Ron Caruthers 0:00
Today we are going to chat about everything related to mortgages, especially in this crazy market right now that we have going on with interest rates rising and people over bidding by $100,000. Minimum. And today we have Matt Shamblin of that, what's the name of your company?
Unknown Speaker 0:21
It is primary residential mortgage.
Ron Caruthers 0:23
Alright, so Matt's been around that. And I've known that family for not How long have I known your family? Like 20 years, right? And yours? Yeah, yeah, sure. It was originally run by not my dad and his uncle. I think Matt's kind of the torch has been passed along. So I think it's fair to say Matt's grown up around the mortgage business. And like I said, now we're in a little bit of a crazy time right now, Matt was said, right. Let's dive right into it. First things first, interest rates are going through the roof. What do you think's gonna happen next?
Unknown Speaker 0:58
Well, yeah, I mean, if anybody really there's a lot of hand wringing in the industry about what the next like 6090 days looks like. One of the things that we're seeing right now is, like Fannie and Freddie are
Ron Caruthers 1:12
unexploited exploit it sounds like they're five map. Yeah, sorry.
Unknown Speaker 1:17
So Fannie, Fannie Mae and Freddie Mac, they're, they're the two government sponsored entities. So they ensure in back a large portion of all the loans in our country that get funded every day. So they kind of the people that help us set our interest rate markers, what they'll insure what they won't insure. The interest. The interesting thing right now is, as our rates have continued to, to rise quickly, they have kind of drawn a line in the sand on rates that they're allowing us to sell. So what that means is, even though rates maybe should be close to 6%, they're only letting us for six and a half percent, they're thrown releasing rates into the mid fives, to the higher fives. And I think the reasoning behind that, if we can look into a crystal ball is maybe they feel through their, their economists that this may be the, the, the ocean floor of rates, and we're going to maybe start bouncing back up and not letting people lock into rates that will immediately be outside of the market too high. And so we've had actually, for the first time, and probably since Christmas, a positive weekend rates like total, not a lot positive, but at least a little bit of a bounce. And so I don't think there's going to be a run where rates go flying back down. But it'd be nice if we had some settling into the marketplace. Because there's just a lot of mean, when you when you go from really the low 3% range around Christmas to the high 5% range now and about four and a half months. That's, that's pretty unprecedented. So people are trying to figure out, kind of get ahead of it. Either way, they're short the market or, or not. So really, I think rates I'm a maybe a positive thinker. I think rates are in the midst of stabilizing, which is a positive thing. For all sides. Yep.
Ron Caruthers 3:10
And when they stabilize, what does that mean, in English? Does that mean they stay at 5%? They stay at 6%? Get back down to where they were?
Unknown Speaker 3:18
What is that? Yeah, in any kind of market run where it's a positive or negative run. Usually when they they hit the the bottom floor, the top floor, there's usually a bounce back a different directions, a smaller one. So you know, if rates right now are in the mid to high fives, my thought processes, maybe they bounced to the low fives, and then kind of settle settle there for the time being unless, you know, there's always other margin constraints. I don't think anybody in January or February or December thought this Russia Ukraine thing was going to happen. And you know, that puts a different strain on markets too. And so, but I think in my mind, I think we're maybe seeing even in the last two weeks, like a settling, which means like, rates might get a little bit better. But then kind of flatline if that makes sense. They're not going to be such like a like right now we can do kind of jokes. When you look at the mortgage market, it was an EKG, you'd be having a heart attack because it's just up down up down every day. And it's usually not It's usually more of a wave if it gets in my head. We're seeing it like this every day. And it's very shocking, like swing so boy, we'd love to eight on any market. We'd like to find some normality over a long period of time so people can kind
Ron Caruthers 4:30
of settle it. Okay, so by the way, Dominic without you here to start the show. I totally butchered it. I did not introduce the show properly. I dove right into it. But this is the make more cheap more show. For those of you just tuning in. We chat myself and Dominic of ropers advisors have Matt Shanley and on today's our guests but we chat about all things related to money. And we had a great show last week talking about buying houses and the crazy market but all of our quit Questions related around mortgages, or I won't say a lot of them, but the majority of them related around mortgages and what to do so that shambling a primer as mortgage, we got on here to answer those questions. So, so now, what advice would you give someone right now that's getting ready to buy a house? That is like, I don't I was planning on a 4% rate now going to 5% rate, what what advice are you giving everybody right now?
