The Rachel Cruze Show - The Ultimate Guide to Mortgages

Episode Date: August 30, 2021

Dreaming of a new house is fun. But home loans? Those can be scary. This episode will help you make sure home ownership is a blessing. You’ll learn: Everything you need to know about mortgages If refinancing is right for you And when you should start teaching your kids about money Follow me on Instagram @RachelCruze and join the Official Rachel Cruze Community on Facebook: bit.ly/3mhDHaL Resources: Ramsey+: bit.ly/3A45Be4 Learn more about your ad choices. Visit megaphone.fm/adchoices

Meeting with mortgage lenders can feel very intimidating. You want these people that have a heart of a teacher, not the heart of a salesman. You do not need to feel pressure at this at all. You need to find someone that's willing to teach you and walk with you through this process. Hey, everyone, welcome to another episode of the Rachel Crewe Show podcast. I'm so glad that you're here. All right, guys, you and I both know that the housing market is insane right now. So I thought we would talk all things, mortgages today.

You'll hear a conversation I had with Churchill Mortgage Loan Officer Jordan Heatherly. We talk about all things refinancing. So what is refinancing? When is a good time to refinance? And so much more. So if you've been thinking about it, you don't want to miss this episode. Then I answer a question from Mary, who wants to know the best age to start teaching and talking to her kids about money. But first, let's talk about mortgages.

And we're going to do a deep dive, you guys, like a super deep dive on. this topic. So let's get started. All right, real estate is a hot topic right now. And so you'll realize that homeownership is a goal that most people have, which is awesome. Listen, I am all for real estate. My husband loves real estate. My dad loves real estate. Like everyone in my life, I feel like loves real estate. So I am all about it. Winston I, we built a home. I mean, we just, we love everything about it. So trust me, home ownership is something I think is awesome and to think a great goal to have in your life at some point for sure. So it's a blessing. But listen, the important thing here is you have to get the money part of it right. And whenever

you talk about homes, usually the word mortgages comes right after. So this video, we're going to just break down everything you need to know about mortgages and how they work. What is a mortgage and how does it work? Well, a mortgage is a loan that specifically helps a borrower buy a home. first thing you need to know about mortgages is that they are not the best way to buy a home. The best way is, of course, 100% down. And listen, before you get all crazy on me, there are people that do this, okay? People are doing it. And I want to share these stores with you because they're amazing.

We'll do that for another episode. But this is possible. But again, if it's not in your near future, a mortgage is the only type of debt I will not get mad at you about. So how do mortgages work? Well, the first part of a mortgage is the down payment. So this is the savings that you put toward the purchase of the home. Then the mortgage notes is the legal document with all of the terms. So this document includes the total amount of the house.

The costs, the lender will charge you at the repayment plan, the timeline, and more. So then you'll have a monthly payment that includes the principal, which is the amount you borrow and have to pay back, property taxes, home insurance, and sometimes private mortgage insurance, which is known as PMI, and you have to buy that if you don't put at least 20% down. So this protects the bank if you can't pay back the loan. And then, of course, interest. So here are the common mortgage loan types,

an adjustable rate mortgage or an arm, federal housing administration loan, so an FHA, a Department of Veterans Affair, VA loan, and a fixed-rate conventional loan. So let's break these down. All right, number one, the adjustable rate mortgage. So this is a mortgage that sounds really great at first because you start off paying very low interest, okay?

Your interest rate is very low. Then the interest rate can fluctuate over time to benefit the bank. And so it ends up jacking up your monthly payment and puts your budget at risk. So if you hear the terms, adjustable, balloon, 5-1-arm, anything like that, you run the other way. Not good.

