These are from my YouTube Channel @MortgageN3rd
Oh, is it time to do another Q&A video? Hey everyone, Ryan Bolton here, local mortgage expert, ryanbolton.com, answering your real estate and mortgage questions on another Q&A video. Really have a lot of fun doing these. Let’s just jump right in, see how many questions we can answer. Try to keep these videos to about 20 minutes or so. Let’s see how many we can get through.
Here’s been a hot topic, is buying down your interest rate with points. What are points? What does that even mean? Points are a percentage of the loan. Very common is 1% or 1 point buys down your interest rate. The trick with this is how much does it cost versus how much it’s saving? If you pay 1% or 1 point and it lowers your rate 0.25%, over 30 years that’s going to be a significant savings. But if you’re paying 1% upfront, let’s say it’s 1% of your loan, it’s a $400,000 loan, that’s $4,000. Usually it takes over five years just to break even. But then after that’s when you start really saving money. When you’re looking at a buy-down, you really want to say, where’s the break even point? What’s the payment without the buy-down? What’s the payment with it divided by the cost? And that determines how long you have to keep it just to break even. It’s a really simple math formula, just to be able to compare. And if you’re not going to keep the home that long, a buy-down doesn’t make as much sense. Honestly, I’ve been telling my clients, you might be better off using that buy-down money or the extra money as buying out the mortgage insurance or doing different types of programs because the money will typically go further buying out the mortgage insurance than it will buying out the interest rate. And everybody’s saying, well, you can always just refinance down the road. If you buy-down your interest rate and then you refinance again, you really are just throwing away that buy-down money where the mortgage insurance might be a better way to get rid of it. It’s just a little bit more cost effective, so you want to check out that. If you’re looking at a buy-down and you’re not putting 20% down or more, you might want to talk to your loan officer about what are the options to reduce or even buy out the mortgage insurance with that same 1%, 2% worth of money. You can even buy it down on the mortgage insurance. You can take that same 1% and just buy it down so the monthly mortgage insurance can be cheaper. That’s really how it works. A point is a percentage of the loan, but it’s never just a set amount. It’s never exactly one point. I see it 1.234% for that rate or it’s 1.446 or the other way around, it could be 0.647. It just depends on the day and the difference between the two interest rates. But it’s worth being able to run the numbers and say, yeah, it sounds great to get a loan under 6% by buying it down. But if it’s costing you $5,000 and saving you $50 a month, you have a long time before you actually break even with that additional cost. Now you are seeing incentives where it’s built into the sales price or the builder covers it. There’s some ways where it’s not actually coming out of your pocket as well. But again, if there’s money to be used, sometimes buy-down may not be the best option. It might be better to look at the mortgage insurance. All right, let’s see what else we got here. But I get that question a lot. “What’s a point? I don’t understand what a point is.” It’s a percentage of the loan. One point is 1%. A $400,000 loan, that’s $4,000, 1%.
All right, let’s see. What is the difference between home equity loans, second mortgages or regular mortgages? Boy, there’s just a lot of terminology there. Many second mortgages are home equity lines of credit, but not all of them. A second mortgage is the loan that’s in second lien position. You have your first mortgage that you used to maybe purchase the home. You get a line of credit or a second mortgage that goes behind the first mortgage. It’s funny, not all home equity lines of credit are second mortgages because the property could be free and clear. The reason we call it first and second mortgage is its lien position against the home. Let’s say you go into foreclosure. Let’s say you stop making your payments, medical, something happens and you can’t make your payments anymore. The first mortgage starts to foreclose. The second mortgage company typically could lose their money because the first gets paid first, the second gets paid second. The property value goes down and the first mortgage gets paid off. Whatever’s left over goes to the second mortgage, but if the property’s in bad shape or the value’s gone down or something like that, there’s deferred maintenance and it hasn’t been taken care of or rental and all kinds of situations with real estate, but