Real Estate the Ramsey Way - These Mortgage Mistakes Could Cost You Thousands

Episode Date: October 30, 2023

When you’re ready to buy a house, making sure you get the right mortgage is one of the most important home-buying decisions you can make. But the truth is, most mortgages out there suck. In this episode, you’ll learn the best way to finance a home, sneaky mortgage traps to avoid, and how you can feel confident in your lender.  Helpful Resources: Finance your home the smart way with my friends at Churchill Mortgage. Find the only real estate agents in your area endorsed by Dave Ramsey.

What's up, guys? You're listening to Real Estate, the Ramsey Way. This episode is all about making smart decisions with your mortgage. And while it's the only kind of debt that I'm okay with, I'm not okay with just any mortgage option. In fact, most types of mortgages out there suck. And lenders will use these crappy mortgages to get you into a house for as little up front as possible so you feel like you're getting a good deal. Then they can charge you tons of interest and fees, not to get you. to mention keep you in debt for way longer. But there's a better way to go about home financing. And it's actually incredibly simple. So stick around to find out how. So I did this video on my YouTube channel about a week ago. And for some reason, it just blew up. And people are very interested in this idea with mortgage interest rates being super high right now. And we showed a stat there in the very beginning at, you know, January of 2022, it was like 3%. By May of 2020, 22 is 10%. So we've been seeing the spike in adjustable rate mortgages, and I want to get your tape on. 10%.

10%. Uh, no. The actual, the amount of people doing them. Oh, 3% of the mortgages. The amount of people doing adjustable rate mortgages has gone way up. Yes. Okay. Yeah, not the interest rate itself. Okay.

So I wanted to cover this, and I just watched your real estate lesson in Financial Peace University where you cover a lot of these mortgage traps. But a lot of people are going, this might be my ticket to home ownership, Dave. And this article impacts what's going on here. Your ticket to foreclosure. Yeah. Arms have started to recover more from more than a decade of disinterest from both consumers and lenders. They're returning to the fold amid a sharp increase in home prices and fixed mortgage rates that began in early 2022. As the housing market begins to thaw from a year of depressed demand, more potential sellers begin to list their homes.

Could arms help more prospective buyers get a foot in the door of their first home? You don't understand. This passive aggressive question statement here is on Experian. which is a... This would be the credit bureau. Yeah. What is their vested interest in this? Getting you in debt and keeping you in debt because you're all worried about their FICO score.

They'll make money if you get a mortgage and they have to run the score. This is a money-making scheme for them. We love debt. And so we're experiencing and we're going to passively aggressively ask, is this a way for people to get their foot in the door? That sounded very soft. It sounded like a suggestion to me.

sounded like a conspiracy to me. They have a new stat in here, Dave. The share increased from 3% it was for much of the decade to as high as 13% by October 22. Of the mortgages. Of the mortgage originations. That are going out there.

3% used to be adjusted. So 97% were not doing adjustable, and now 87% are out there. And it's down as of April 20203, they say it's now 8% of all new mortgages. Yeah, thank God. It's taken a dip. So do we need to talk about this?

Well, I want you to just share why they're a bad idea because people don't understand and there's a funny clip from the office with Michael Scott falling for one of these. And he's like, well, no, it's 30. She's like, no, it's 10 over. And so I wanted you just to run the analysis on who is this for? Why are people doing this?

Why should they stay away? Okay. We'll get real technical to help you. But before we do that, let's just say this, all right? If you buy a mortgage that adjusts in an increasing interest rate environment, what are you expecting it to adjust to up? Well, that's dumber than a rock on the surface. Interest rates are moving up,

and you're buying a mortgage that allows them to end and gives you the probability of a higher interest rate later. Let's just start with that stupid. Okay? The second thing is this. Let's say interest rates stay the same or go down slightly. Here's what you're going to discover. Your mortgage interest on your adjustable rate mortgage is going to go up,

even if rates go down a little or stay the same. Here's why. Your mortgage is adjusted based on an index and a spread over the index. Let's just do a simplified version, okay? Let's say you took out a 4% adjustable rate mortgage, and it's supposed to be 2% over the index. the index. That would mean the index would be two. Two plus two is four. Okay. And if the, but the index, however, when you start your brand new mortgage, they move you in on a bait and switch because the index is

already higher, would give you the spread, would already give you a higher interest rate today than you're getting today. So instead of the more, okay, let's say we're getting a 4% adjustable rate, the index is two, your spread is two, so that 2. So that 2. plus two equals four, okay? But it's not two. The index today in that case would be more like 2.6. So the interest rates would have to go down 0.6 for your rate to remain the same the next time it adjust.

