Finance

Something made me head to the Google machine recently and search for private school tuition rates in Michigan. It occurred to me that the daycare we are sending our kids to isn’t really a daycare at all. It’s a private school.

It’s still a daycare but its different from the one I went to when I was a kid. My parents dropped me and my brother off and we played. The one we send our kids to teaches and plays. I’m sure the daycare game has changed since the 1980s so I won’t go into the specifics of what goes on at the daycare as that’s not what this article is about.

My search for private school tuition rates in Michigan was done because we have grown accustomed to (no we haven’t) the price of daycare and was wondering if it was comparable to a private school. And maybe we could afford to send them to one.

Let it be known I puke a little when I know we are spending $11,400 per kid a year for a grand total of $22,800 a year. Just…balls.

It appears most of the private schools were high schools and more expensive per year than the daycare. Balls…again.

Weaving through the search results I read a comment on a post which is the title of this article. Its one of those times when you read something and it stops you dead in your tracks. You let it sink in, think about it, and move on only to have it pop back into your head ten minutes later.

That’s what happened to me and I tried going back to find the comment. Sadly, I could not.

Like I said. It got me thinking. Since having kids we have spent an insane amount of money on daycare. My estimates are around $50,000 in three years for two kids. Just…balls.

And I know we haven’t been able to save nearly as much as before kids. That $50,000 would have been put into maxing out retirement accounts and after that into a taxable account made up of stocks paying quarterly dividends and an S&P 500 index fund.

And that’s just from daycare. I’m not including diapers, formula, clothes, car seats, toys, books, strollers, high chairs, and the other dozen or so things that would never enter your house if you didn’t have kids.

Show Me The Money

Since September 2013 I have been using Mint to track my entire financial picture. All of my credit cards, checking and savings accounts, along with my brokerage accounts are linked there.

So I ran some reports to see how much my savings rate has moved since becoming a dad.

Included in “Financial” are deposits made into retirement and taxable investment accounts. Lets say 40% of my income went to investments.

Included in “Home” was a major home renovation which I paid cash for. “Home” represents 15% of my income. Lets say 8% went to paying down our mortgage plus half of the remodel costs which should increase the value of the home and the other 7% went towards interest, grass seed, light bulbs, etc.

I look at real estate I own and live in as a “neutral” investment. The house appreciated in value but you can’t spend equity and it doesn’t earn dividends.

Lets say 40% went into “Financial” plus the “good” 8% from “Home” represents me setting aside 48% of my income in some sort of savings or investments. Not bad.

Oh Boy.

“Financial” dropped from 40% to 12%. “Home” went up from 15% to 20% and included another large home remodel project. Lets say 8% went to paying down the mortgage plus half the increase in value of the home due to the remodel.

I went from 48% of my income going into savings or investments before kids to 20% after kids. There are people who would say a 20% savings rate is pretty good. I disagree.

Notice the new “Kids” section representing 10% of my income. Fun!

And taxes (income and property) now represent my #1 expense. Just…balls.

Clarifications

• These are just my finances.
• Our son was born in July 2014 and daughter in July 2015.
• Andrea has a full time job and pays our sons daycare. I pay our daughters.
• Theres little to show for 2014 in the “Kids” section as I didn’t start paying for daycare until Oct 2015.

Because Kids

How many times have you heard parents say “kids will change you”. I think this is more about struggling to grasp your life before kids to now having kids. You don’t realize how over your non-kid life really is.

Fast forward a year or two or three and the financial reality of being a parent sets in. I grew up in a household where both parents worked and my brother and I went to daycare.

After we spent $22,800 last year just for daycare I can understand why one parent would quit their job and stay home with their kid(s). By the time our kids go to first grade we will have spent $114,000 just on daycare. Just…balls.

And sadly, its worth it. Which is for another story.

What you don’t see in the report is how my income went down by 40% in those two years. Why? With me being self employed and working from home we decided I would keep our oldest home with me two days a week and send him to daycare three days a week for his first year.

I realized quickly I cannot work with a baby at home. They are demanding and exhausting.

Doing this saved us some money and he did get used to the daycare. I’m sure it made me a better human being as I know how to take care of a baby on my own. Put that on the resume.

Our combined income has been about the same these past five years. Her’s has gone up as mine went down.