that’s really why we call it a second mortgage. It’s not the first mortgage that’s liened. It’s the second mortgage, usually after the money used to purchase the home. You can get access to… Instead of refinancing this big first mortgage, you can just add a little small second mortgage behind it. Now home equity lines of credit are typically second mortgages and they just function like a credit card where it has a line feature. That’s why it’s called a home equity line of credit. Let’s say it’s a $50,000 line of credit, but you only need to borrow $10,000 for home improvements or debts or something like that. Then you still have that other $40,000 to work with or you can pay it down, use it, pay it down just like you would a credit card. Now why is it better than a credit card? Typically it’s a much, much better interest rate because they’re actually liening a property they can take back, even though they have to worry about the first mortgage in most cases, but still way better than just a signature credit card that nothing’s really tied to it. They don’t have any way of really foreclosing on it. And typically home equity lines of credit will do larger loan amounts. These are major debt consolidation, maybe a major vehicle purchase or home improvements. I would say home equity lines of credit are very common to do some renovation or something to the home. And that’s what those loans are designed to do. It can be tricky that most second mortgages are lines of credit, but you do have second mortgages that are just 30-year or 20-year or 10-year fixed-rate lump sum. You get approved for 15, you get all of it up front. You have an advertised payment, you just pay it down. Where lines of credit, you get a line that’s available and you draw against it, pay it down, draw against it, pay it down, very similar to a credit card. It’s just tied to the home. And then when it says here, “What’s regular mortgages?” Mortgage is just a term that says a loan against a home. There’s lots of different mortgages and lots of different titles for them, but the lien position is what determines risk and interest rate and all those things.
All right, so let’s see. How can someone be priced out of their home if they already own their home? You don’t. If you own the home, you’re not really priced out of it. I see this terminology of “priced out of your home” or “priced out of the market” or something like that. A lot of it has to do with maybe upgrading. Maybe you say, okay, I’ve got this home that I paid $200,000 for five years ago, six years ago, whatever it was. Now to replace that same home would cost me $400,000 or $600,000 or something like that. And the fact that maybe the rate they’ve got because they’re able to refinance a few years ago is so much lower than the new home. Many people are just priced out of being able to upgrade because it’s so much cheaper to keep the home that they have. That’s where you see these lines of credit and home equity lines increasing as people are like, well, I’d rather keep my home because I can’t replace it, but I’d like to remodel it, maybe update it, do some things to just make it nicer. But I have all this equity, so why not do a line of credit? That’s why second mortgages, lines of credit have gotten popular and refinances have just plummeted because so many people already took advantage of the rates of threes and fours and now rates are in the sixes. It is something where lines of credit got more popular for that reason. But as far as being priced out of your home, it’s only an issue if you’re trying to upgrade or sell or buy something else that you may not be able to replace what you’ve got. It might be something where it’s just better to keep it, maybe renovate it to just fit your needs a little bit better. That’s probably what that question’s asking.
All right, let’s see. How does depreciation affect interest rates? It really doesn’t. It’s something where once the loan is locked in, you’ve got your loan, it doesn’t matter if the house goes up or down and value. It doesn’t change the interest rate. Just like the other way around. If the home also appreciated, the rates wouldn’t change. Maybe there’s more of a backstory there, but how does depreciation affect interest rates? It doesn’t. Now, obviously if the old market is starting to depreciate, there might be some things to do with rates and the market trying to stabilize things. There might be stuff that they can do to help rates stay at a certain price. And we saw that in ‘08, where they were buying up mortgage-backed securities just to keep the engine moving till it had a chance to recover. But as far as your home going down and value, doesn’t all of a sudden make your rate go down either, just like if it goes up, the rate’s not going to change.