Y'all follow how I'm doing this, okay? Because the index plus your spread equals your interest rate. And the index is already cheated up when you go in, so rates would have to go down in order for you to do this. So it's a big gamble. So it's not a big gamble. You're 100% dead on going to have an increase. There's no gamble about it.

And you bought the house on short-term thinking. Thank God it's Friday. Oh, God, it's money. I can pay this payment, like this payment's even going to be around. On the first adjust, you're going to see an increase. It's not a gamble. Almost 100% of the time. Because, again, rates would have to go down to get your spread,

to keep your spread on the index. Far enough down. Okay, it just doesn't work. So this all came from mortgage companies protecting themselves in 1982. I was selling real estate. The first adjustable rates came out then.

Okay? Because interest rates had gone to 17%. Remember that? And money market rates, back then we had these things called savings and loans. Money market rates on your savings were 12%.

Wow. You could get 12% on your savings account. Well, let me help you with this. The local savings and loan makes a loan in the 70s on a mortgage, 4%. They are receiving 4% on $100,000. Interest rates shoot up. That's a 4% fixed rate loan. Now, in order to get $100,000 into the savings loan or into the bank,

they've got to pay out $12, but they're only receiving $4. That's a problem. In a banking world, they call that disintermediation. Your butts upside down mathematically. And so that's one of the things called the savings and loan industry to crash. That's why I brought up savings and loans. It's one of the things that crashed them was disintermediation. It wasn't fraud.

It was that. Because they had millions of dollars of mortgages on the books at a fixed rate, and all of a sudden they're having to pay more than they're receiving to get new savings deposits. So they said to themselves, self, I don't like this. Next time these rates go up, we're going to have a portion of our portfolio that adjusts up as interest rates go up. And so the adjustable rate mortgage was born to protect the banks against an increasing interest rate environment so they don't get stuck with a bunch of low interest mortgages on the books. Tata.

The first adjustable rate mortgage I sold was fixed rates were 14%. 1988, 1982, 1983. The fixed rates were 14% our adjustable were 12. And I said, man, nobody will ever buy these things. And that was 1982,

and they're still buying them. Still around today. So just transferring the risk from the lender onto you. It's all it is. 100% what it does. It transfers the risk of higher interest rates from the lender.

It ensures that the lender is always going to freaking make money. This is a bank play. It didn't got anything to do with being a blessing to you. in allowing, according to, experience, help prospective buyers get their foot in the door. Bull crap.

Hadn't got anything to do with prospective buyers. It's got to do with banks. And one thing you can count on on banks is banks protecting banks. It's what they do. And they've been good at it for a long time. That's why their furniture is nicer than yours. That's why their building is bigger than yours.

It's not an accident. Santa Claus didn't build those freaking towers in the skyline. It was you. You built. them with this kind of crap where you give these banks your money. John, one of the things that has happened with this surge in real estate is a surge in real estate values. A lot of you are sitting on a home that is worth a whole lot more than it was 20 minutes ago

than it was two years ago, than it was three years ago. There was a big hurricane, and I can't remember the name of it, that hit Florida and did massive destruction before Katrina hit. at New Orleans. So several years back, in other words. And after that hurricane, State Farm made the decision that they were no longer doing policies that covered the value of the house. Instead, they're going to do policies, homeowners policies that they state the value. And State Farm is the biggest player in the homeowners insurance world, and so everyone followed suit. And sometimes some of the policies, in other words, you buy a house for $300,000, we'll make up a number,

and you buy a homeowner's policy for $300,000 to cover the home you just bought. And it might have an inflation clause on it that the next year it's a little bit more, and next year it's a little bit more. But it would be, it would not be unusual for a whole bunch of you listening right now to have a home that you paid $300 for, that you've got $350,000 worth of coverage with those inflation kickers on them and the thing's worth $500. and it burns down and you can't rebuild it. You can't build a driveway with $300,000 right now.