Unknown Speaker 5:29
You know, for us, one of the things we've always taught even in in any kind of market, I'm not gonna say that rate is important. But it isn't the marker that I would go on for how to make a decision. Because ultimately, like sale, price, loan, program, all of that stuff, interest rate is all important. But your monthly payment is what actually comes out of your budget like that actually affects your day to day life. And so we have a lot of families that will will give us a, we want to work towards a range, like I feel comfortable at $2,400 a month, or 90 $100 or $4,000 a month, whatever your budget is. And then wherever the rates kind of fall in line, and also with property taxes and insurance will kind of reverse engineer into a place where like, Hey, this is a living, breathing thing. Like maybe right now you're looking at, you know, 750 to 900. But rates go up now, you're really, maybe you want to stick away from that 900 more 850 and below and, and so we want to, because, as we know, with, with most people, that cashflow is so important, because that is our ability to save for retirement, that's your ability to live your life. And so we want to think about it more than a monthly payments since then just be like, well, because most people don't know the difference on a half a million dollars between 4% and 5%. That's it see, it seems terrible, and it's not great. But depending on what we can do, or, you know, some of the things that happen now is you're also selling your home, generally for more than it's ever been worth. So maybe a down payment access to you. So yeah, it's gonna be a worst payment. But it's offset maybe by, you know, an extra 10% down you can put and so it's definitely not ideal, you know, market conditions, I won't lie to anybody here. But really understanding product and placement, downpayment, mortgage insurance, there's all of these things. Even I will tell you, I haven't sold an arm in a decade. And then about a week, and about a week and a half ago, we started seeing arm products being released in the mark, by
Ron Caruthers 7:33
the way, just so you guys know, because that is becoming code here. Sorry, my arm is adjustable rate mortgage. So meaning rather than like a 30 year fixed or 15 year fixed, which, which really, I haven't seen any of those on the market in about 12 to 14 years since the whole kind of mortgage meltdown, if any of you guys saw The Big Short, where you saw kind of where they were talking about them. By the way, if you guys have not seen The Big Short create movie, you guys need to see the big short because it explains what happened in the 2008 kind of monster meltdown of all the markets. So I'm kind of looking up at people getting nervous a little bit on Twitter about the market right now. It's like kids as having not even a real market meltdown. So like my grandpa back in my day, you can't we had a real meltdown. But anyway, okay, so back to the adjustable rate mortgages. Matt? Yeah, you're starting to see those again. So what is the advantage of an adjustable rate mortgage there.
Unknown Speaker 8:36
So, you know, one of the things that's an advantage is, generally speaking, if the market is at mid fives, and adjustable rate mortgage is gonna give you some interest rate relief, so your rates gonna be a little lower, the offset of that is instead of being fixed at that rate for 30 years, you can choose a term of being fixed for five or seven or 10 years. But after that, that fixed period ends, you go into an adjustable period. So that means your rate can change depending on the product by month or by year. And it changes within a pre prescribed range. So that introduces volatility down the road. And so one of the things that was a part of the mortgage crash in 2008 2009, and in the years preceding that was a lot of people it was a more in vogue product, it was about 10 to 12% of our home market bill the place, we're in these adjustable rates. And the the assumption is Oh, my house is always going to be worth more down the road. So I'll head this equity build up, and I can get into a debt I can run to safety and five or seven years old, better product. Well, yeah, we had a recession values. Yeah, that didn't happen. Yes. So those kinds of loans have the volatility to kind of blow up if you get laid off and your rates higher and things happen. So while it can be a good release, a relief for people if, hey, you know what if I'm at five and a half and I get you a seven or 10 year ARM at 5% It's not a that product, it just needs to be really well explained to the borrowers making sure they understand the ramifications of it, it's, there's a positive, and there's a volatility aspect to it. And so as long as you're okay with both of those things, it can be a great viable product. And so when markets get, you know, interrupted, like they are now with higher rates, and really, you're seeing a lot of, like volume lead the industry, so people that are, you know, there's just less loans going out there because there's less inventory. Investors and banks are starting to introduce different products to see if we can entice more volume and back into the industry. And so that's a, that's a watchful kind of eye thing, because that happens, it goes out of control, then people get put in the program loan programs, that is, you know, do that could blow up on them. And then that can kind of really exacerbate a recession by people were foreclosed and kind of like when the mortgage crisis happened.
