makes you want to be a bank now huh. Sit back and watch the checks come rolling in every month for basically working one time.
**Bonus** – My Prediction for The Mortgage Industry
If you have made it this far than congrats. We have crossed the 5500 word count. My prediction for the mortgage industry as a whole is thus:
Mortgage Bankers – Will slowly be replaced with a website showing what types of mortgages the company has, what interest rates are, and what the closing costs including points are. Pick one. Mortgage bankers will transition into customer service reps if needed. There will still have to be human interaction but less of it on the front side.
Application Process – Insert your income, assets, social security number (to pull credit report), and what you think the value of your home is. The system will approve or deny your application immediately.
If approved, you will upload paystubs, and bank statements. No more faxing or attaching documents in an email to your mortgage banker. If denied, the system will tell you why.
There will be a drop down asking if you are buying or refinancing. If refinancing, it will populate the debts on your credit report asking if you’d like to pay them off.
Appraisals – Might not be needed anymore especially if you are refinancing with the same company who holds your mortgage. Maybe they use Google Earth to verify the house still exists.
Closings – Might be done over Skype or something similar. No need to send a notary to a house or go to the title companies place of business.
Loosened Guidelines – Why not? Seeing that the FHA still exists and is continuing to insure loans mortgage companies make then there really isn’t any risk to the lenders.
Undocumented Loans – Might be a stretch here but I would not be surprised to see NINA (No Income No Assets), NIVA (No Income Verified Assets), SISA (Stated Income Stated Assets), SIVA (Stated Income Verified Assets) and others make their way back. We called NINA loans the “Drug Dealer Loans.”
To qualify, you had to have a credit score over 620 and a LTV under 90% at a minimum. In most cases people were refinancing and were doing under the table jobs to pay the bills. The credit report showed they were making payments but could not verify where the money was coming from.
NINA – No paystubs or bank statements were sent in. Based off credit score and LTV.
NIVA – No paystubs but bank statements were sent in.
SISA – No paystubs or bank statements were sent in. We did verify they worked.
SIVA – No paystubs but bank statements were sent in.
Without being able to verify income or assets it meant these clients were charged points and a higher interest rate. These loans slowly went away over the years and rightfully so. I could see a scenario if refinancing but not purchasing.
The NINA, NIVA, SISA, and SIVA loans were popular with self employed people as it required them to send in little to no paperwork.
Interest Only Mortgages – Make a comeback. These were popular when I was a mortgage banker as it allowed people to pay interest only for the first 10 years of the loan and then the payment would adjust to a 20 year fixed rate mortgage including principal. Interest rate was fixed the entire time.
A trick with the interest only loans was if you paid more than the interest only payment the rest would go towards the principal. The following month your interest only payment would go down as it recalculates based on what the principal balance is. On a regular 30 year fixed the payment stays the same every month till its paid off even if you pay more.
If you break it down you are really making interest only payments for the first 10 years of a 30 year fixed mortgage anyways. A $100k balance at 4% for a 30 year fixed has a $477 monthly payment ($333 interest – $144 principal). The $144 might be the difference of someone staying in their home or not.
Interest Rates – They have to go up. Mortgage rates have been at historical lows for quite sometime. Something has got to give.
We covered a lot here. Hopefully some of this helps you in deciding what type of mortgage to get, where to get it, and how the mortgage process from application to closing works.
If you think I missed something or have a question then leave a comment below.