Up next is the Federal Housing Administration or an FHA loan. So this is a government loan that really tries to help out first-time homebuyers. Oh, it's so nice. Because usually if you're a first-time home buyer, you have very little to put down. But listen, here's the catch. With an FHA loan, you pay an upfront mortgage insurance premium or an MIP at closing. So not only do you pay this extra cost during the purchase, but then also you pay it on top of your mortgage, like every month in most cases,

over the course of your entire loan. It's very expensive. Very, very expensive. Okay, next up is the VA loan. So these mortgages are guaranteed by the U.S. Department of Veteran Affairs, and they're specifically for our country's military. But the problem is that this is loaded with fees and higher interest rates. So while it's an honor to be eligible for a VA loan because we love our veterans,

I honestly would steer clear of it. because it ends up being more expensive. All right, lastly, let's check out the fixed rate conventional loan. And this ding ding ding is the winner. So this loan locks you into a single interest rate so your monthly mortgage payment will never go up. It's predictable, you know what's happening. All right, another question people have is how do you know

if you're ready for a mortgage? Well, here at Ramsey Solutions, one of our goals for you is to build wealth so that you can live and give like no one else. Which means I don't want you signing up for a mortgage. mortgage you can't afford. I want this home to be a blessing for you, not a curse and a burden. So first off, you know you're ready for a mortgage depending on what baby step you're on. So if you're on baby step one, I would say no to the mortgage. That's getting a $1,000 emergency fund.

If you're on baby step two, I would say no to a mortgage. This is when you're getting out of debt. And then baby step three, I'd still say no because you're saving up for a fully funded emergency fund. but I would say yes on what we call Baby Step 3B. So again, once you're out of debt and you have a fully funded emergency fund, this is when it's a great time to go and buy a home. Now, some of you are thinking, yeah, but how am I going to get a mortgage?

If I have, you know, I don't have a credit score because I'm out of debt and all this. I'm not using debt. You can do a process called manual underwriting. It's a process at which you can still get a mortgage without a credit score. I talk about this a lot in different episodes, all the things.

So lots of information out there on that. I'm not going to dig too much into the details, but just know if you are out of debt with a fully funded emergency fund, you can still get a mortgage. Now, there are three additional boxes. I want you to check in your mind to make sure that you are in a place where, again, you can get a mortgage and it's not going to be a burden for you. It's actually going to be a blessing. I want you to save no less than 10% for your down payment. I would love for you to get to 20% if you can so you can avoid PMI insurance like we talked about. I want you to get a 15-year fixed-rate mortgage, which means you'll pay off your house in 15 years versus 30. Your payment will be slightly higher, but I promise I'll show you in just a minute

why it is so worth it to do it that way. And then I want you to make sure your monthly payment is no more than 25% of your take-home pay. I know it sounds like a lot of rules, but listen, these guidelines are here to help you. I've just talked to so many people where they are still living paycheck-to-paycheck, they don't have savings, they have debt,

they get a house and they find out quickly, oh my God, house is so expensive. Stuff always breaks. I'm having to pay for it. But I have no money. And it ends up being a stress point. So again, these guidelines are here to help you buy a home where you can have peace of mind. Now, I also have a tool to help you with this. It's called the Ramsey Mortgage Calculator. So you can use it for free by texting mortgage to 33789. So check that out. Now here is why you want a 15-year mortgage versus a 30-year. We talked about that earlier. but let's just do some math, okay? Get ready, get ready. It's very exciting, okay?

So let's say you're buying a home that's $250,000 with 20% down. That means you're going to have a mortgage of $200,000. A 30-year mortgage on $200,000 loan with 5% interest has a payment of $1,074. Now that does not include property taxes and insurance, but that's your payment. Now, the same house, the payment on a 15-year mortgage with a 4.5% interest rate would be $1,530. So you're paying more, $456 more to be exact, a month for a 15 versus a 30 year. Now, that may not seem like a huge deal, but let's look at the big picture, okay? When you pay $1,074 a month over 30 years, you end up paying $386,000. for your $200,000 mortgage loan. Uh-huh.