Ron Caruthers 10:53
Okay, so what would you advise? What would you what is the price differential right now, if my 30 year fixed is going to be five, five and a quarter percent, or five and a half, whatever? What what could I reasonably expect on an adjustable rate mortgage?
Unknown Speaker 11:07
Probably right, probably around five, it's usually about a half percent lower. And so when you're looking at like a half a million dollar home, or half million dollar loans, loan amount of half percent, in interest rate is probably going to run you about 180 to 200 bucks a month in difference, so that's a good value, but you're offsetting 30 years with security for 20.
Ron Caruthers 11:31
Yeah, taking some risks there. And of course, again, you can refinance, the triple where the mortgage adjusts, but it requires you to have a job yet, because I've said all the time, a mortgage is not a loan against your house, it's a loan on your income secured by your house. And so if you don't have any income, then we got a problem. If somebody got sick or lost a job, you lose that ability. And we had that happen a lot in 2008, where people were laid off their jobs and then want to do it their their mortgages begin to adjust, stop. And they're like, I want to refinance. It's like you can't and your entire industry, ran for the hills and wouldn't make loans for a while. Right. Yeah. Yeah. So we love Matt. But yeah, you know, bankers are conservative lot. And they weren't, they weren't gone.
Unknown Speaker 12:27
So. And I think too, like, I do feel if I can put like an economist hat on, I think we're due for like a correction kind of in all markets, we're seeing it in the stock market. At some point, homebuyers are gonna have to kind of level out I mean, we've had like, 30% growth over a 24 month period. That's just unheard of in any time in the history of our country. So I think some some reality needs to hit our markets. The good thing is, just so everybody doesn't think I'm saying, Hey, it's 2008. Again, I don't believe that because almost everybody is in I mean, upper 90% of people are in traditional 30 year fixed mortgages. So the only way that we would have a really crazy run on on that stuff, is if unemployment like gets way high double digit like 1215 20% like a reflect Great Depression type situation. Okay, then it's gonna reverberate, but for the most part, people have locked into really low interest rates for the last two years. And so and then aren't going to change. So they should be able to wait to the storm, but I think that is going to come down. But everything else is expensive gas. Gas is four bucks in Ohio. It's probably how are you?
Ron Caruthers 13:42
Yeah, that's high. $107 To fill my car the other day. 16 gallons. So So what are you advising? What are you advising people right now?
Unknown Speaker 13:53
You know, to me, like, one of the things that we've always worked on, Brian is, and I think it's the biggest mistake in most consumers life is they don't bring their financial advisor in the conversation of their home.
Ron Caruthers 14:05
They like what you're saying, man. Oh, man. Yeah. Well,
Unknown Speaker 14:08
we, I mean, we've worked with, I've worked with over 100 of your clients, at least and, and the reason is, they think like, mortgage bank, mortgage goes to the bank. Retirement goes to planner. But neither of those teams talk to each other. Yeah. And so when you're gonna stop that, yeah. And so when you're, when you're both doing what you think is right, for the borrower without communicating, you're gonna step on each other's toes, you're gonna pitch a 15 year mortgage, not knowing that they're not saving enough for retirement already. All of these things and so what I will tell the consumers get with a lender that and get with your advisor and bring and make yourself like a like a triumvirate to understand, hey, I want to buy a house. I want to move up. I want to move out. So I'm gonna
Ron Caruthers 14:52
look up tram for it so we can explain some of that good. Good luck Yeah, tea. We needed. We needed dumber mortgage guy on next time it speaks English. That that all went to college.