Because Life

When we found out we were pregnant again as our son turned 5 months old it was something. We talked about having two kids but the first took longer. Yes – we were a little shocked.

And we decided to do the same with our second child as our first. I was going to be staying home with our daughter two days a week as our son transitioned to five days a week when he was a year old.

Between juggling two babies and finding out my dad was diagnosed with a disease that would eventually take his life there just wasn’t anytime for work.

Basically, I didn’t work for over a year. I just couldn’t. Life needed me.

And the daycare didn’t have space for our daughter to go full time until she was sixteen months old. A year of being at home two days a week parenting turned into almost three years.

Thankfully I did have income from the business I spent years working but there was no time to build it. So the income dropped. And when you’re not working you can’t save.

Changing Jobs

As we began to share stories of parenting with friends I often hear how one of the parents had to quit their higher paying sales job making $100k a year working 60 hours a week and take another job within the company making $60k a year working 45 hours a week.

Only because they have no way to get their kids to daycare or a family members house and they would never see their kid.

How are you going to save anything when you’re making $40k less a year and now you have daycare to pay for? And I don’t hear stories about making sacrifices with their lifestyle (cars, trips, etc.) coming up.

Biggest Expense Of Your Life

When I was 19 years old I learned your retirement should be the biggest expense of your life. I was fortunate enough to be told this from my dad and at a summer internship with a stockbroker at Merrill Lynch.

The stockbroker told me something that has stuck with me to this day. He said:

“Brad, I’ve got people who call me asking if I can get them a 15% return on their money but only set aside 10% of their income. If they could set aside 50% of their income in a simple mutual fund they wouldn’t need stockbrokers or financial advisors.”

So thats what I’ve been doing since then. Saving/Investing half and living off the other half.

That is until kids came into our life.

As I get used to seeing money going towards our kids its nice to know the money I saved before kids has reached the snowball effect. Basically, the accounts grew in value more last year than I made in income*.

Could Not Imagine

The thought of starting to save for retirement (or anything really) at the age of 37 without kids would be concerning. The thought of being in the same position with a kid on the way would send me from DEFCON 5 to DEFCON 3.

Bumps In The Road

I watched my parents save and invest my entire life. And neither of them came from money. What they did do was work their asses off and make sacrifices. Its really the only way to get ahead when you’re not born on 1st or 2nd base.

Saving when you have kids can be done but it is so much easier to do when you don’t have them. It just is.

I hear from other parents that once they get out of daycare and into school the costs go down and it feels like getting a raise.

But man, that comment hit home. Its remarkable how much things have changed with our finances and lives since our kids came around.

*I understand 2017 was a crazy good year for the stock market. But even if it went down the mutual funds and stocks I own historically pay dividends which I re-invest. So I would have got shares on the cheap.

From mid 2005 to late 2007 I worked as a mortgage banker for Quicken Loans. I started at the end of the refi boom and got a taste of the money being made. I also saw first hand the housing market collapse. It was crazy. It was as if somebody turned the lights off one day and that was that.

I really liked working for Quicken Loans. The culture was great. They gave you everything you needed to be successful. It was up to you to make it happen.

I’ll go into more of my experience later but for now I want to talk about what I learned. And to see if what I learned is still true today. I am not in the mortgage banking game anymore but my brother works at Quicken Loans (call him if you want to refinance or buy a home), as does Andrea, and a number of my friends.

So even though its been over a decade since I worked there I am still around it. Its kind of like I’m still on the sales floor when I get around my brother and a couple of our friends who we play softball with that work as mortgage bankers too.

And since I have been a homeowner with a mortgage for 5+ years I’m going to see if I am practicing what I learned. Lets get into it.

Personal Finances

I learned more about someones personal finances in 8 minutes on the phone than their entire family knows about them. When applying for a mortgage the banker has to know your income, assets, and credit score.

When was the last time you told your family members how much you made, or how much you have saved, or what your credit report looks like? Probably close to never, right?

Don’t Judge A Book By Its Cover

I talked to people from all over the country who did all sorts of jobs. I spoke to a man who said him and his wife were both Drs in their early 50s whose combined income was over $400k a year but only had $50k in savings. I had more than that saved at 26 years old.

And then I had a couple in their early 50s who worked for their city making a combined income of $75k a year but had over $500k in investments.

This was not the norm and the Drs lived in a very upscale area. You just never knew who you were going to talk to.