Yeah, yeah. And so what I'm telling you is that it is now incumbent upon you because the insurance business changed as of that hurricane that I can't remember the name of. The insurance business changed and it's basically stated value plus or minus inflation kickers and the inflation kickers aren't enough. Wow. And so you have to revisit your homeowners insurance once a year. and make sure you have the right amount of coverage for the value of the house.

How will you value your home on an annual basis like that? I mean, you can jump on just one of those websites and look at it. You're not going to be far off. But you kind of know I got $189,000 for the coverage, and this house is worth $600 grand. Our neighbor just sold their house. Yeah. So you know you're like way off.

Yeah. And so you can toss that to your insurance provider, and they'll do a little research on it and tell you what to cover the house for. but you need to update your coverage because the value of your home is growing and your policy's not. You know what really freaks me out is the millions of people who in 2020 and 2021, when the housing prices started to surge, took out a big home equity loan to pay for their new bathroom they want to get done during that gap. And now not only is the insurance coverage not there, but they're going to be on the hook for that loan. They're going to be staring at a burned down lot holding a check that can't replace the driveway,

plus you owe me UOS this equity loan. Exactly. What a mess. If you'd refinance the first mortgage, they would have required to update the insurance, but many times a home equity loan doesn't. Wow. What a mess. You're exactly right.

So you could literally be upside down in the house, like on an old day is, all days in a car. Yeah. That kind of thing. So what I'm telling you is get online at Ramsey Solutions.com and click the ELP for insurance. and get a free quote on your car insurance and your homeowner's insurance and keep your homeowner's insurance updated for the right amount of coverage because if your house burns down and you have 50% of it covered, you're going to build a very small house in that lot. I mean, you're going to be screwed up. And if you've got a mortgage, you know, your mortgage is probably less than that. You're going to end up with nothing.

Zero. You're going to pay off the mortgage and have a burned up a lot. Yeah. That's all you're going to have. And so you're going to be in a mess. So make sure you keep your coverage. coverage up to date and always price shop it with one of these insurance brokers. Now, the difference in a broker in somebody like State Farm, one of these name brands, you know, if they've got a

celebrity endorser, they're probably a captive company, meaning State Farm agents can only sell State Farm. Or a lizard. That's right. That lizard thing. That's the other one, yeah. And so you can, you know, nationwide can only sell nationwide. And so, you know, they're captive agents, is what we call them in the insurance business. So instead you want to get a broker that will shop a bunch of different companies and find you the best price in your situation. And so many times when someone goes to Ramsey Solutions.com, clicks on the ELP and gets with an insurance broker in shops, they not only get the right amount of coverage

because their house has gone up in value, but they also get a cheaper rate. And so if you're buying the same amount of insurance, a lot of people, save seven, eight hundred bucks a year by changing their car and their homeowners, or auto and homeowners over. And because they're just people are, we're fairly lazy about our insurance shopping. We sure are. We get it in place. It's, it's rip it and forget it, right?

I mean, you just put it on there and you pay the bill, you pay the bill, you pay the bill, unless something comes up and shakes you up. But I'm telling you right now, I don't know what the percentage is, but I would guess north of 50% of you listening to me right now that own a home do not. not have the proper amount of coverage on your home because your home's gone up in value and you didn't update your coverage. And the insurance companies do not update it. They are not, they took that responsibility away from themselves and gave it to you. Having sat in this middle of a street with somebody watching their house burn down on a couple of different occasions, that sounds like a nightmare

on top of a nightmare. Oh, it is. It's one of the most horrible things to go through emotionally. Whether you're buying a new home or refinancing your current home, you should, should never sign on the dotted line until you're sure it's the best decision for you. That's why I recommend reaching out to my friends at Churchill Mortgage. They're experienced Ramsey trusted loan specialists can save you time, headache, and help you finance a home the smart way. Just click the link in the show notes or go to Ramsey Solutions.com slash mortgage to get connected. Jeff is going to start us off this hour in Cincinnati.