All right, what else we got here? Can I claim a rental property as a second home to get a lower mortgage rate? No, that’s mortgage fraud. If you’re using it as a rental, but then claim it as a second home and then go back to using it as a rental, that’s mortgage fraud. It’s one of the biggest problems in our industry. In fact, a lot of guidelines when it comes to second homes and vacation rentals and long-term rentals have gotten pretty popular, where the guidelines are starting to get closer and closer to where everything is either going to be primary residence or rental property. There used to be more of a separation between what was a true second home and what was a true rental property. And honestly, it got abused. There’s so many people that went out and got a second home and then turned it into a VRBO vacation rental. Obviously, they’d still use it, so they’d get their second home use out of it, but most of the time, they really were using it as a rental property. Because this VRBO concept or nightly rentals has gotten really popular, it’s becoming an area where lenders are having to deal with most of these homes being done as a second home and they’re really not a second home. I tell you, it’s one of the biggest frauds in our industry. It’s people claiming it to be a primary residence, when really it’s a rental or it’s a second home VRBO. The terminology, most people don’t know what the differences are, but really it’s something where it’s an issue in our industry where people are claiming occupancy that’s just not really the occupancy. Now it can change, sure. Let’s say you buy a house a year from now, you decide to keep it, build an investment portfolio and go buy something else, upgrade and just roll those properties in a rental. No problem. You don’t have to refi, you can keep the same loan that you have, but if you buy it day one and you rent it out day two, that’s fraud. You really didn’t do the loan as you actually were going to use the property. And why is that such a big deal? Why do we care as a lender whether it’s a primary residence or a rental property? Let’s run through a scenario. Let’s say you’ve got your rental property and you’ve got your primary residence. You lose your job or you have a medical situation or the renters just trash the home. Which payment are you more likely to miss if you run into financial hardship? In most cases, it’s going to be the rental. You’re going to keep the primary residence. You don’t want your kids to lose their house, your wife, it’s more of your home, you’ll just let the rental go. And they’re usually not maintained quite as well as a primary residence. It’s just a different risk model. It’s just, there’s lots of data over years and years and years of doing mortgage loans. They just foreclose more often than a primary residence and it makes total sense why that would happen. But the rates and terms are better if it’s a primary residence so people claim it to be primary when really it’s an investment property.
Let’s see. Does getting a home loan to buy a home depend on your savings? In some cases, yes. There’s a lot of programs that require that you have the down payment, closing costs, and some money left over in the bank. They call them reserves. They want to make sure that you don’t just have all your money tied up in down payment. That way if something happens with your job or health or something pops up in the local economy and an industry just closes down or shuts down and all of a sudden there’s just a big void of people missing payments, they want to see they have at least a little bit to fall back on to get reestablished, get a new job or get your health situation figured out. There’s always going to be foreclosures. In any market up or down, there’s always going to be people that pass away or have health issues or job issues. There’s always going to be foreclosures in any market. But having that reserve requirement for certain programs will help you get better rates and terms knowing you have a little bit to fall back on to ride out the storm, essentially. There are programs that definitely require that you have some money in the bank. I’ve seen as little as one month reserve, one extra payment in the bank, up to 12 months, depending on the program. The more you have in savings, it just strengthens your file. Let’s say your credit score is maybe a little lower but you have the down payment, job history, savings. It can help to strengthen the rest of the file where you might get underwriting exceptions or something. And money in the bank is one of the strongest indications that somebody’s ready to buy a home and they have the money left over and they can budget and they’re not just living paycheck to paycheck or negative every single month in their checking account. Savings is definitely an important part of it. But there’s loans that don’t require it but the better loans usually do. They want to see some money in the bank. And it can be retirement, 401, savings, that type of thing. It doesn’t have to be like checking and savings but just something to fall back on if you lose your job or something happens.
All right, what else we got here? My dad is 67 and retiring with $77,000 left on his mortgage and $300,000 saved for retirement. Should he pay off his home loan? I would say no. And here’s the reason I look at it. The only way you get that money back is selling or refinancing the home. And if the payment’s low enough and can be maintained, it might be better to leave it there. Now, some of it comes down to where other money sources are coming from if they’re starting to be restricted or limited. Some of it comes down to just cash flow, what’s left over every month. But honestly, it’s hard to answer that in a general term because what’s the payment on the $77,000? How much of it is taking away from other savings? But when you get to that certain age, I’m sure he’s got a lot of equity in a home at 77. That’s why it’s hard to answer that question without knowing all the scenario. But my general answer to that is no, don’t pay off the loan, really don’t. Get rid of all the other debts because that same $77,000 might wipe out way more per month than the mortgage. You probably have a lot of equity that’s still on the property and you can’t get to that money. If you’re retired, your income’s changed, you’re not getting a pay stub every month, you’re living on fixed income, and all of a sudden you have something happen where you have an expense you’re not expecting or medical issues or something like that, and you’ve got all this equity you can’t get to because you can’t qualify, you don’t make the income anymore, you’re subject to different interest rates because the rates have gone up. It depends on what rate you got on the $77,000, but there’s very few times where I’ve sat down with a client and said, yeah, tie up that $77,000 to get rid of the payment. You’ve got $300,000 in the bank, that can make the payment for the entire life of the loan, so why give it all now? Why give all $77,000 now? Why not spread it out to be able to make sure you have access to the money if you need it at that stage? I’m a big believer in real estate, big believer in mortgages, and they can leverage that money better than any other type of debt, especially if there is any other type of debt. You’ve got to look at the situation. If dad’s got $77,000 in a mortgage, but he’s got a car and a couple of other things that cost him more but takes less money to pay off, pay off that stuff first, and then maybe start tackling the mortgage, but honestly, cash flow is king at that age. You want to be able to control your expenses as much as you can, and having access to $77,000 in the bank or $77,000 in equity, I’d rather have the money in the bank, I really would.