Most People Should Rent

When I say “most” I mean like 51% of the American population would be better off renting versus owning a home. Close to half of the people I spoke to were one missed paycheck away from financial disaster. The house was killing them. They had nothing in savings. Credit card debt everywhere. Car loans, etc.

How on Earth are you going to pay for a new roof or to hire an appliance repair person to come out when you have no money?

If they were to rent, all they would have to worry about was paying rent and utilities. Everything else would be taken care of by the landlord.

Owning a home is not some glamorous thing. Even in the best situations it can still be a pain in the ass. Your dream home is not in the suburbs. Its probably not in the city either. Its probably so far away from where you work that it basically doesn’t exist to you anyways.

When there are many homes available to buy in the same neighborhood at any time it discredits the whole “dream home” saying. Its a house. With many like it probably for sale down the street.

Unless the house you’re buying is on a lake or mountain top where houses never come up for sale then maybe it would be worth trying to rent your dream home before buying.

House Poor

Tying in with “most people should rent” is most people I talked to back in the day and even today are very close to being house poor.

They buy into the “I need a bigger house” syndrome but fail to understand how much its going to cost to furnish a larger house along with paying utilities for it.

We would all be surprised how much house you really need if we took into consideration how much junk we have laying around and how much we spend on utilities.

Always Put 20% Down

If you are buying a home than put a 20% downpayment. Most people know if you don’t put 20% down than you will be paying Private Mortgage Insurance (PMI) which in most cases adds $25 to $100 a month to your payment depending on your credit and loan to value.

Why are you buying the home again? Because you don’t want to throw money away renting? What do you think PMI is? It’s money you are throwing away.

Can’t put 20% down? Don’t buy a home. Rent.

Can put 20% down but than will have no money? Don’t buy a home. Rent. Save.

Can put 20% down but can’t fully fund your 401k every year? Don’t buy a home. Rent. Save.

Can put 20% down and can fully fund your 401k every year? Buy if it makes more sense than renting.

Can put 20% down and can fully fund your 401k every year and have money to invest? Do whatever you want.

If you’re going to buy a home, then buy a home. Put some skin in the game. Get rid of the PMI. Make that monthly mortgage payment lower than a rent payment. Make it so that if you do have to move in less than 3 years the option of keeping the house and renting it is there.

I spoke to too many people who were trying to buy a home with nothing down. Typically they didn’t have money to pay for closing costs so I could not approve them. From what I hear, people are still buying homes with as little as 3.5% down via FHA loans.

If you’re putting less than 20% down (assuming you can’t put 20% down) I’d make the argument you are renting your own house without the benefits of renting (not having to worry about stuff breaking, etc.)

Always Get A 30 Year Fixed Mortgage

In just about every scenario it makes sense for you to get a 30 year fixed. And its because your life changes. Its also because you remove yourself from playing the interest rate game with adjustable rate mortgages. Is saving $12 a month in interest worth it when the payment could go up $50+ a month in a couple of years. If it is, than put more money down.

It also gives you control of your finances as it gives you the lowest mortgage payment. Fund the 401k, save money for a kitchen remodel, throw extra money on it to pay it down, and then scale back to pay for daycare if you become a parent.

Interest Rates Are Interest Rates

Don’t buy a home because interest rates are low. Buy a home because you want to buy a home.

Refinancing your mortgage and your mortgage banker has a loan that makes sense? Move forward that day. Don’t play the whole “what if interest rates go down tomorrow” game. What if they do? What if they don’t?

Mortgage bankers hate that. I hated it. Its true that interest rates move on a day to day basis but in most cases its only .125%. We’re talking about a couple of dollars either way on a monthly mortgage payment. Historically speaking, interest rates for mortgages keep bouncing off all time lows.

Predicting what mortgage rates are going to do is a waste of time. From time to time I’d have to use the “Let’s not go tripping over pennies when we are saving you dollars” line to get the client re-focused and to move forward on a refinance.

Government Makes Things Worse

Where to start? Lets go with Federal Housing Administration (FHA) and Veterans Affairs (VA). They both need to go away.

FHA – The sole reason the FHA was put together was to “encourage” homeownership. To do so the Government passed some bills creating the Housing and Urban Development Department (HUD) which manages the FHA. To “encourage” home ownership the FHA insures the loan by charging the borrower insurance as either a lump sum or into their payment. If the borrower defaults, the FHA pays the lender back the remaining balance.