Is that how crazy? It's like almost double. Now, if you do a 15-year and your monthly payment is $1,530 over 15 years, that equals $275,000. So if you go with the 15-year, you save yourself nearly $200,000 over the life of the loan. I mean, you could, like, buy another house with basically the money you've saved. I mean, it's crazy. And the best part is you're debt-free and half the time. So the 15-year, again, while you pay some more up front, it is going to save you so much money on the back-end when

it comes to interest. So the 15-year fixed-rate mortgage every single time. Okay, now you might be asking, so how do I apply for a mortgage? Well, once you have your down payment saved, you're going to shop around and apply for a loan. So you want to shop around because different lenders will offer different interest rates, and you want to get the rate as low as possible because it'll save you thousands or even tens of thousands of dollars over the course of your loan. But meeting with mortgage lenders can feel very intimidating. So remember, when you meet with people like this, and the same is true. If you're working with a tax professional or insurance or anything, you want these people

that have a heart of a teacher, not the heart of a salesman. So if your lenders on the other side of the desk pressuring you to buy something, fire them. Okay? You do not need to feel pressure at this at all. you need to find someone that's willing to teach you and walk with you through this process. All right, another word around mortgages and housing is the word refinancing. So let's move on to this subject. Refinancing is getting a new mortgage by changing the terms of the one you already have on your current home.

So why would you refinance? Well, years down the road, you may want to save on interest, may want to get a different lender, or even get out of a bad mortgage like we talked about earlier. So if this sounds like you, then you might consider refinancing. It's pretty amazing, isn't it? Mortgages are not that complicated, you guys. We can really break it down, and it can help save you so much money. Well, hopefully you feel more confident about mortgages, which ones not to get, like, steer clear of some.

There's some that are great, obviously, and you know when it's a right time to buy a house, when it's not, if you should refinance or not. Again, a lot of complicated subjects, but you guys can do this. You can learn this information and figure out what's best to run. for you. All right, I love this show because I like to break down complicated and sometimes intimidating topics when it comes to money. And I always encourage you guys on these topics of life, bring in an expert, someone that knows this world. So today I have Jordan Heatherly on with me. Jordan, welcome to the show. Thank you very much. Thanks for doing this. Yeah, thanks for having me. Okay, Jordan is a home loan specialist and most importantly, husband to Lindsay Heatherly,

who's basically my boss here on the show, the show producer. So we're like, this is fun. This is very fun. I'm excited to be here. I know. She roped you in, Jordan, because this episode we're going to talk about refinancing. So refinancing, again, it's one of those kind of complicated, can be intimidating subjects because it has to do with mortgages, all the things.

So, Jordan, first of all, how long have you been in this world? So I've been in this industry for seven years, in the Churchill for Judge Chive, six. Okay. Yeah. How is it? I really, really enjoyed it. Has it been crazy, like recently? I mean, because of homes, I mean, the sales, you know, people buying homes, selling homes, all of it.

It's kind of been nuts. Yeah, for the last probably 18 months or so, it's been crazy. It's been nonstop, but it's been great. I would much rather be busy than be slow. Yes, that's true. That's true. Okay, so refinancing, that's been a word that's been tossed around a lot recently. People talking about refinancing because, you know, rates dropped, all of that.

So let's go to the basics. Yes. Explain in layman's terms. Yes. What refinancing even means? Yeah. So the refinancing that we help people with is mortgage refinancing, which is when we take your old loan or whatever your current loan is and we change it up.

So you're getting new loan terms, hopefully for your benefit if you're doing it the right way. Yes. And usually people are doing this because the interest rates, right, has lowered or they've had a bad mortgage that they want to kind of get a better, right? So what have the rates been, like, on average? I know it'll change depending on when this airs. But what was kind of like a normal rate, you know, this time three years ago-ish, to like when it kind of just dropped and went crazy? Yeah, so probably we're looking at something in the threes or fours a couple years ago.

And this year it's been in the twos. So it's dropped pretty significantly. And that's driven a lot of this craziness where people are reaching out, wanting to ask questions, does this make sense? So that's why everybody's been reaching out. It's been pretty crazy. Okay, so when is a good time for someone to refinance? Yeah, so that can be different for people depending on their situation.

So that's really where you want to reach out to somebody, get some involvement, But generally speaking, I tell people that if you can drop your interest rate for around 1% lower than what you're at currently, that's when you should look into it and see if it makes sense. And if financially you can get your money back for the cost of refinancing. Okay. And it's not free to do this. It's not like, yay, you just get. I need to get paid. Yeah, that's right. That's right. Exactly. Exactly.

