Big John Talks! Top Mortgage Myths
Updated: Jul 20
Mortgages can be complicated and confusing, tune in to learn more about the top mortgage myths to put your mind at ease. Join me next time with a special guest as we discuss our opinions about the 30-year vs. 15- year mortgage.
Welcome to big john talks Your guide to everything business in Columbia, South Carolina. Hello Midlands This is john Hinks with big john talks calm. This week's podcast is going to be about the myths of the mortgage business mortgages or my specialties, what I've been doing for 16 years now, and I've done the wrong things, we've done the right things, and I kind of have a little bit of a grasp. But let's get right on into it the first myth in the mortgage industry that I'd really like to just go ahead and clear up this interest rate is everything. The lower the interest rate, the lower your payment and the lower amount of interest that you pay on the loan. So yeah, that's a big thing. Interest rate is a big thing, but it is not everything. When I do see people discussing mortgages on social media, you can see some pop up on there and say, I just got my client a 1.875% interest rate or a two and a quarter percent interest rate. In the back of my head, I'm going well, I'm looking at interest rates, and there's no way you can get that low. Unless you pay for it, you have to justify the means to an end with everything in a mortgage loan. The average time I think people are in a mortgage is probably seven years. So here's what I'm going to do is I'm going to break down about why interest rate is not every first thing there are certain loan programs that have lower interest rate than other loan programs. But with some of those loan programs, such as FHA, they come with an upfront premium 1.75% of the loan amount and comes with a monthly mortgage insurance premium that is typically a little bit higher than it would be for a conventional loan. The differences is FHA is monthly mortgage insurance rate is set depending on how much money you put down, but if you put the minimum amount down is point eight 5%. It is set and it is typically a little bit higher, with folks with good credit than a conventional mortgage insurance companies such as Genworth or arch or essence, any of those type of companies, but the interest rate can typically be a little bit lower. But does that mean the loan is a better loan? Well, depending on the type of program you're doing, it just depends if someone has a little bit of a lower credit score, FHA might be a little bit more competitive loan and someone has a higher credit score, then you don't do an FHA loan, you go conventional, and you know, it's very well could be that a conventional loan that you put someone in has a higher interest rate. Another thing that I'd like to talk about a little bit is a lot of times people spit information out and say call me because I got this client, a tuna quarter rate, or I got a low interest rate here, but what they don't disclose is what it cost in order to get that loan. So therefore the cost and I justify the means you have to look at how much interest you pay over the average amount of the loan. So I always ask my clients like, okay, so you're buying this home at 28 years old, it's a three bedroom, two bath house, it's a great first home for you. But if you have four children, and there's six of you in that house, your income increases, and you have to buy a bigger home. Where are you going to be in your equity? And how much could you put to the side? By not buying this interest rate down? Should you get to that point, you have to do the math, a good loan officer is going to do the math, a good loan officer is going to say, look, if you don't plan on being here in five years, there's really no point in you spending two times or three times as much in closing costs just to get a lower interest rate. Because you're only going to save X amount of money in five years with that interest rate. Nobody can tell the future. No, you may not be in this house for five years, you may be in it for 10 years, but you still kind of have to kind of justify the mean interest rate is not everything interest rate is important. Yes, with an interest rate. There are a lot of companies out there that will throw interest rates out there a little bit of a bait and hook and you can try to get a loan through them but it takes you 60 days to get the loan. Customer Service may be poor, all for that little bit of a lower rate. So again, if you were asking me and I was a regular consumer, I would shop sure I mean, it's important to shop for a loan. If it came down to me having a miserable experience for 60 days or using a local lender. Even competition using a local lender. My interest rate was only an eighth higher buddy, I'm going local lender all the way and I'm getting this loan closed and I've got my person for life anytime I buy my next home or whatever
I've got my mortgage professional anyway that is Myth number one in my opinion, interest rate is not everything It is important. It is very important to weigh out all of them. those options when you are shopping for a home loan onto Myth number two. Myth number two is 20%. Down is the best loan program. I am a big fan of Mr. Ramsey, a big big fan, I am a big believer in little to no debt, I do feel that you should have your money working for yourself. I do feel that paying interest on things you don't need is not good for you or your family. So I am a big believer and little to note that I am not a believer that 20% down is the absolute best loan program, why 20% of bank has to take over home and foreclose on loan that you know, their sole purpose is to just clear the debt off of their line when they sell the home and to do it quick. They're not a real estate company, you know, your Wells Fargo's of the world that is not Wells Fargo real estate as Wells Fargo