If the borrower defaults the lender still gets paid. So theres no risk on them. The FHA says they are “the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing.” So then how did the FHA get its seed money to start?

The main reason the FHA was created was because of the Great Depression. And because people did not have money, the banks were not offering favorable loan types. Most home mortgages were three to five years, with no amortization, balloon payments, and loan-to-value (LTV) ratios below sixty percent. Refinancing wasn’t even an option then. Homes went into foreclosure but the homes were not worth much so the banks didn’t get much back.

My perspective says all of those loan terms sound about right for what was going on. If I’m the bank and know that nobody will pay me back then why would I risk lending my money without terms that cover my ass?

Fast forward to today and what makes FHA loans popular is most only require 3.5% downpayment and you can have crappy credit (580+).

Thing is, most mortgage companies today have conventional loans (not FHA) which allow borrowers to put as little as 5% down to buy a home. Thats 1.5% more than the FHA. Yes, they will probably need to have credit scores over 680 to get approved on that loan. But isn’t that what we want? The market is showing it can handle this situation.

And if you can’t come up with 1.5% more for a downpayment and you have 580 credit scores YOU SHOULD NOT BE BUYING A HOUSE! Clean up your credit report. Save some more money.

VA – 100% financing with no credit score requirement. There is no mortgage insurance like FHA but the Veterans Administration charges funding fees up to 2% of the loan amount (lets call that insurance).

If there’s a group of people who should strongly lean towards renting versus buying a home its active duty military. Whats an average assignment, 3 years? You know how many people who are not in the military think about buying a house and staying in it for less than 3 years? Close to zero.

And again, if you could come up with a 5% downpayment with average credit scores you could get approved on a conventional mortgage. Just 5%.

I saw this play out recently. My Mom sold one of her rental properties to a single guy who was a retired Veteran and was collecting disability.

At the closing table were my Mom (who is a retired Vet), me, our realtor, his realtor, his mortgage broker, and the notary from the title company. He began telling us about his living situation and how he didn’t like the apartment complex where he was living as people kept stealing his plastic patio furniture.

A friend suggested he look into buying with his VA benefit and that his mortgage payment might be less than his rent payment. Which it was. And it didn’t matter that he did not have any money to put down as the VA didn’t require any. He asked for sellers concessions which my Mom said yes to.

As soon as I heard that I kind of felt bad for the guy. For one, his situation wasn’t great. I could tell he was hobbling around a little. And two, he was no match for the mortgage broker and realtor telling him “How great homeownership was going to be. And how it was going to save him money.”

Seriously, I heard his realtor say that. And his mortgage broker walked in and gave him an American flag to fly from the front porch. That was a nice touch.

Three months go by and my Mom gets an email from our realtor who forwarded an email he received from the buyers realtor saying there was water leaking into the house and they were “going to take legal action” against my Mom.

Our realtor told the other realtor he should know better. There were 3 inspections done on the house. Three! None of which found any prior water damage. Nor had we ever seen water coming in before.

Hey man – you bought a house. This stuff happens. It sucks. That $150 he was saving in his mortgage payment versus renting is now gone.

I wonder if the realtor and mortgage broker helped him out?

Fannie Mae & Freddie Mac – These two organizations were created during the Great Depression. Both are Government Sponsored Enterprises. Basically, they are quasi Government agencies that receive the best parts of working with the Government (money) and the private sector (private money).

Fannie Mae and Freddie Mac make the rules for just about every mortgage lender assuming you want to sell the loan on the secondary market. Both have had scandals. Both were bailed out by the taxpayers. Both don’t make things better.

Federal Reserve – This privately held organization controls the U.S Dollar. There is nothing Federal or Reserve about it. Every time money is exchanged the Federal Reserve knows about it. Whats amazing is they are responsible for the ups and downs of the housing market and mortgage rates. Not 100% responsible. Closer to 80%.

As a mortgage banker you had to at least be familiar with what the Federal Reserve was doing. When they raised or lowered the Federal Funds Rate (aka – Prime Rate) it affected Home Equity Lines of Credit and Adjustable Rate Mortgages. Typically, fixed rate mortgages would move too. I recommend reading End The Fed to get a better understanding about it.