So how much does it cost on average? How does that all work? The closing cost really can vary as well. Normally it's a few thousand dollars, but it can go up depending on how much money you're borrowing. So that's another thing you definitely want to reach out about, see what your options are, make sure that your costs don't outweigh the benefit of your refinancing. Yeah, so let's talk about that because there's some reasons not to refinance. Yeah, absolutely. And what is kind of explain that. Well, so the main reason why somebody would refinance it would be a bad idea is normally a few things.

One, if you're planning on moving or if you're planning on paying off the mortgage in a really short period of time, even if you're dropping your interest rate by a percent, 2 percent, it really might not make sense because you need to take time to recoup those costs. or if somebody just gets some bad advice and gets into a loan program or loan term that might not be best for them financially, then you might just get some bad advice and end up in a worse position than you were before when you refinance, or when you refinance for the first time. Okay, so mortgages in general, though, it can be a complicated subject, and it's a big deal. I mean, usually a home is the largest purchase anyone's going to make, right?

And we talk on the show about it some and about how there's some bad mortgages out there versus good. So I'm just curious from your perspective, which I know you're a little bit. biased, Jordan, on all of our stuff. Yes. But I'm just curious overall, not just refinancing, but mortgages. Like balloon, mortgages, adjustable, ray, all that. Like, as a professional, when you see people with that versus just a standard fixed rate, what do you see? Like, when you see that, are you, like, cringing inside? Or like, tell us your thoughts. I want to know. Yeah, I definitely cringe a little bit. And then, honestly, I feel bad for people because I think

a lot of what I've seen over the last few years is people just get bad advice. Loan officers are just out to get a loan done and not really in it for the long-term financial health of the people they're working for. So there's a little bit of me feeling bad, but then there's definitely some cringe aspects. Now, luckily, some of the programs that were really crazy went away a few years ago because of everything that happened with the housing market crash. But there definitely is still some loan products out there that have balloon payments, which are terrible, adjustable rates, which really have worked out for some people over the long run, but just increases your risk unnecessarily. And that's why we really try to push people into

fixed rate mortgages, because that's the least risky way for you to do it. You have your fixed cost. you know what the mortgage payment's going to be, and then you can just attack it and pay it off as quickly as you can. So good. And I love even how you're answering this, because we always talk about getting someone with the heart of a teacher, not the heart of a salesman, right? And you said some people are in the industry,

just to do the deal, right? Just to get it done. Absolutely. So how important is it for someone who is going to either refinance or even get a mortgage maybe for the first time or they're moving to a new city? They've got to buy home. Yeah.

To have a professional on their side that actually walks with them and explains stuff to them. Like, is it annoying for people to ask questions to you? Oh, no. Because I always say a heart of a teacher, right? Yeah. And so I always think, okay, the professional on the other side of the desk, people are thinking, oh, but I don't want to bug them.

I don't want to be annoying or I don't want to look stupid. What are your thoughts like with people asking questions? Well, that's what we're there for. I mean, that's one of the biggest compliments that I can get from somebody is that they felt like the process went smoothly, that it was not as difficult as they thought it was going to be or not as daunting. So for me, that's just communication. That's giving them all the information,

eventually letting them make the right decision for what's best for their financial health. But that's where we're there for. So a lot of times people will have my personal cell phone number. They'll be texting me questions, you know, sometimes inconvenient times, but I get back to them what I can for sure. But no, it really is a great, you know, resource for people to just reach out whenever you have questions. You need to feel comfortable. Like you said, this is one of the biggest investments that people can make. And if you don't know what's going on, if you feel uncomfortable with the situation, that just puts you in a really bad position and can lead to some long-term stress for sure.

So utilize the person that you're working with, ask a lot of questions. I tell people it's cliche, but there are no such things. thing as a dumb question when you're talking to somebody. Yes. See you guys. There are people out there with good hearts in all these industries. So whether it's like taxes or insurance or mortgages, again, these complicated subjects when it comes to our personal finance, find someone a pro in your corner.