Hi, Jeff. How are you? Hey, Jeff. I'm doing good, Dave. How are you? Better than I deserve. What's up? Well, I'm kind of a new follower. I just found you earlier this year. We had some questions about potentially refinancing our house. We originally bought it back in January of 2021. This was obviously before we knew you, and we got a 30-year loan at 2.5%. and now kind of considering do we move to a 15 year but my biggest concern with that is that we're giving up that 2.5% rate to go somewhere around 5% or so.

You're right. I would not do that. You're right. Okay. No. You keep the existing mortgage you have. If you calculate a 30-year mortgage and you calculate a 15-year mortgage at the same. same interest rate in your case two and a half and you pay the difference like you like you took out

a 30 and you pay the extra amount as in the difference between a 15 payment and a 30 payment it will pay off in exactly 15 years okay you do not have to refinance to pay a loan off in 15 years you just have to pay it like it's a 15 year payment and it'll pay right out um or more of course and then it would pay out even sooner so never refinanced just to move from a 30 to a 15 because you take on the closing costs at a minimum, and in this case, you'd go up an interest rate. So you never do that. Just pay extra on it, and you'll get there.

Okay. That was easy, wasn't it? As far as how much, like how I can afford, we were well within the 25% calculating it off of the 2.5% rate that we have. Great. But with rates now, I know we're not refinancing, but that would obviously put us probably closer to the 30% mark. Well, it doesn't matter. It doesn't matter. You're fine. The reality is your house payment is a fourth of your take-home pay at a 15 year on two and a half. And so you're fine. The reason we put that in place is not to keep people from buying homes. And John, people are really mad right now about house prices. Apparently, I hate homeownership and I'm unrealistic. old boomer or whatever other terms of derision you can throw up my bald head.

But I don't care if you get a house you can't afford. It doesn't affect me. It affects you if you buy a house you can't afford. Jeff's in good shape. He's not got any issues. But here's the thing. And I've been answering this question the same way for 30 years. Like we have people call us from California.

Well, Dave, you know, you can't buy a house in California for that. That means you can't buy a house in California for that. That's what that means. And you also may not be able to buy a Bentley. You also may not be. When I grew up, this county that we live in is the 11th wealthiest county in the nation, the wealthiest county in Tennessee, Williamson County, Tennessee, where you and I are sitting right now, where both of us live now.

When I was growing up, that's where the rich people lived. And we said stuff like, you can't afford to live there. And you know what? Not everybody can afford to live there. Everybody can afford to live on Rodeo Drive or in downtown Manhattan or downtown Tokyo or downtown London. It's freaking expensive. And so sometimes you just have to say, I can't afford it, number one.

But number two, the reason for this is we know from the data of doing this for 30 years that your most likely way to become wealthy is to get your home paid off as soon as possible. And all other debts, too, because it frees up your most powerful wealth-building tool. And so if you keep a mortgage around like it's a pet for your whole life, because you're thinking, well, I'm always going to have a mortgage. and the only way I can afford a mortgage, the only way I'm ever going to get a house, because I'll never get a house, I'll never get a house, I'm so stuck,

and it's just not fair, and life's not fair, and I'm a four-year-old in this cereal, I'll throw in a fit, and I want Captain Crunch, Dad, blame it, you know, and it's just like, and everybody's acting like that right now. And so I'm sorry. I'm sorry that when I was a kid, I couldn't live in Williamson County. I couldn't afford it. My family didn't make that kind of money.

I'm sorry. I had a traumatized childhood. I'm sorry, but it's the way life is, And so, you know, the answer is no. The reason you tell yourself no is so you can tell yourself yes later. So if you go buy a house you can't afford and you go take car payments out that you can't afford and you go take, which nobody can, you go take out a student loan and you go take out MasterCard and Visa and American Distress, you're going to be normal. And normal is you work your whole life and give all of the money you earn to someone else in the form of payments and retire broke and hope social insecurity will take care of. of you. Who the crap wants to be normal?