Summary – Im sure there are more Government agencies out there to talk about but it really comes down to three things. Loan terms, downpayment, and credit.

Banks and mortgage companies are more than likely going to have a 30 year mortgage available moving forward. One of the reasons why the FHA was created was because there were only short term loans available. Thats not the case anymore. Knowing that, there’s one less reason for the FHA to exist.

VA requires nothing down and FHA requires 3.5%. If borrowers could come up with 5% down they could get a conventional loan from just about any bank or mortgage company in the U.S. Just 5%. For 1.5% more we could eliminate at least the FHA. A huge Government agency.

And lending to anyone with 580 credit scores. Come on. You are not doing them any favors.

It makes me wonder why we need so many Government agencies. Isn’t it interesting how all of them were created during the Great Depression?

Because of all of this Government involvement we get housing bubbles which create swings in the market. And then the Government has to step in and write blank checks to these organizations and does its best to lower interest rates for everyone.

Even going so far as offering modified mortgage programs like HARP (Home Affordable Refinance Program) to help people who are severely underwater on their mortgage. Yes – programs like HARP do help people stay in their home and keep payments rolling in. But what HARP also does is it admits the Government made a mistake in the beginning.

I doubt anything changes even though the market is showing it can handle all of the “problems” it couldn’t handle during the Great Depression which caused these agencies to be created.

Report Card

Lets see how I did with what I can grade myself on.

We rented a small bungalow in Royal Oak for two years before buying. It allowed us to save quite a bit of money.

When we bought our house we put 20% down and took out a 30 year mortgage. The mortgage payment was $200 less than what we were renting for not including taxes and insurance. We ended up paying $250 more if you include those.

We were ready to buy a house and it just so happened to be 2012 which was the last dip in home prices. It didn’t hurt our 30 year mortgage was at 3.99%.

After being in the house for a year we refinanced to a 15 year mortgage at 2.75% which was awesome. Right up until the point when we welcomed two kids into the world some thirteen months apart. Daycare costs soaked up the extra money.

So we looked into refinancing back into a 30 year and the 3.99% we originally took out was available. Since we put down the 20% and paid off so much on the 15 year loan in 4 years our mortgage payment was under $600 a month (not including taxes and insurance).

We got lucky with interest rates there. If they would have been 4.5%+ I don’t think I could have done it.

Saying all that, sadly, the math works out that we should have been renting. If I showed you the Excel spreadsheet showing how much money we have put into the home (20% downpayment, remodels/repair, roof, electrical upgrade, appliances, painting, carpeting, dozens of $80 to $200 trips to Home Depot) and instead rented something exactly like what we are in and invested that money in the same investments we have over the last five years we would be $175k wealthier. It makes me want to puke.

I’m giving myself a B+ in applying what I learned.

My Downfall

It is true that I was let go. My weakness as a mortgage banker is I would turn into a financial advisor. Giving good financial advice is not the way to make money.

As an example. A potential clients goal was to lower payments as money was tight. They had a 30 year fixed rate mortgage at 5.5%. In 2006 that was a very good rate and was .25% higher than the 30 year rate on that day.

On their credit report I noticed a $640 monthly payment to GMAC. I asked them what that was. It was their Chevy Tahoe payment. It wasn’t their mortgage killing them. It was their car.

I told them basically word for word what they should do is “sell the Tahoe and buy a Ford Focus instead. You’ll save $300 on the monthly payment alone. Insurance has to be half. And you’ll probably save $100 a month on gas. That’s $400 a month.”

I’m thinking thats great advice. Because it is. They did not like that idea. Neither did my director.

I didn’t even present a mortgage to them as in my mind getting rid of the Tahoe was the only logical thing to do. For them to save $50 on their mortgage payment they would have had to pay $3,000 in closing costs plus another $1,500 in points to buy down the rate on a new 30 year fixed mortgage. Why on Earth would anybody do that?

My director reminded me that giving financial advice is not what we do. We sell loans. If we had a loan that saved them $1 a month than I had to present it. Its up to them to decide if it makes sense.

He also reminded me I could have presented them an interest only mortgage at the same 5.5% interest rate they had with $3,000 in closing costs which would have saved them $100 a month due to not paying down the principal balance.

You can only stay a mortgage banker for so long when you’re not presenting ideas like my director mentioned. Moving forward I would present ideas like that but never sold them as its something I would not do. If they liked it then I’d write it. If not, than ok.