Unknown Speaker 15:13
linebacker right? No. Yeah, well, yeah, decades ago but yeah, I would tell her
Ron Caruthers 15:18
when he got hit by Matt. I'm just saying guys walk I think Grace is the great point around we've talked about this a lot in in our our discussions in past shows the more Pete Moore Show is like, we've talked about this idea that you got to have your advisors in on it, your tax guy should be in on your conversations, even when you buy a car. I mean, I was at Ron's office last week after we did the show. And we were talking about something I was like, Oh, hey, by the way bottom and wants to buy a Tesla. If I was my wife, you want to buy a Tesla? How can I register that? And he was like, What's your corporate structure? And you know, it's just that discussion of like, Alright, cool, then then it's you know, that's what so then talking to your but then yeah, you're right. I don't know that I thought so you said it. And then I was like, Duh. But like I don't know if I've talked to my you know, Ron, or a tax guy or a financial planner when I've done my mortgage, but everybody has to come together. Like you're you have to have a finance team. And it's something that's big when you're especially and what we'll talk about self employed people here in a minute, maybe some of the sound off in the comments. If you're self employed, let us know in the comments because we want to we want to take some of this your direction here in a second. But when you're when you're running a business, if you want to go sell that business at some point, exit that business, one of the things people will always advise you is have your team, your know your attorney, your tax person, your financial adviser ever because everybody's gonna have everybody's gonna have an opinion about selling your business. But it actually applies even if you're not self employed as well, like you should have that. You know that that team behind you to support you in all your financial decisions. So great advice, man. Great, so she's self employed. Hey, by the way, for those of you just joining this was the make more keep more show. Guys are jumping on late. We'll post the show after the thing. I'm Ron Carruthers. That's Dominic of real business advisors. And then today with us we have Matt a primer as mortgage. Matt Shamblin if you guys want to talk to him, by the way, when the show's done, send him nudes. Just go for it. Jump right in his DMS. He loves it and absolutely abused him. Actually, all of that. So let's so I want to chat before Dominic, before we get to the self employed. Sorry, Rachel, you ought to wait a minute. And proven by wisdom. There was a question that we got in there, but it slipped by so fast. I didn't see it. I want to jump on that. I want to talk about downpayment 15 versus 30. Then we're gonna go to self self employed
Unknown Speaker 17:46
downpayment First,
Ron Caruthers 17:48
hold on, so I'm gonna guess if I have the questionnaire you will scroll back and grab that I'm not I'm not with her. So I'll have to find out. I'm where I'm up in Marina Del Rey right now. Do we need to chat? You're like not with her is there so no, not not live or? Die? Yeah. Get her wherever she wants. If you don't want to die, or Yvonne is Italian old school hardcore Italian and you did not mess with Ivana. No, no, no, no, no. Forget that question for a moment. Sorry. Whoever asked it. It was a good one. It just went by too fast. Yeah, I think it was a Yeah. Somebody reposted because I think he's on here every week or she are lovely. Lovely. JP or whatever posted that question so reposted if we if we missed it, so please, don't mind so sorry. Oh, just texted it to me. But hold on. Okay, beautiful. Well, grab it back. Hang tight. For one second. We'll get to it. I got it. So
we have dead air. Okay, Dominic just got kicked off. By the way for someone asking John on here got cut off for a second for someone asking if it's recorded. It is. I posted about 10 minutes after the show. It just takes a few minutes to render and upload. Okay. All right. Thank you there. There's the 30. Why did the arm return after being gone for so long? And does the risk really outweigh the return?