Right. And so you've got to break this cycle and not be angry at me or at the world or at Instagram or Twitter or whatever it is you're angry at this week because house prices went up. I'm really sorry. I don't want you to be upset. I don't want you to not have a house, but also don't want you to do something stupid that's going to keep you broke your whole life. I'll throw a third one on there, Dave. I have founded my life when I've had a 30 or more and I've had a couple of those in the 15 year. I can have all the best intentions with a 30-year mortgage, but when it comes down to it, every single month,

somebody invites me out to a thing. Or, hey, we're all going out to this thing. And whether I've got the best intentions or I've got all the willpower in the world, it's really hard for me to double that payment or to make that gap payment between the 30-year note is requiring me to pay and what I could be paying for that 15 year.

With the 15 year, I'm locked into it. I got to do it. One of the things I figured out when I very first started doing this stuff with financial peace, when I started studying rich people, is they put smart things on autopilot. Yes.

I don't want to think about it. 100% of the 15-year mortgages pay off in 15 years or less. 100% or they get foreclosed on. I mean, 100% of them do. Okay? People that take out authority promising to pay a 15, the studies say 92% do not stick with the schedule.

So if you put a system in place that you have to be in the top 8% is the only way you win, you lose. You're going to, that's dumb. I just was listening to some obesity researchers today, and they were talking about step one, create an environment where you can at least attempt to be successful. Get the junk out of your house. You can't have it all there and say,

I'm going to make good choices because you're not going to make good choices. James Clear talks about that in atomic habits. It talks about the exact same. thing. What is it? You're trying to create a habit and don't put stuff that's contrary to the habit right in front of you. Let's go to Suzanne out in Spokane. Hey, what's up, Suzanne? Hi there. Hi there. How's it going? I just love that it rhymes. Suzanne in Spokane. It just made me happy. It's good to have you, Suzanne. How can we help? Yeah. Good. Thank you guys so much for taking my call. You got it. What's up? So this is basically what I've got. So my husband and I, we're actually in the

North Idaho area. So we're just kind of over the border from Spokane. We moved here really unexpectedly last year after my husband lost his job and it just ended up being such a blessing. He got a job up here. And we absolutely love it. We don't want to leave. We're closer to family now and he got a good job here. He's been able to start a business. So he's actually working two jobs. And I am a stay-at-home mom now. We've got two baby girls. Congrats. And so thank you. So it's really expensive here.

That's one thing we didn't know. We didn't know the area that well. But we love it. So we're determined to stay here. Okay. And we were actually able to pay off all of our debt last month. Wow. Congratulations.

Super exciting. Yes. So in the midst of COVID and babies and this move with everything, we still manage to pay off our debt. So we own our vehicles, all that. And we're in a rental, but we've decided that we want to go ahead and buy, even though this market is really crazy and it's really expensive here. But we figured since we're debt-free, we can go ahead and pull the trigger and do it. So we're in the middle of purchasing a place that we found.

So you already have a contract out? Yes, we do. Yeah, we close here in a couple weeks. Okay. Yeah. So it is expensive and we know that, you know, we had started with a budget that was a bit lower and we decided to go higher because we just, We found this great property, and it just seems like a wonderful place to raise children.

And since we're dedicated to staying in the area, we wanted to do it. You've laid the groundwork to justify not making a smart decision. Is that what happened? Am I questioning the decision? You've laid the groundwork to have possibly made a not great financial decision. It sounds like there's a lot of emotion behind this of just excitement about getting in a house and all this. So give us some details about the financial aspect. Yeah. So when we first started looking, so we've been looking for months and months with our

realtor. And we didn't have a super firm budget in mind, but we decided around the 450 mark was we didn't want to go much over that. We felt we could really afford that and still be able to save money. But in this market and in this area where we live, what you can get for 450 just doesn't even seem worth it. These aren't even really starter homes. They're not. even really fix their uppers. And we just found that nothing in that price range we were willing to go for. So we decided that we wanted to not only do a house, but get some property since we've got little kids. So we ended up finding something, but it's about 100,000 more. So 550? We initially started. Yeah. So now we're in the 550 range. And how much are you

guys putting as the down payment? What percent? Well, we aren't because we're both veterans. So we're going through a VA loan, so we aren't actually putting anything down. Oof. Okay. What's your take-home? Yeah. So we are, yeah, we are going to finance the whole thing, which puts us at about a $2,500 a month mortgage.