mortgage, they just want the debt off of their books. And they want to do it quick because believe it or not, Wells Fargo may not be the investor of that loan, they may just simply be the servicer of that loan. So the longer they hold a loan, the longer and more money they lose by keeping that house on their books while it's not getting paid. So they like to get it off quick. So what do they do, they typically list the house for 80% of what the house was originally sold for. That's why I always hear that foreclosures are such a deal. 5% down is the magic number where mortgage insurance is not required. But let me tell you something a little bit about mortgage insurance. You know, before 2008, a typical private mortgage insurance company, their rates were much higher, because the risks were so much greater, and the underwriting requirements were not as good. So over the years, the mortgage insurance companies got a little bit more creative. And they also got a little bit more competitive for your business because the loan started performing better. So now they have some really interesting products where your private mortgage insurance what people call PMI is actually not breaking the bank like it used to, they're very competitive. And some of them specialize in their own little niches, you have your upfront mortgage insurance premiums that you may or may not be able to finance into the loan, depending on how much money you put down, or what type of home you're buying primary or secondary, you have monthly hybrid type loans where you can put a little bit more money down and have a lower insurance premium, I am a big fan of the 10% down loan program on a primary home 10% down and finance it because with these crazy low interest rates right now, you may have a financial advisor that can make more money on the money that you have, and be able to do something with that if you're in a low 30 year fixed rate at 3% or 2.875%. And then you give them the other 10% they can make more money than you're spending on interest. 20% down traditionally has been that myth that goes around that that's the absolute best loan program, you have to make sure that is the absolute best loan program for you. For you and you have clients that come in they say I have 20% down, but then once they put 20% down, they got nothing left. Well do you have to put 20% down? Do you like the payment at 10%? down? Do you like the payment at 15% down that goes back to the first myth. Interest rate is not everything. The second myth 20% down is the best loan program not true you have to find the best loan program for you is 20% down like the cleanest, you know freshest loan there it will no 25% is actually the best because that's when the rate gets even a little bit better the interest rate gets better 25% now the less risk for the bank, so you have to find the best loan program for you. So that is Myth number two in my opinion. 20% down is the best loan program. Big john says no, it's not the best you have to find the best loan program for you. Myth number three is must have perfect credit in order to purchase a home there is damaged credit, there is credit that has been hurt and then there are just people that do not pay their bills. And it is a mortgage loan officers responsibility to be able to differentiate between those on the front end,
okay. The loan programs are designed to whether or not someone has the ability to repay it is our responsibility in the front is a licensed loan officer nmls 335154. It is my responsibility as a loan officer. If I decide to pre approve a client that they are in a loan program that they can repay there are a lot of factors to make that decision credit is simply a formula and algorithm designed by Experian TransUnion and Equifax. as to where they rate your ability to repay. But there are things that can show up on a credit report that the client may or may not have a lot of control over. And there's also times in a client's life where a year ago or two years ago they were laid off COVID is going to be a great example, I think in 2021, about where people are applying Look, man, I was laid off for four months furloughed, or my income was 50, or 75%, of what it was supposed to be, and I missed a payment or two. And that's life, I think you have to make a decision and determination in order to see if that client has the ability to repay. One of the things that I like to look at is does the client have a little bit of savings? Have they been able to put money away? Are they able to suppress those must spend everything I have feelings? What is it that they were late on? Was it a simple mistake, because let me tell you something, I'm a plumber with leaky pipes on this the best buy a payment back in 2015. that sucker still on my credit, so it's annoying, but luckily, there are loan programs that are a little bit more lenient. When it comes to being able to purchase the home does the client have the ability to repay now if a client comes in and they've got just late payments everywhere total disregard of ever paying anyone back collections galore, and so forth note and the credit score would reflect that. Does the client have a motivation to buy a house? Well, let's find out let's put them in credit repair and let's see if they're serious about that. And I'll tell you now, credit repair is not everything that is cracked up to be you have to want it more than the credit repair company has to want it is a partnership and repairing your credit it is not a paid them and they fix it. There are loan programs that are designed to help people get the dream of purchasing a home, it is up to the loan officer to help make that determination. On the front end we have different tools, such as loan prospector and desk underwriter that will help us make the determination if they can buy a home. There are manual underwrites that give us very specific guidelines