Money Rehab with Nicole Lapin - Mo’ Mortgage, Mo’ Problems Pt 2

Episode Date: July 7, 2021

In Part 2 of Nicole’s primer on mortgages, she shares her tips on interest rates… and her all-time favorite mortgage hack.  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. And we're back.

Yesterday, we started to answer this question from Tiffany. 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? In part one of my mortgage primer, I explained why you want a 15-year fixed rate mortgage. And today we're going to be tackling strategy when it comes to the interest rate, your down payment, and your mortgage points. Your interest rate and your down payment are extremely important to nail by every single basis point

possible. A slightly higher interest rate could mean thousands of dollars over the lifetime of the loan, and the amount you're putting down determines how much cash you'll have free to use to generate returns elsewhere. Conversely, a higher deposit could mean a lower interest rate because lenders like to see that you have the discipline of saving a bigger amount. So what should you do? Well, the strategy you take on the down payment depends on your overall financial picture, but everyone can agree that the lowest interest rate possible is the most ideal. If you're having trouble in a traditional loan process, getting a mortgage broker is not a bad idea. Obviously, check to make sure that person isn't sketchy, but I used one, and they found the best deal for my needs,

and the lender was the one that paid the commission, not me. If you're a first-time homeowner, also make sure you look at your state's bond loan programs. Your interest rate can range from about 2% to 9%. And how much your initial deposit is depends on your credit score. You don't need a perfect credit score, which, pop quiz, what is that? If you said 850, you are correctamundo. Less than 2% of the population has a perfect credit score. So I would aim for 775 or above to try to qualify for the best rates. Before you start the mortgage process, make sure your credit is in tip-top shape. And if you need a refresher on that, listen to episode 23 of Money Rehab, Don't Get Screwed by Bad Credit. Duh. Once you've done as much credit hygiene as

you possibly can, request a rapid credit rescore. This entails submitting proof of positive account changes to the three major credit bureaus, Experian, Equifax, and TransUnion. The process can lift your score by 100 points or more within days when erroneous or negative information is cleared from your credit profile, as opposed to the months it usually takes for your credit score to reflect positive account changes. When you're setting up your mortgage, you also want to consider mortgage points. Think of these points as like being prepaid interest fun bucks, where you can basically pay cash upfront to get a lower interest rate for the long run. You actually might be required to buy points

if your lender feels your credit or assets aren't up to snuff. But you can also choose to buy points at closing to reduce your interest rate, which is a smart way to benefit from having a lower rate down the road if you have the cash now. Hold onto your wallets, which is a smart way to benefit from having a lower rate down the road if you have the cash now. Hold on to your wallets, boys and girls. Money rehab will be right back. Now for some more money rehab. Here's a little point cheat sheet. And fair warning,

there are numbers involved, so don't freak out. On a high level, a point is basically prepaid interest on your mortgage loan. Let's take a closer look. Each point costs the equivalent of 1% of the mortgage loan. So if you got a $250,000 loan, a point costs $2,500. Each point you pay at closing lowers your interest rate by 0.25%. So in exchange for paying more upfront, you can lower your interest costs over the life of the loan. So if you paid, say, two points at closing, you could bring down a 5% rate to 4.5% rate. That's a lot of scratch over the life of the loan. Which, side note here, if you listened to yesterday's episode, the life of the loan, which side note here, if you listen to yesterday's episode, the life of the

loan is hopefully 15 years and not the typical 30 years. But regardless, you'll need to stay in the home a long time to reap the benefit of a lower interest rate. Let's take a little bit deeper into the interest rate. If your credit score isn't looking cute, the bank could peg your interest rate at a higher level than they would for another rehabber whose credit score is stellar. Unless you want to hold off on buying until you can improve your own score, the only way to bring down the rate is to buy points. Remember, each point you pay at closing lowers your rate 0.25%. Let me give you an example. Let's say our pal, we'll call her Tiffany, has a killer credit score. So she gets a 4.5% interest rate, while another pal, let's call him Mr. Big Spender,

has a lot of credit card debt. So he'll get quoted something like 6%. So let me do the math for you. Mr. Big would have to pay six points to get the same rate as Tiffany, right? I'll show you how I got there. Six, the points Mr. Big bought, times 0.25%, the amount each point lowers your interest rate, is 1.5%. So 1.5% is the mortgage percentage Mr. Big will get off his interest rate, which takes him from a 6% rate to Tiffany's 4.5% rate. So time for a pop quiz. If your bank pre-approves you for a mortgage, does that mean you can afford it? No freaking way. That's like saying if a stranger offers to sell you shoes on the street, you should buy them. But they don't know your size. So it's stranger danger. Don't forget, during the

housing crisis, banks were offering mortgage loans to people no matter their credit worthiness, which of course led to a lot of people losing their homes to foreclosure. You need to work out your own budget, including all the costs of owning a home that aren't included in your mortgage, like utilities, repairs, and maintenance. The bank doesn't care how much money you might need for other parts of your budget, like food. Remember, no financial institution knows you better than you know you. Don't let your bank tempt you into doing something that's just not right for you. And the same thing goes for interest-only loans. Do not let me see you taking one of these out. Yes,

I know the monthly payments are often lower than regular loans, but none of that goes to paying off the principal. So you're basically a homeowner in name alone. All of the responsibilities of being a homeowner, but without getting any closer to actually owning the home. You just have a fake label of being a homeowner, and people who need that label also need money rehab. Okay, so for the final event, here is my favorite mortgage hack. Without tweaking the amount you've decided to contribute monthly to your mortgage, make bi-weekly payments. You can determine how much to pay bi-weekly by dividing whatever you're paying monthly in half. For example, if you decided to pay $2,000 monthly, you would instead pay $1,000 every other week. Let's bring back the $300,000 home example I

brought up yesterday. If you're paying bi-weekly instead of monthly, you will save more than $40,000 in interest. How does this work? Magic, you ask? It's really just an organizational trick to make squeezing in a few extra payments a little more feasible for you. Essentially, you're taking the same amount you would be paying monthly, but instead of the 12 payments you would put down on a monthly schedule, you're actually making 13 payments a year because that's how it shakes out if you pay bi-weekly. The scheduling shifteroo can knock years and tons of interest off your mortgage. Have the bank set up bi-weekly payments to deposit automatically. Some banks or credit unions use a third-party processor for bi-weekly payments

with high fees. So if that's the case, you can DIY this by basically picking a month to pay twice. That still gets you the annual 13 payments instead of 12. This sums up our little primer on all things mortgages. For today's tip, you can take straight to the bank, say yes to mortgage points, no to interest-only loans, and hell yes to paying bi-weekly. 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.