Unknown Speaker 19:08
My question stay on that I got my own opinion. But go Yeah, go for it. It's I think it's an it's a question that answered itself. And the second part, the return of it is because of there's just a lack of volume in our industry. So think of it this way in mortgages and lending. If there's a lot of volume on like when rates are really low, people generally just run to the fixed 30 year price because it's it's the most stable and it's great. And so there's no need for extra products and everyone's kind of just doing a 30 year fix or 20 year fixed. But when rates go up, generally there's less volume and urgency less loans being closed. And so when that happens, these banks because they are for profit, will and investors are for profits, they will come up with different things that they'll look at the market today. If we reintroduce the seven year old with a more competitive price, we can maybe get more market share with it, knowing that that could entice somebody that either doesn't qualify or just walked away because they didn't like their rate to exclude. There's a product here that I like, it is very, it is much more risky. But it isn't a product that can't be utilized, it just has to be utilized well, so what I mean by that is on an arm, I would definitely only do an arm, if I have a, I have a pretty solid downpayment percentage, I wouldn't do like an arm on a 5% down. Because if there's a volatility in the market and value flips, you're immediately negative average, like equity, meaning you owe more than it's worth, which also means
Ron Caruthers 20:41
you can't, which also means you can't refinance, that Adjustable Rate begins to jump off, that's where you get into trouble there. Or
Unknown Speaker 20:50
I would look at somebody that's like, Man, I just, I bought my house for a mid, and I sold it for a ton. And I found my dream home. But the rates high put 30% down or even sometimes more. Yeah, the arms fine there, because you're going to still pay off principal, those seven to 10 years. But when it goes to the adjustable period, you'll have even if there is a market downturn of your value performance five or 10% less than you bought it, you'll still have equity space to kind of get into a fixed product. And so
Ron Caruthers 21:23
it's more and you're really, it's really, your game upside rates are gonna go lower at some point in the future, or you're not going to be in the house when the rate begins to adjust the other direction. And just for some historical perspective, Matt, what is the highest interest rates ever gone?
Unknown Speaker 21:42
Well, I have to look at a chart for that. I mean, I got in the mortgage industry in 2007. My dad, you know, company, you're like John. Yeah, you know, thing.
Ron Caruthers 21:51
Let me tell you back in the 70s, in the early 80s, mortgages were like 14 and 15 and 18%. So don't forget, like, if you guys have only been around you guys watching this sound like my grandpa again? You know, if you guys don't know, I mean, inflation. Yeah, nine 10%. Inflation suck. It got up to 15 16% for a brief period in the late 70s, early 80s. There were actually gas lines, because there wasn't enough gas, you had to wait in line for that. So now, in fairness, CDs, were paying 15 to 18% life insurance contracts. Okay, something similar. So it all rose and it all fell. But the gamble that will go back to three and 4% interest, it is more likely that it will go up to six, seven and 8% in the future. That's kind of the way I would go so lovely. CJP I wouldn't do it. Unless I got a much bigger. Yeah. Spread. I got paid to let me in for three and a half, three for seven years. Sorry, guys. We're getting to sdg&e trucks through them by not sure what's going on. But dude, there's a ton of them. Alright, well, my powers working for now. So we'll be good. What do you what's the least someone can get in on a down payment.