Help, they're out there. They're out there. Okay, so I know we're talking about refinancing overall. So what is the best way for someone to prepare to refinance? If they're watching this and they're thinking, okay, I think it's time to do it. Right. What can they do? So the biggest thing you can do is try to plan.

and sit down and really think about what does the next maybe three to five years look like for you? Like I said, if you plan on moving, if you plan on, hey, we're going to tackle this mortgage in two or three years, you need to think through that and then communicate that to the person that you're talking to about refinancing. Because at the end of the day, like I said, I can't say for sure that one specific scenario, always you should refinance because everybody's scenario is a little bit different. So really have at least an idea of what you think your life is going to look like for the next however long, and then talk to somebody about that. So it's just planning, figuring out what the future will look like.

And then also just gathering your information, getting your most recent mortgage statement, maybe having an idea of what your homeowners insurance premium is currently, what the taxes are. That stuff can all be helpful for a loan officer for them to help you make the right decision by providing you with all the information you would need to make an informed decision. Yeah. So great. Yeah. Oh, such good information.

Again, complicated subject, you guys, can be simple. You can understand this stuff. Well, Jordan, thanks so much for being here. Yeah. And if anyone wants to reach out, I know not necessarily to you personally. but overall, where do you recommend people getting their questions answered? Honestly, the easiest place is just Churchillmortgage.com. We can get you connected to somebody, a loan officer in your state that's licensed,

and we can help you and take the conversation from there. Amazing. Awesome. Jordan, thanks for being here. Yeah, thanks for having me, for sure. And hopefully, you guys, that this helps you, again, having someone in your corner that can walk with you and help you make really great money decisions that, in this case, refinancing could possibly save you tens of thousands of dollars

over the course of your mortgage. This episode, I have Mary on with me, and we're going to chat a little bit about her money questions. So, Mary, welcome to the show. Thank you. Absolutely, where are you calling from? South Bend, Indiana. South Bend, Indiana. So great.

I've been there a few times. Have you? Yeah. You probably go to Notre Dame. It's a great spot. That is true. Yes, I have visited there before. Yep.

Yeah. Okay, so Mary, where are you on your money journey? Where are you at? We are on baby steps four, five, and six. Amazing. So we got debt free in December 2020. Nice. Like in the middle of COVID, a debt-free journey came to an end.

That's awesome. What made you guys want to do this? What made you kind of start the whole process? Yeah, so I was, my first born was three months old at the time. I was sitting there a little bungalow. I was just sitting there crying because our house was so tiny. I didn't like where we were at. And I said, I'm just going to do it.

I didn't even talk to my husband. I just, like, came home, had, like, all the money envelopes. I said, I'm going to start using cash for stuff. And he's like, okay, sounds good. And then we just started. That's amazing. Okay, so did you guys kind of get in the rhythm then to budget together and decide to get out of debt together and all of that?

So the debt was from my college. And I'm the spender. Robert barely spends money. And so that's why we didn't have any issues. So I created the budget. and show it to him and say, okay, does this look good? He goes, yeah. And so we just do that for the month. That's amazing. See, there's the trick. You just kind of get the spenders on board.

Once the spenders are on board, it's flawless. No, that's amazing, no. I mean, you're making it sound like, oh, yeah, it was crazy. But that's, I mean, you guys did an incredible job paying off all that debt, getting an emergency funds. Yeah. But, man, you did it. That's amazing. Okay, so what question do you have for me? Okay, so my kids are two and a half in 15 months, and I just started reading your new book, and I was not raised to talk about money. I never got an allowance, all these things. And so I'm wondering at what age is a good age to start teaching your children about money.

It's such a great question. I feel like a lot of people on their money journey, they have little kids, and they're like, okay, so how can I help my kids avoid, you know, all the mistakes that I may? Like, how can they have this great outlook with money earlier? So I think, number one, you even asking the question, I think is amazing. I mean, I would say on a tactical sense, by the time they're like three, four, five years old, you can kind of start saying, hey, here's what it looks like to clean up. And if you clean up, maybe you get a dollar or 50 cents or whatever you choose to.

You know, you kind of can slowly start to introduce how money is made when they're that young. I have a three-year-old. She just turned four. So I have her in my head, as I'm saying this. My six-year-old kind of gets it, and she'll, like, take out a broom. And she's like, do I get a dollar? And I'm like, okay, let's be a little bit more specific with these chores. But I think about my four-year-old, I'm like, she can do a lot.

