The Rachel Cruze Show - How a Mortgage Actually Works 

Starting point is 00:00:05 So the real estate world has a lot of kind of confusing terms, and it can feel like buying a home is very intimidating because it's like this whole other part of life. And if you're not familiar with it, it can feel very overwhelming. And so it's important to know these terms and understand how housing works before you get into it. Because for a lot of people, this is one of the biggest financial decisions that they're going to make. And when you buy a home, usually it's the largest purchase you'll make in your lifetime. So today we're going to talk about the basics. And this is everything from what the principal means to interest, to PMI. All of these terms we're going to talk about because when they're less mysterious, it's much more approachable when you go to buy a home.

Starting point is 00:00:47 And before we jump in, be sure to like, subscribe, and share this episode with a friend. All right, we're going to start off with the basics. What exactly is a mortgage? Well, a mortgage is a type of loan that you take out for a home. and a mortgage is the one type of debts that Ramsey says is okay, right? Because we are all about being debt-free. But when it comes to your mortgage, that is the one type of debt. It is okay to take on.

Starting point is 00:01:13 And there's lots of different types of mortgages out there. But your mortgage, the basic definition, it is the money that you borrow to buy a house. All right, what percentage of your take-home pay should be going towards housing costs? So when you go to buy a home and you take out a mortgage, they're going to break your mortgage up into payments. And so it's really important to look at that payment per month and make sure it's a good ratio for the income that you're bringing in. Because if it's too high and so much of your money's going to your mortgage, you're not going to have a lot of money left to do things like pay off debt or to save or to live off of. And so the 25% rule is always what I go by. And this includes HOA insurance and all of that.

Starting point is 00:01:54 Okay. So 25% of your budget really should be of your income should be going towards how. housing, which is a mortgage or rent. Another question we get a lot is what kind of mortgage loan does Ramsey recommends? So we always want to do a 15-year fixed-rate mortgage. So there's a lot of different types of mortgages out there. There's balloon mortgages, adjustable rate, all these different ones. But a fixed rate locks you into a rate that you know forever and ever amen. That is your rate. And you can do a 15-year or a 30-year when it comes to fixed-rate mortgages. And the 30-year is very, very common because your payment is less. You don't get as great of an interest rate,

Starting point is 00:02:35 but you're spreading out those payments over 30 years, so it's much more digestible for a lot of people. But we recommend the 15. So cutting that 30 in half, because I want you to get out of debt as quickly as possible. And so this really forces you into a rhythm of getting out of debt very quickly. So the 15-year fixed rate mortgage is what we recommend. How do you know when you're ready to buy a home? So when you're going to buy a home, you want to to be financially in a good spot. This is one of the biggest mistakes people make is, you know, maybe living paycheck to paycheck. They don't have a lot of wiggle room, and then they go and buy a home. And when you're a homeowner, it's very expensive. You have to pay for a lot of different

Starting point is 00:03:11 things that you may not be thinking about versus when you're renting, the landlord covers a lot of those things. And so you know you're ready to buy a home when you have all of your debt paid off. So all of your consumer debt is paid off. You're debt free, and you have a fully funded emergency fund. And that's going to be three to six months of expenses. So if you're starting out, maybe you're renting right now and you have some debt and you have no money saved, again, it may be a couple of years until you get into the home buying process. But when you don't have payments and when you have money saved in the bank and you go and buy a home, it is much less stressful process. And again, it gives you peace where your home is a blessing, not a curse. Now, once you have that fully funded emergency fund, you do want to save up for a down payment.

Starting point is 00:03:51 So for first-time home buyers, saving 5% to put down for your home for a down payment is what we'd recommend. All right, before I tell you about specific costs included and not included in a mortgage, I want to tell you about our sponsor Christian Healthcare Ministries. When you go against what society thinks is, quote, normal, it might feel weird at first, but that is okay because we want you to do things that are weird if that means you're doing things intentionally, including how you spend your health care dollars. And one way to be intentional is with Christian health care ministries. CHM isn't health insurance.

Starting point is 00:04:24 They're a health cost-sharing ministry that's helped hundreds of thousands of things. families like yours, take care of health care costs without sacrificing their freedom. Program starts as low as $98 a month, so find out more and join at c.hministries.org slash budget. That's chmistries.org slash budget. All right, so what are all the costs that are included in a mortgage payment? So first is the principal, so the remaining balance that you owe on your home after the down payment. So let's say you bought a $350,000 house.