Unknown Speaker 23:10
That so? Yeah, so one of the things I mean, I know that this this, this probably has a national reach. So there are some states specific that we call them DPS downpayment assistance programs that you can research and your loan officer should be able to know them. So there are loans as little as 0% down. downpayment assistance generally are like grant programs that have pretty specific qualifications. And they're usually for like a first time homebuyer or a kind of lower third of the market purchase price. But please investigate those. As far as like conventionally speaking, if you're a first time homebuyer, you can put as little as 3% down on a conventional loan. Or if it's not a first time homebuyer, you put 5% down FHA three and a half percent. The reason for the difference between a conventional and FHA. FHA allows for lower credit scores, but they also have higher mortgage insurance. And there's also an added cost your closing costs that gets financed, so your start loan amounts higher. And so FHA is more for like, hey, you know what my credit is, you know, middle, the low six hundreds. And I don't have a lot of cash and reserve, it's got a lot more expanded requirements, a conventional is more of, hey, my credit score is 680. And above, and I have at least 5% down, that's gonna have a lower mortgage insurance monthly premium, because if you don't have 20%, down, you're gonna have that extra added payment of mortgage mortgage. Yep, yeah. So those are the two main products. Now if you're a veteran or the armed services, and we appreciate your service and one of the things that our country and our government has done is created a VA loan. VA loans are 100% financed, you have no mortgage insurance, you can buy a home, exactly have no money down. You can even ask the seller concessions so there's no money out of your pocket, your closing costs get covered So one of the questions we always ask our clients is, are you a veteran? Because sometimes veterans don't even know the benefits that they've gained? Yeah. And so we want to make sure that we are making sure that they know that they're not missing out on a product and putting money down when they don't have to, or they don't have to, and about what are the higher limits
Ron Caruthers 25:19
on that, like in California, if if that was the veteran, which I'm not? Or going FHA, what, like, how much house can I buy with one of those programs.
Unknown Speaker 25:30
So the thing about, so FHA, it goes by your county, okay, there's a county limit. So, you know, your San Diego county's your LA County's your San Francisco counties, all those, the higher dollar ones, I want to say it's 825 125,000. And that's the loan amount. And that's the purchase price. VA actually doesn't have a ceiling, what they got was there's there's a 0% down payment up to the county lending, limit that FHA number, and then if you buy anything above that, there's like a calculation that you have to have a percentage of that amount, be down payment.
Ron Caruthers 26:05
So like, if you buy a 1.5 million or a house and your county is at 800,000, you're gonna have to put 20% down of the difference. I know that's really getting in the weeds. But that makes sense. That's, yeah, so So and what VA is great. Yep. And what I was gonna say is, the lesson here is just make sure you're talking to somebody who knows this stuff. Yeah, because this is one of the biggest decisions you will make well, we talk about areas where people lose money unknowingly and unnecessarily. This is one of those areas, and it's the largest taxes are generally the largest, if you're successful. Mortgage is kind of your second largest. And it's the voluntary one, right? Because you get to choose where you live in how much you spend. And so you want to make sure you get this right. Or you could be losing 1000s of dollars of interest and fees and costs and all those sorts of effects. What do you recommend your clients do? Not as far as putting a lot down a little down? What do you tell them?
Unknown Speaker 27:04
You know, it's one of those things that I think even as a financial adviser, I can you know, I've known you guys for so many years and work with Iran, like, you know, we have best practices, but there's no like everybody fits in the same exact box, depending on where you're at where you're on. Like, we have a lot of families we work with on like the East Coast and East Coast for a half a million dollars in like New Jersey, your property taxes are probably 20 grand a year. It's outrageous. And so what a lot of families will do is they'll make Jersey
Ron Caruthers 27:33
Yeah, please
Unknown Speaker 27:34
don't move into a school district for their kids to go to school. But he knows that got that thing goes to the other side. They'll sign up in their house and their bank West real estate, because they can get have to, they have to tax and Morehouse so that's just a snare. So it's very dependent on you know, there's a joke, you know, there's there's a lot of like talking get financial bars, like you got to put 20% down, you gotta put 20% down, you got to put 20% down. That's such a fallacy. Think of it this home values have risen 30% In the last two years in most places in the country. So if I had 10% down, and I was trying to say that as a 10% down, guess the Golden Gate is getting moved 500,000 Our houses now 650? Well, no 20% It says you missed a lot more than 500. But if I didn't put 10% down at 500, I got the house. And then I get 250,000 or raise in value. I had a friend in Florida right now. But it's also two, four and a half years ago for 260. And somebody knocked on his door and gave him cash at 820. Now if you'd waited till a 20% down, he would have maybe bought that house at 500. And so maybe make $200,000. But I mean, I joke when there's like you just sold your house for a 401k like you just have like a whole retirement plan out of your house. And yeah, so getting into a home and into a payment that that fits your budget is way more important than saying I gotta get to a specific percentage now. Because the longer you wait, especially in this marketplace, inventory isn't happening like there's they're not building more California, like you can't go west, the ocean. So like