When home values started dropping it caused appraisals to come in low which killed deals. It was only a matter of time before I’d be let go. For two years I did enough loans that made sense to me and the borrower. I even made it to Senior Mortgage Banker.

The last three months of employment I no longer could write enough deals to keep my job. And that was that. The difference between an unemployed mortgage banker and a “great” mortgage banker in an environment with low appraisals and rising interest rates is you really have to sell those hard to sell loans. Which I was not comfortable in doing.

I enjoyed my time working at Quicken Loans. Learned a lot about the financial world, sales, and people. Who knows what would have happened if I would of made it two more years to be there for the next refi boom of 2011 – 2015. A couple of my friends who did are now making $200k+ a year. But I would not have heard about the Beachbody Coach business and would not have experienced everything that I did.

My attitude towards the job would be a little different if I was to give another go at mortgage banking. Maybe because I’m a little older and know what its like to be a homeowner paying a mortgage now.

Because I can tell you that less than 20% of the people I worked with at the time owned a home. Mostly because we were all under 28 just getting started in a career. There was little real life experience to owning what we were selling.

And those that did well spent like it too. I remember seeing people not that much older than me buying Corvettes, Mercedes, and BMW’s who still lived at home with their parents. I didn’t get it.

There was little training at that time too. Maybe a month or two in a classroom before getting on the floor. And licensing wasn’t as big of an issue then as it is now. Outside of a handful of states you could write loans anywhere.

Not so now according to people I know. Almost every state has a test you have to take and many companies have three to six month training programs.

To be honest, I’m kind of surprised that the mortgage banking job I had back in the day is very similar to the one available today. I wonder how much longer it will be before mortgage companies eliminate the mortgage banking job completely.

An online application process would provide you with a dropdown of choices (Buy/Refinance) and with loan options to choose from with costs involved. And the system would tell you that maybe you need to pay off debt to get approved. Something like that.

Its really close to being the last financial product where you need to call somebody to get approved on something. Every time I’ve applied for a car loan (lease), a credit card, insurance, etc., I was able to do so without talking to a person. Time will tell.

The long hours didn’t bother me all that much because I knew it was a sales job and that it takes about three years to build up a client base. The environment was upbeat on most days and had just the right amount of energy to make those long days go by quickly.

It wasn’t a job for every one though. There was a lot of turnover and nearly everybody who did that job did not have kids. Seeing how I have kids now I don’t know how somebody could or would want to do that job. It is time consuming.

All in all I had a great experience working as a mortgage banker. Nearly everything I learned I was able to transfer over to what I’ve been doing for the past decade.

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

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!

What’s Your Interest 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.

Paying Points

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.

Underwriting Process: 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.

Collections, Judgements, Liens, Property Taxes, & Income Taxes

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.

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)

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.

Sellers Concessions

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.

Giving Up A Good Mortgage

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.

First Time Home Buyers 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.

Summary

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.

When people sign up for a service like satellite radio they sign up for a certain time period such as a year or year and a half. At the end of the time period it is supposed to shut off, not keep on going while Sirius continues to bill.

When you sign up for Sirius they send you a welcome letter stating the terms of the service. Nobody reads them because the sales staff informs you that you are paying for the set time period and that’s it. No where in the sales presentation do they say about auto renewing.

The welcome letter is more of a formality then stating the obvious. We know what we bought, how much we paid, and for how long. Why would we need to read the pack if everything was stated to us in the first place?

Most people who are introduced to satellite radio services are done so when they lease a car. Ford has an agreement with Sirius that the first 6 months of the lease include it for free. At the end of that time period you can either continue it by paying or let it turn off. Since you did not agree to something with Sirius it automatically gets shut off the day you hit 6 months of having the car. The agreement is between Ford and Sirius, not you.

During those 6 months you get use to having uninterrupted music and hundreds of choices. You end up liking it so much that you see no need to bring cd’s or your iPod on road trips anymore. The $10 a month does not seem like that much and since you can play it on your computer at home you ante up the money and either pay for it in whole for the rest of your lease or by month.

When it is time to turn in your car lease you will start getting notices on you radio saying it is time to renew the subscription and it even shows the phone # on it. You can either call and pay or do nothing as you are turning the car in and getting something else assuming that when you turn it in everything is all squared because you paid for it in full.