and able to help make that decision together. So no, you do not have to have perfect credit to buy a home you have to show that you have the ability to repay. So credit does not have to be perfect to purchase a loan. I'm going to go follow right up in there that the last Myth number three that your credit must be perfect in order to purchase a home. I'm going to go ahead and just say Myth number four is just because you got the score doesn't mean you can purchase a home there are other factors that go into purchasing a home but I've got a 660 score I qualify Well, not really because you got X amount of late payments within the last 12 months your score still up somehow some way there are other factors such as you may have a tax lien you may have a high debt to income ratio, the assets that you have cannot be sourced Myth number four is just because you got the score does not mean you can buy on to Myth number five, it's number five is applying for mortgage hurts your credit or being denied a mortgage hurts your credit look, you gotta pull your credit score to see if you can purchase a home. So when you have a client or someone say, Hey, I don't want you to touch my credit. Well, the conversation ends right there, I've got to be able to see your credit in order for me to be able to qualify you for home the myth that it hurts your credit score, it is untrue, the fact that your credit score may drop a little bit for a short amount of time, that is true. The fact that you may apply for a mortgage with 10 different companies. That could be a little true. But back in 2009, when they made the changes in the algorithms for credit pools, there are two different kinds of algorithms your consumer credit and your mortgage credit, the consumer credit, the most common thing is my FICO score says that I'm a 720 Well, if I pull your score, chances are it's gonna be a 690 because my algorithm is different we use a third party, there are several different third parties that use mortgage algorithms. So your your credit score could be traditionally a little bit lower, they look at the use of credit they
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look at the long term effect so kind of like how long if you had credit and so forth consumer credit is very now this is a Dave Ramsey thing consumer credit is designed for you to go borrow more like Hey, you got good credit, go spend more money on your credit card. Well, that's the beauty of it. That's what they want you to do. So when we say that mortgages hurt your credit when it's poor, that's not true. If it is affected, it's very little to nine, not enough to make a significant impact in what your score is. Now if you go from car dealership to car dealership to different retailers pulling credit opening different credit cards, yeah, that's gonna hurt your score. Too many inquiries on your credit will affect your score, but getting a mortgage pool to see what your score is, or to see if you qualify does not affect your score. That is a myth. The second thing about it is getting denied for a loan for debt on your credit, heard that several times if I get denied, that's going to be reported on my credit. No, no, it will not be on your credit. Myth number five is getting a mortgage pool will affect your score that is just not true. Myth number six. And the final myth for this week, if you do a 30 year fixed loan and you owe $200,000 on your home, and you make the minimum payment for 30 years, yes, it is a 30 year loan, paying your loan off early is allowed. You only owe interest on what you owe. So the faster you make your payments, the less interest you owe. So there's no set way to do it. You can do it any way you want. If you want extra payment a year, yes, you'll pay your loan off earlier a double your payment the whole two times a month thing Well, that's the same thing is one extra payment a year because there's 12 months but there's 52 weeks, you divide it by two, then you're you're basically making 13 payments. I mean that's that's how that works. But paying your your loan off early is not a penalisation you're allowed to pay it off as fast as you want you do not start the amortization over if you refinance, if you keep making the same payments the 30 year is designed that if you make that particular payment that you are required to make and that is the only payment that you make on the very minimum, it will take you 30 years to pay it off. They only charge the interest on what you owe. So the less you owe the less interest they charge. So every time you make a payment you basically escalate the amount of principal that has been paid down the mortgage. So then therefore you can pay the mortgage off. So again, the six myths are interest rate is everything not true. 20% down is the best loan program. No, you got to find the best loan program for you must have perfect credit. No, nobody is perfect. There are loan programs designed to help you get into your first home. The next myth applying for a mortgage will hurt your credit does not hurt your credit is seeking information in order for you to be able to find the American dream will it affect your credit very little for a very short amount of time. And then of course the last is the infamous you can pay a loan off as fast as you want. There are no prepayment penalties if your mortgage does have a prepayment penalty on it. Don't close on that thing. Find a better mortgage. It's john Haynes with lending path mortgage. Thank you so much for tuning into big john talks calm my nmls is 33515 for guys tune in next we're going to talk a little bit about the 30 year versus 15 year I'm gonna have a special guest on here that has a different opinion than me. We'll see who comes out on top on that he's so much for tuning in and I look forward to speaking to you. Thanks for listening to big john talks. Check out more episodes in bigjohntalks.com