Ron Caruthers 29:11
getting into the home, like yes, we're gonna have a disruption in value, maybe like values in homes are going to generally be stable to positive. And so every year you wait that that price goes up a little bit more. And if it's like right now, it's way out weighing your ability to say like an extra 10% 50 grand, who can save 50 grand a year after taxes without a huge bonus. If you wait a year now that's 65 grand, because the values here's something really to think about. And I want you guys this is some deep level stuff that Matt's talking about right now because that is one of the biggest misconceptions. I say, Well, I don't want to pay PMI. And I gotta have 20% down and like that's really freaking hard to do once you get into the housing market, because over time houses are going to rise in value. That it's easy sell one home buy another because that equity worked for itself, but here's something I want you guys to remember. Your house, your equity in your house, your down payment, let's put it that way is a dead equity item. And what that means is, your house doesn't care if it's financed 100% Or you paid cash for it, it has no idea it's gonna go up or down independent of those factors. And so that equity or that big down payment isn't earning you any money to speak of other than getting you into the home in the first place. And you can't access it without going to somebody like Matt and be like, Man, can I please have the money? And that's why fill out 427 pages. And now our proctologist is going to come up with financially speaking and go through. Yeah, so So we, as a general rule, and yes, they're exceptions to every well, my recommendation to my clients has always been the least amount down, but that you can get in with most amount longest term that they'll let you have, we'll get into 15 versus 30. In a moment, maybe we'll push that to after the self employed piece of it. And never prepaid never send an extra payment to the bank. And the reason is, it doesn't lower your payment. It doesn't lower you don't have access to it. If you change your mind like Hey, guys, I was kidding. I would send you that extra 500 bucks a month. Again, you gotta go back through the process. And it does short your term, but it's on the back end. Yeah. And it doesn't it doesn't lower your interest rate. The bank's not like oh well you know Dominic sending us all these extra insert interest payments. He's a nice boy. We're gonna send him we're gonna lower his interest rate a little bit because bankers are you know, I mean we love math, but bankers are bankers so they will play dumb as long as they can until you make more and by the way, no disrespect intended Matt but Mark Twain was not wrong when he said a banker is a fellow that will lend you as an umbrella when the sun is shining and want it back to second it begins to rain. Yeah, so anyway, so jumping in here real quick just for anybody who's just joining on this is the make more Keith Moore Show I'm Dominic that is run that wave to the crowd run and that's Matt on the ladder to where everybody sees everybody he's in the lower right for me so so anyway, good good to have you all on here we talked all things money this week we're talking about mortgages and sort of a follow up to last week's discussion around real estate real estate investing how to buy your first house how to buy your 20th house how to get the you know where to put money and we have some actually some questions that were from last week which we'll we'll throw in here in the middle of it one throw it throw it towards you, Matt but we we asked earlier how many of you are self employed got a few of us responding for sure. And feel free to let us know if you're self employed. That's a big one when it comes to mortgages, right is as Ron always says, and again if you didn't hear him earlier in the show this is such a great point of mortgage is not a loan on your house a mortgage is a loan on your income secured by your home. So we're what it becomes really tough for self employed people sometimes to get a mortgage I know for my own personal experience, you know, our credit is good, everything's fine. But they're like oh, but we want to see this and all that you know, and you run a business kind of differently. So Matt, what are your What are a couple of suggestions we'll wait for Ron's I have no background noise going on here. I live in a nice quiet street and I've had for San Diego gas and electric trucks go by and now we got the crane going by so I don't know what's going on we do have because my neighborhoods like 65 years old we got the overhead power lines here so Ron's gonna lose power here shortly. Probably but look there's the ocean right there. Yeah, there you go.