Sirius has the policy that if you do not call in to cancel they have the right to continue billing your credit card that is on file. If there is no credit card then they start sending you bills. You will get a bill in the mail saying you owe money now with a late fee on it.

If you do not pay the first bill, Sirius writes off the debt and sends it to a collection company. Of course you will be confused as I was to hear a call from a collection agency as I keep excellent record of my finances. I was informed that I owed $31 to Sirius for not paying my last two bills which I should not have had in the first place as the service was shut off and the car was turned in.

A quick phone call (45 minutes on hold) to the customer service center (which I think is in the Bahamas) should get to the bottom of this. What they tell you is that the terms of the welcome pack said they were going to keep billing but since there was no credit card on file they kept accruing a balance.

Bills were sent but were thrown out because why would they keep billing as my year and a half I paid ahead of time for was up? There was nothing they could do now as the debt was sold. Yup, a $31 bill being sent to collections to ding up my credit report.

In the end it made sense to pay the $31 for a service I never used as it was not worth my time to fight it and let it jack up my credit report. But who is the loser here? Is it me? The consumer who thought everything was explained to and did his part but never read about a policy where he had to call in to cancel (I never received a call asking if I wanted to re-new)?

Or is it Sirius? The company who provided a outstanding service. One so good that it became normal to skip the local radio stations and go right to the satellite stations and then listen to at home on my computer. The loser is Sirius.

The policy should be that there is no auto-renew policy. If you pay in advance then at the end of your contract the service gets shut off. This way when the person goes to turn it on and hears nothing they know that they need to call in to renew.

Sirius can flip a on/off switch at anytime. By continuing to bill and then sending it to collections (w/o a phone call) will mess up a credit report. Even worse is that its over $31. Sirius could get rid of all the employees (saving $$$ on salaries) who work at that call center.

Even the manager I talked to (Joshua) agreed that it is a bad policy. I asked him how many times a day they get a call like mine and he said “too many.” Unfortunately I can never go back to Sirius Satellite Radio again. Not because of the product or the service, but because of a bad policy and a lack of communication on their part.

When leases first came out as an option to get a new car it was commonly said that this is throwing money away. “You’re renting it” was a common phrase said to those leaning towards leasing. Much of this has to be done with the generations before hand who were told to own and keep everything.

While there is some truth to holding onto somethings for the long run you really need to consider what makes most sense for you. Especially when it comes to you and your finances.

Advantages

No More Repair Bills – When you lease a car you never have to worry about paying for major car repairs. Leases cover engines, transmissions, or any other major mechanical mishaps. All you are responsible for is maintenance items like oil changes and tire rotations. Unless you pop a tire you’ll be turning in the lease before new tires or breaks are needed.

Get A Car Based On Your Needs – It’s true you can buy any car at anytime but doesn’t it seem your car needs change every two or three years?

Cheaper Than Buying – Lease payments are always going to be less than car payments. Most car loans are 5 years. Take a $30,000 car over 5 years and with a 0% interest rate. If you bought the car you would pay $500 a month.

A lease payment would be around $350 saving you $150 a month. This way you can keep your money and invest it. If you really like the car at the end then you can buy the remaining balance out right.

Easier Approval – It is usually easier to get approved on a lease than on a loan. The car manufacturers need to get somebody else paying down the balance on the loan and are willing to loosen their guidelines more than a bank because they need to make a sale.

A bank sees you as a risk because they are giving you money to buy something that will be worth less the second you take it off the dealer lot. If you default on the loan, the bank is stuck with a vehicle that is worth less than what the balance of the loan is.

Straight Forward – Usually, every element of the deal, lease price, term, money factor, residual, vehicle make and model is already in place and cannot be changed. This way you know you are getting a good deal.

Financially Savvy – Why not lease a well equipped (not fully equipped) Ford Focus or something cheap for your daily driver and buy the used SUV or Minivan that you drive occasionally. Going this route might save you up to two hundred dollars on the new car which you can use to buy the used car.

Piece Of Mind – How many times have you been driving around in your old beat up clunker and something broke. Your car repairs cost over $1k and it puts you in debt. It’s a never-ending cycle with cars. Sure, car companies are making better cars, but they are man-made. They will break down no matter if it is a Mercedes, Lexus, or a Ford.