On a 30 year? Yes. Okay. Suzanne. All right, what's your question? You're getting us all fired up here. I'm getting riled up, Suzanne. How can we help?

I know. Well, that's what I was. I don't know if we can help. You're knee deep in this thing. If I'm you, I'm getting out of this thing if there's still time. But you've already signed a contract. So what's your question? Well, my question is, should we focus on saving money?

Because, you know, we're in this. We're going to be paying this mortgage. Should we be saving money and focusing on that? Or should we focus the extra money that we have every month towards this mortgage and get it down? You should have focused it before you ever gotten this contract and had a healthy down payment on a 15 year. that's what I would feel better about. I don't love this idea of you guys getting out of debt and then taking on over a half million dollars

on a mortgage and thinking that they're doing you a favor by giving you the VA loan. And is that not a big part of your take-home pay? What is your take-home pay? It is. Right now, well, we've got several different sources of income. What's the total? Here's what happens, Suzanne. You have created a universe that you want to have.

You want to be in this area. you want your kids in this area well our kids need to go ahead and have this too so you created that as well and you've created a really fungible flexible dollar amount we just got a lot of money coming from this place

and that place and this place and here's what you've done you've created a cloud that allows you to a not see very clearly and not have to see very clearly which allows you to live in a fantasy and now you've zeroed in one of the if not the hottest real estate markets of all time.

So it takes a teeny tiny correction and you are underwater in a half million dollar house working side jobs that are we kind of make this as you know it and suddenly this zero down VA loan is a nightmare

because you're underwater and you can't get out. So tell me how much money you make. How much money comes into the Suzanne and company home every month. About my

hopefully can't because it's a new business but about $100,000 a year right now. Is that take home pay or is that gross? Yes. That's take home.

So you're taking home about $8,000. Right? Right. And your mortgage is going to be over about 31% of your take home pay is going towards a mortgage and that's on a 30 year

which we never, ever, ever, recommend we always tell people to do the 15-year fixed rate but you're here right but we're here Suzanne how old are you guys um 35 and 37 okay you've got a lot of life to live and I want to see you live it and I don't want to see you drowning in this giant mortgage payment with nothing down I've I've just talked to too many people heard too many stories and they start out like yours starry-eyed about the housing market and wanting to get in and we want the property we got to have the yard and the budget's flexible and we're not putting anything down and all of a sudden they can't breathe.

And we get calls, I'm sure we'll take one during this show, where someone calls in and says, we're in over our head, we put nothing down on this house, and we're drowning. And so if there's time to get out, I mean, it's just... You sign the contract, so you sign the contract. I don't know what the situation is there. If you're stuck with this thing,

you may want to look at increasing income, refinancing to a 15-year, and making sure that you can afford it. But as far as paying down the mortgage, I mean, it's a little late for that conversation because we're really, we're knee-deep in this thing. But we recommend 10 to 20% down to avoid PMI or more on a 15-year where the mortgage payment is no more than a quarter of your take-home pay.

So so far, every one of the rules has been broken, which just hurts my heart because I want to see you guys win. And you've worked so hard to get to this point where you're debt-free and you're making these decisions. And I don't want to see you step backwards and make a bad financial decision for your future. Listen, the best most secure way to buy a home is with the 100% down plan. It might not be easy, but trust me, people pay cash for homes all the time.

Now, if you're going to go the mortgage route, let's recap what you need to know. You need to be completely debt-free before you do a mortgage. You need three to six months of expenses saved in an emergency fund before you do a mortgage. And you need a down payment of at least 5%, but, ideally 20%. And you should only choose a conventional, fixed rate, 15-year mortgage

with a monthly payment that's no more than 25% of your take-home pay. All right, guys, thanks for tuning in, and don't forget to share this with a friend who would enjoy it. And make sure to tune in for the next episode for expert tips on how to sell a home.