All right, what else we got? If you have any questions, comments, concerns, please post them in the comments. We’ll get to them in a future video. Let’s see what other questions. It’s interesting watching the questions and how they have trends, that you had the points or what’s a second mortgage, what’s a reverse mortgage. It’s really interesting to see how the questions ebb and flow over time. Let’s see, do I have to pay any mortgage if I bought my house with my own money? Yes. No, a mortgage is a mortgage loan. If you paid your house in cash, a mortgage is a loan to help you buy the property or to refinance the property. No, you wouldn’t have to pay any mortgage, just like if you go to buy a car and you just pay cash for the car, you don’t have a car loan or if you go to a furniture store and you just buy a couch, you don’t have a loan for the couch. That’s why you have the cash for it. Now, why you would use all the money to buy the house without a mortgage? That’s what I would start saying, why didn’t you get the mortgage? Why didn’t you put 50% down and keep the other 50%? Why didn’t you buy two properties instead of one? That’s the way I would look at it is, why not leverage some of the mortgages that are out there, even at the rates. Your 30 year fixed rate money where rents are going to continue to rise, I just wouldn’t tie up that much money. We talked about it on the previous question, if there’s a mortgage that works, do the mortgage and then put less money down, save the money. You could literally do a $300,000 purchase, put $150,000 down, have the other $150,000, have that, make the payments. You’re giving them the money either way. Why not spread it out over time, have access to the money for other opportunities that might come up over the next five, 10, 15 years and leverage it. There’s lots of things you can do if you do it right.
All right, how are we doing on time? Man, I feel like I’m going fast today. Oh man, we’re almost there. See if we can find a couple more here. I feel like I’m talking really fast. I’m a fast talker, so maybe slow that down to like 0.75 on the speed, maybe. I don’t know. Let’s see, do current taxes need to be paid in full in order to refinance your home? They do need to be, yes. If taxes are owed, no lender’s going to refinance the property without paying the property taxes. It’ll just be part of your fees to do the refinance because the taxes are one of the few things that can jump in front of a mortgage company. If a mortgage company is in first lien position, but you owe property taxes, the state can come and take away the property and the mortgage company’s just out their money. no new mortgage company is going to go into a refinance transaction knowing that that’s a possibility that the taxes aren’t paid. Now that could still happen down the road and there’s not much they can do down the road. That’s why escrow accounts are really common, but it is something where the short answer is yes, taxes, whether it’s the property taxes or IRS or any of those types of taxes as well. They’ll want to know as much as possible that those particular things are paid.
Oh, let’s see, what else do we do? Can you have more than one first mortgage? Yes, but not on the same property. Yes, you can have many first mortgages, they just have to be on separate properties. Otherwise, if you have two mortgages on a property, they both can’t be a first mortgage. One would be the first one recorded, the second would be the second loan or second mortgage that was recorded afterwards. A first mortgage is simply a mortgage that was recorded against the property, it’s the first lien position, so it’s the first one to get paid off if there’s a foreclosure or some issue other than taxes. There’s certain things that can jump in front of it, but generally speaking, it’s the most secure position on a piece of property because you’re going to be the first one’s paid off in the event of foreclosure. If you have a first, second, third, fourth mortgage, everyone that’s behind the first doesn’t get paid unless it sells for enough to cover all these other liabilities. That’s why many lenders want to be that first lien position or what’s called a first mortgage. You can have more than one first mortgage, just not on the same property. You can have a first mortgage on five properties because that’s the first lien or the first mortgage on each property, but you can’t have two first mortgages on one property, if that makes sense.