Starting point is 00:04:55 Let's say you put 20% down, which is $70,000. thousand dollars then you'd have two hundred and eighty thousand dollars left on your principal to pay off over 15 years or if you took out a 30 year so the principal is just that it is the exact loan without interest the exact loan that you have left to pay off then you add on interest and interest is extra money that you pay to the bank for borrowing money from them to purchase your home so there's different types of interest out there we kind of mentioned this earlier the fixed rates means again it is what it is. So if you take out a loan and mortgage rates are at 6%, you have 6% for 15 years. If you got in early in the market a few years ago, maybe your rate is like 3%, which is amazing.

Starting point is 00:05:39 And it's a fixed rate. It's 3% regardless if rates go up. It is what you have. And again, there's the adjustable rate, which means it fluctuates and goes up and down. There's different types of loans in this. But again, the fixed rate is what you want. You do not want your rate going up and down. You want it fixed. So, for example, if you have a fixed interest rate of 5.2% on that $2,000, you're going to pay an extra $273,500 in interest over 30 years, which basically is double the amount of your original loan. So that's the 30 year. Okay, so think about that, you guys. I mean, you're paying more in interest, basically, than what you were paying for the house of what you put down, which is crazy.

Starting point is 00:06:19 But if you did a 15-year loan, then you're you're paying. you'd only pay $123,800 in interest on that same loan. So you're paying way less interest because you're paying off that loan early. And if mortgage rates drop, you can always refinance your loan to get a lower monthly payment or shorten the life of your loan to pay it off faster. So a lot of people will do this, again, depending on what rates are doing. But if you get in now and let's say, you know, your rate is 6, 7%, then in maybe 5, 6, 6 years, you know, it may drop back down. Who knows? so let's say it does to 3%. We'll just dream for a second.

Starting point is 00:06:54 You can go and refinance and get that lower interest rate. So you have to pay closing costs and a couple other things, but in the end you end up saving money long term when you do that, especially depending on how deep you are in the mortgage. All right. So if you went around some of these numbers, maybe on your own, maybe for your own mortgage, just to see. Make sure to check out the Ramsey Mortgage Calculator.

Starting point is 00:07:15 I will put a link down below for you to try, but it's always fun to kind of fool around with that. or if you are going to buy a home, put some numbers in and kind of see, okay, what can we afford? Now, you're also going to pay property taxes. So by law, land and buildings have to be reappraised every six years. So property taxes often change according to that timeline. So you have to pay taxes on the land. That is what it is.

Starting point is 00:07:38 So you can do this. Usually it's wrapped up within your mortgage payments. But let's say you're on baby step seven and you paid it off, then that property tax will come at another date. And usually you can just pay for that. in full. There's also homeowners insurance that you're going to have to get, and it's common to bundle home and auto to include that, again, in your mortgage payments every single month. You can do that. There's also PMI, which is private mortgage insurance. And if you have less than 20% down for a down payment, you're going to pay PMI, which can run a couple hundred bucks a month, I mean, depending on what your

Starting point is 00:08:12 mortgage is. And so once you hit that 20% of the principal, then you don't have to pay that anymore. but this is basically insurance for the bank or for the mortgage company that you loaned the money from to make sure that they get their money. All right. Here is what is not in a mortgage payment. Your HOA payment. So if you are part of an HOA, yeah, you're going to have to pay that extra. There's utilities.

Starting point is 00:08:34 So think about water, gas, electric, cable and the Internet, maintenance costs, because that is some big ticket items if you don't take care of those. So be sure to prepare for all of these costs in addition to your mortgage payment. when you're buying a home and you're using that calculator because, again, it is so understated that when you buy a home, you have a lot of other aspects that you're going to have to pay for. So it can be very, very expensive. That's why I want you in a good place financially when you do this. Now, if you want more mortgage hacks, make sure to check on my episode. Easy ways to pay off your mortgage early.

Starting point is 00:09:07 You can click right there. Or if you're listening on podcast, click the link in the description. All right, you guys, remember to take control of your money and create a life you love.

The Rachel Cruze Show - How a Mortgage Actually Works

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The Rachel Cruze Show - How a Mortgage Actually Works 