Money Rehab with Nicole Lapin - Mo’ Mortgage, Mo’ Problems Pt 1

Episode Date: July 6, 2021

Buying a house has historically been a big part of the American Dream… but a mortgage? What a nightmare! In Part 1 of Nicole’s primer on mortgages, she breaks down how to make your mortgage work (for you). Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. By now, you've probably heard my hot take that buying a house isn't for everyone.

If you're thinking about buying a house before you do anything, go back to Money Rehab episode 8 and take my quiz. If you check off all the boxes, then go forth and find your dream house. It is Money Rehab approved. But know that you aren't done checking boxes just yet because now you have to set up your mortgage and your mortgage could make or break this white picket fence American dream fantasy that you're living in. Listener Tiffany knows this all too well. Here she is. Hey, Nicole. I just bought my first house and I'm worried that it's a mistake. There's so much

paperwork and it's really overwhelming and just makes me feel like I'm not smart enough to figure this out. Specifically, all the mortgage stuff. I don't know what I'm doing at all or which kind of mortgage to sign up for. Help? Tiffany, first of all, do not talk about our new friend like that. Even though we romanticize home ownership in this country, there isn't a lot to love about a mortgage. It is confusing and it's a huge decision. So it's good that you're really thinking about it. The short answer to your question is that you need a 15-year fixed rate mortgage at the lowest interest rate possible. I'll say it one more time for you folks in the back. You need a 15-year fixed rate mortgage at the lowest interest rate possible. And Tiffany,

I hear you when you say the language is confusing. There was a time when I would just smile and nod when people were talking to me about things like a mortgage or a fixed rate mortgage that I didn't understand. But I realized that pretending I knew what I didn't was just stopping me from actually learning what I needed to know. So we are done smiling and nodding today. I'll take you through everything you need to know. And because I have a lot of information to share, I'm going to break this up into two episodes. So do not panic. And if I see anything that raises even more questions, you can always DM us at money rehab show on the gram. Let's start with the type of mortgage we're talking about. So while fixed rate mortgages, FRMs, sound really similar to the other common mortgage option you're probably seeing out there, adjustable rate mortgages or ARMs. Fixed rate mortgages and adjustable rate mortgages are very different.

Please be very careful what you're getting yourself into. Fixed rate mortgages are just what they sound like. They are fixed. Whatever rate you get is the rate you pay for the duration of the loan. That's it. Even if the market changes and rates go way up, yours will stay the same. You're stuck with whatever you get, good or bad, but at least it's predictable and you can factor your payment into your spending plan pretty easily.

Adjustable rate mortgages are, well, adjustable, but therefore unpredictable. They are tempting because they are usually much lower than the equivalent fixed rate mortgage. But unlike fixed rate mortgages with adjustable rate mortgages, the rate will rise when the market rates rise, which makes them very risky. The amount you pay could change yearly, quarterly, or even monthly, which makes it really hard to budget properly. You might go for what's called a hybrid arm, which is a fixed rate for a certain period of time, like five or seven years, and then it's free and clear to adjust. If you know you can pay the house off before that rate adjusts, then kudos. Go for it. If not, though, you're just kicking the unpredictability can down the road. P.S. I know

you're not going to tell me that you'll just put the house on the market in five or seven years, because if you're even thinking about selling, my friend, you should not be buying. Last word of caution about adjustable rate mortgages. Some arms have teaser rates that are low for a few years and then jump up, even if interest rates don't increase. You might think you found a loophole and plan on refinancing into a fixed rate mortgage when your teaser adjustable rate mortgage jumps up, but not so fast. Refinancing an adjustable rate mortgage to a fixed rate mortgage is really, really expensive. During the financial crisis, the housing market crumbled because many people had taken out adjustable rate mortgages thinking the very same thing. When interest rates go up,

no problemo, I'm just going to game the system and refinance into a fixed rate mortgage then. Well, they were wrongo. The problem was that many of them ended up underwater because of tanking home values in a lot of housing markets, which left them simply unable to refinance at all because their homes weren't even worth the amount of the loan. Now let's talk about the mortgage duration. Contrary to popular belief, try your best not to get a 30-year mortgage. In my opinion, 30-year mortgages are one of the scams of the financial world that are made to look innocuous, but are actually cancerous to your finances. Let's look at the numbers. If you get a 30-year mortgage for a $300,000 home at 4.5%, then your monthly mortgage

payment is about $1,500. Do you know what that amounts to at the end of 30 years? Just about $550,000. You've basically paid double for your house with all the interest over time. The alternative is a 15-year mortgage, which has a slightly higher monthly payment of about $2,300. At the end of those 15 years, you'll have paid $413,000. Paying an extra $100K, sure, is not awesome, but it's not as bad as paying $250K extra for your house. I know some of you might be thinking, holy shitballs, I already have a 30-year mortgage. It's okay. Just keep it. One of the things that doesn't suck about 30-year mortgages is that you do have a lot of flexibility. So that means you can turn the 30-year mortgage you likely got suckered into into a 25-year or even a 15-year

mortgage, really any number of years you want, simply by upping your monthly contributions. So if you can get ahead on your payments, even by $100 a month to start and shorten the length of your mortgage term, please do that. Make sure you call your lender and let them know that you're doing this, though, and that you want the money applied to the principle and not the interest. The philosophy behind going for the shortest mortgage duration possible is that we're trying to build assets, not get dragged down by debt. The 30-year mortgage is no way to sprint to wealth. It's not even a jog. If anything, it's a crawl. Tomorrow, we're going to be talking about interest rates and mortgage points,

and I'll give you my favorite mortgage hack. But for now, here's a tip you can dig straight to the bank, Tiffany. When you're setting up your mortgage, look at your fixed rate options. Those will likely be better friends to you than the adjustable rate ones. Money Rehab is a production of iHeartMedia. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Catherine Law. Money Rehab is edited and engineered by Brandon Dickert with help from Josh Fisher.

Executive producers are Mangesh Hatikader and Will Pearson. Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all. Spend my money, money. Spend my money, money, money. Spend my money, money, money.