Summary

Cars and trucks are liabilities. They will depreciate. When you lease your car you will not have to worry how much it is going to be worth at the end of your contract. Yes, you are paying the depreciation of the car but who cares? In most cases you are going from point A to point B.

Wouldn’t it be nice to know you have one monthly payment you can budget around instead of spending thousands of dollars to buy something used? And then knowing you will more than likely be putting money in repairs over the years.

Each situation is different.

Some people like to buy 10 year old cars, drive them for 2 years, and repeat. This is a sneaky play if you buy reliable cars and do not beat up on them. You also have to not mind driving ten year old cars. This saves you thousands of dollars.

Some like buying 3 year old cars and driving them 5 years. Which is also a decent play except for the initial up front cost.

But with leasing there are no surprises. You know what your payment is every month and how many miles a year you can drive. If you choose the right car, the advantages of leasing might make more sense than buying.

Being self-employed is a lot of people’s dream. Call your own hours, answer to no one, take vacations when you want, earn as much money as you want, and those awesome tax write-offs.

This is hardly the case. Any self-employed person will tell you it is a lot of work. Much more than anyone can imagine. In most cases you will work way more being self-employed versus being an employee. And then there are the responsibilities of being the owner. It’s all on you.

And that’s all on the business side of things. Self employed people get so wrapped up in their business that they often forget their business and personal lives are separate. Where this really hurts self-employed people is trying to get approved on a mortgage.

Why?

It really comes down to two reasons why self-employed people cannot get approved on a mortgage.

Time – Most mortgage companies want to see two years of self employment. Reason being is they know most self-employed (sole proprietor, etc.) businesses fail in their first three years which means you’re not going to make mortgage payments. In their eyes you are risky to lend to because you do not show a consistent work history.

There might be exceptions to this rule if you are refinancing a mortgage and have been self-employed for at least six months in a similar field as before. Such as being a lawyer to now consulting lawyers. You’ll need to show income deposits, have great credit, assets, and equity in the house.

Buying a house will be much harder if you have less than two years of self employment. You may need to put a lot of money down (20% or more), have assets (savings, 401k, etc.), and have great credit. It’s really up to the mortgage company.

You may be able to provide a license or certificate proving self employment over two years to help your case.

Income – What’s the one thing self-employed people love? Write-offs. How many times have you heard your self-employed friends talk about their write-offs? Here’s the thing about write-offs. When the mortgage company asks for your 1040s and they see your self-employed business brought in $200,000 in revenue but after writing off $150,000 in expenses they see it as you make $50,000. Not $200,000.

And that’s what most self-employed people do not understand. The write-offs are whats keeping them from buying a house or refinancing.

If they didn’t write off everything or justify buying a new car, computer, office furniture, or going on “business trips” to get a write-off they didn’t need they would show more income on their 1040s.

Self employed people write off everything so they can pay less income taxes at the end of the year. I do not blame them. It makes sense in their eyes. Just not in the mortgage companies eyes.

What To Do?

Co-Signer – Is someone buying the house with you who is not self employed and working? Mortgage companies will work with this. Same goes for refinancing assuming the other person is on title of the house.

Stop Justifying Write Offs – Yes, if you have write-offs then include them on your 1040s. No need to pay more income taxes. Can you run your business bare bones for two years without buying new cars, computers, office furniture, and going on “business trips”?

The difference in getting approved on a mortgage when buying a home showing $200k in income with $150k in write-offs ($50k in yearly income) versus $200k in income with $75k in write-offs ($125k in yearly income) is huge. You are talking about a $125k home versus a $300k home.

Summary

It can be very tricky trying to get approved on a mortgage when you are self-employed. Mortgage companies want to see you’ve been at it for at least two years and that you’re making money.

You need to keep these in mind if you see yourself buying a house in the future. Exceptions can be made especially if you are putting down a lot of money (20% or more), have assets (savings account, 401k, etc.), and great credit.

Refinancing for a self-employed person will be easier than buying. Reason being is you are already in the home. This was common when I was a mortgage banker. Many people bought the home when they had a regular job and then went the self-employed route. Taking cash out might be tricky if less than two years being self-employed but if all you are doing is a rate and term refinance then you should be ok.

Be conscious in how your business finances affect your personal finances. Many self-employed people tend to blend the two together which is easy to do. Mortgage companies do not think that way however. And you need to know that when trying to get approved on a mortgage.