Let’s see. Time? Ooh, I like to keep them about 20 minutes. See if we can squeeze one more in here. Does opening a bank account affect getting a mortgage? Only if they pull credit or if you do a credit card or something like that. The one downside about opening a new bank account is usually I have to put funds in that account and they have new funds unless you source and season from the previous fund. If you’re in the process of getting a home loan, I wouldn’t recommend opening up another bank account or moving your money around. You’re better off just leaving everything where it’s at, get approved for the loan, get moved in and then start buying cars or furniture or other things that use credit or open accounts. But it really depends on the bank. If the bank pulls credit, then that becomes a trigger that can say, okay, did you apply for a new loan that we have to add to your debt ratio or if pulling that score lowers your score under a tier, it can affect the mortgage. Really I don’t recommend trying to open up anything. Even utilities, sometimes they’ll pull credit. Insurance can be a little different. A lot of times it’s a soft pull when it comes to insurance and obviously the lender’s going to know that you’re going to be trying to get your homeowners insurance so they’re going to know it’s not really applying for a loan. But whenever we do an application, we do like this tracking that if there’s an alert or they pull their credit, it sends its alert and says, hey, for some reason they pulled their credit. And a lot of times it’ll be for a car or I would say the most common one, you’ll see furniture, where somebody gets excited about buying a house, they go down to the local furniture store and they put it on 90 days same as cash or six months same as cash, you get 10% off the purchase and suddenly get this credit card to buy furniture, appliances or whatever it is. Then now all of a sudden that’s a new debt, that’s a credit score hit. That can affect the ability to get a loan. It’s sad when that actually kills a mortgage and they lose out on the house. Most of the time it just causes headache and pain and paperwork and we’re scrambling to try to meet the closing deadline and stuff like that, so just when you’re buying a home, if you’re in the process of buying a home, you’re renting right now and you want to buy a home, just start saving your pennies. Just get the money into an account, just let it sit there. And as you work with your loan officer, then you can decide what bills to pay off. But having money in the bank is way better than not. There’s just a lot more flexibility by having the money in the bank, even versus paying off certain debts. The one caveat I have with that is pay down revolving accounts. Try to keep your revolving accounts under 30% of the limit, but not zero. That’ll help your credit score. Now, people tell me all the time, I use my credit card, pay it off, use it, pay it off. That actually doesn’t help your credit as much as keeping it under 30% of its limit. That’s where you start seeing some boost to the credit score, because they only see it once a month. They don’t see your credit card balance every second of every day. They’re not tied to your card like that. They usually report once a month. Now some report twice, but generally they’re going to report once a month, so whatever’s on your statement, that’s what they report to the credit bureaus. They wait 30 days, report it again. If you have it up at $5,000, pay it down to $1,000, and slowly use it back up. Next month, it’s back up to $5,000 or whatever it is. They don’t see that you’ve paid it down. Now there’s some triggering, there are some tracing and some other things that they can do to trend data. This is what it’s called where they can see how much you’re really using that card. But really the most important thing is just keeping under 30% of its limit. If you do that, you’ll have a better credit score.
All right. Wow, we went through a bunch of that. 20 minutes already. Aren’t we having fun? Well, hope you enjoyed the video. Love to help you with your home loan needs. I do lending in Utah and Nevada. You can check out my website at RyanBolton.com. We have a great mobile app. That’s a free mortgage calculator if you want to use that. But it has an opportunity to apply right there, schedule an appointment with me. Love to help you buy, refinance in Utah or Nevada. That’s where we’re licensed. Synergy One Lending is who I work for. They’re licensed in a lot of different states. I can help you or direct you to somebody that can help in just about every state. I’d love a chance to earn your business and show you what we can do for you and answer specific questions that you’re asking about your situation. Thanks for watching. Let me know if you have any questions, comments, like, subscribe, and we’ll see you next time.