Like, Caroline can, she can pick up her room. She can pick up her closet. Like, she can, like, you know, do some stuff. I'm there to help and all of that. But it's amazing how early on they can understand stuff and grasp things and actually do it. I feel like as parents, sometimes. we don't give them that responsibility or that independence as early as maybe they can actually take it, you know?

Right, yeah. So, yeah, I would say that three, four, five-year-old range can just be those conversations, those kind of like more impromptu discussions and examples of cleaning and making money and buying stuff, you know, it can be very light. And then once they turn, you know, six, seven, eight, nine, ten, like they start to really progress, then that's when you can get a little bit more of a full. formula down, so things like writing down the chores, and they get that commission versus allowance, so they have to actually earn the money. And it says it's spelled out, this is what you do,

this is how much you earn. And then from there, I would split it up into three categories. So you can get three envelopes. We have these saver banks that are give, save, spend banks. It doesn't matter. Like, just get something that they can split the money into and start teaching them then to give first, save second, spend third in that order. And they can do that, you know, as little kids. It's amazing what, again, what they can absorb and all of that. So that's more the tactical side. But I would say that emotional side, more is caught than tots. So the fact, Mary, you and your husband have been on this journey, you guys are living, I'm sure, on a budget, you're doing retirement, kids college, men, you guys have a plan for your

money. And so they're going to see that. They're going to see that play out. And I would say just continue to find those real-life examples in the ebb and flow of life to really insert and talk to them. But again, yours are little. I mean, you said what? Just over a year and two and a half. Is that right? Yeah. And what's fun too is you'll see the older they get, their little personalities come through and see, okay, that one's a spender like me, you know, or that one's a saver. And you really do. and you can kind of play off those personalities. But I think, too, you know, making sure money's just not taboo,

that they can come to you with anything, whether it's a tactical question or a more emotional question around money and that there's no shaming in the process, obviously, you know, that you just say, hey, yeah, let's talk about this and kind of teach out of those moments in life, I think are huge, very impactful.

So I don't know if that helps, but yeah, but yeah, I think it's always a journey and it's the ebb and flow of life, is what I always say. There'll be some seasons you're really great out, it and you're on the ball. And then other seasons, you'll look up and it's been a month. And you're like, oh, gosh, we haven't done anything, you know, in regards to money. So lots of grace involved. Lots of grace. Yeah. Definitely. So awesome. Well, I'm excited for you, Mary. Do you feel like a total shift in your life because of getting control of your money? Like, do you look at your kids and say,

wow, they really are going to probably have a better future than I even did? Yeah, definitely. So I, when we got debt free, I made a Christmas ornament to hang on our tree with the year. It says first debt free Christmas and then the year on it. And so that's going to go on the tree every year. And so hopefully as they grow, they'll be like, hey, mom and dad, like, how did this happen? And so I'm super excited about that. Definitely a mindset change that I had to go through because I'm like, oh, I want this. And I said, oh, wait, no, I don't need it.

So things like that. So, yeah, hopefully they get my husband's jeans and their savers. Oh, that's awesome. Well, so, so great. Well, again, I hope those tips help and you guys are doing an incredible job, just, not just for yourselves, but truly changing your family tree. So thanks for coming on and asking the question. Yeah, definitely. Absolutely. Well, you guys can visit ramsysolutions.com for all the kids' products that we have, because, again, ingraining your kids and walking with your kids through this process is a big part of changing your family tree. All right. And if you want to ask me a question, you can go visit all of my social channels. whether it's YouTube, Facebook, Twitter, Instagram, ask your question with hashtag Ask Rachel, and we will get to those. And hopefully you can be on the show.

Well, I love Mary's question because a big part of winning financially is changing your family tree. This is what it's all about. And you guys, again, mortgages, it can be a complicated subject, but it's really, really important. So I hope that you enjoyed this episode

where we dove in to this part of our lives. And I want to thank Jordan, who came on this show today, I hope us talk about refinancing and all the things. So if you guys have not hit that subscribe button, make sure to do that. And if the spirit leads, you can leave a review. And as always, remember to take control of your money

and create a life you love.