So talk to talk to us a little bit MATT What do you suggest like when it comes to we'll talk kind of the diff to different crowds we got you crowded like I haven't I'm self employed right now maybe newer to my my self employment and I want to go by my ex my first house you did that? If you're new to self employment you just did that backwards she shouldn't buy your house self I'm good comparison. Or even if I want to refinance and self employed game talk to me a little
Unknown Speaker 34:35
bit about background or Whelan's? Yeah.
Ron Caruthers 34:37
Okay. Give them any ascertain given says they're screwed but but make it sound nicer than I did?
Unknown Speaker 34:44
Well, I think even in answering that question. I want to start with like, kind of trying to help everybody understand why self employed is a little bit tougher. From an underwriting standpoint, what the goal is looking at so the reason why everyone loves w two versus self employed Is because underwriters are basically trying to mitigate volatility and income. So they're trying to make sure they want you to make eight bucks every minute of every day. And they can chart it out, and they can see it and it's good. But if you have an income that goes like this, like you're in sales where you know, your first quarter is slow, your second quarters, big, third quarter is great. And then the fourth quarter, you go to Jamaica, and they go, Well, what happened? You made 120 grand, but it looks like you stopped making money last two months, and they freak out. And so sometimes there's a lack of common sense. And I totally get that because southern third Baker, the reason they're self employed is because they want to kind of chart their own path in life. And that means they don't work a traditional work schedule or get paid the traditional work way. So to do that, we rely on tax returns, number one. And so if you are for going from like a, I was a school teacher, and I decided I wanted to build guitars, and I started match guitar company last month, but I sold a million dollars worth of guitars, I can't use that income until there's a full 12 month showing on a tax return at least of that income. So we can see what you're not just your revenue, but your cost of goods and how much income and profit you you've delineated. So at least need one year, generally rule of thumb is good for two. But if the first year is solid, we have something to work with. The next thing we do is a lot of people take advantage of extensions for taxes. You know, you don't have to file it last week, like most people, you file them as late as possible to make sure, you know, we understand with especially Ron is a specialist with this with taxes, like taking advantage of the tax code behooves you as a self employed person.
Ron Caruthers 36:38
But yeah, it screws you when you're trying to when you're
Unknown Speaker 36:41
trying. So there's equilibrium. So when I talk to self employed people, a lot of times I'd like to get to him as soon as possible be like, Hey, what is your financial saying, standpoint, right? Now we look at, oh, maybe they're in a great place, that's my house, hey, there's no less like, we kind of went wild with the write offs, you come down too far, I know that you really make 400 grand, but you've only showed 80,000. And you're not gonna be able to qualify for a $900,000 house with $1,000 of income. And so what we'll do is we'll try to gameplay and be like, You know what, if your taxes look like this next year, and you're ready to buy, like, send them in, get your transcripts back, and we'll use those. The other thing we use a lot of times is profit loss statements. And so we'll get that from your just to make sure that your current, you know, if your taxes work for 2020, and now we're in 2022, and you haven't filed your taxes yet, for 2021, we're going to need like a p&l or profit loss on your 2021 just to make sure, in the last 12 months, businesses operate normally, we'd love it to be up but as long as it's stable, it's good. So what I to answer the question specifically is, you know, if you're going to buy a house, you have to be serious about paying taxes in that timeframe. Meaning like your tax bill, your your income taxes, you're gonna have to show a reasonable amount of income, or you get with me and say, Hey, Matt, I need to look into six to $800,000 range, because that's what's going in my area for where I want to live. And then we can reverse engineer like, hey, how much down payment do we utilize? How little do we do you know, how much income do you have to show next year, and then we can work with you and your CPA to make sure you don't pay $1 too much in income taxes, but also you don't short yourself by 10 grand a year. And that's like, Oops, you can't buy it either. So we just want to kind of have a live conversation with people who are doing it because it is a somewhat of a moving target and specific to each case. That makes sense.
Ron Caruthers 38:26
Yeah, I would add by the way you can I have a question for you. But also from the tax side of things, we can always show a couple higher years of income and then if we really did leave off a bunch of deductions and things like that to get that higher income, we can always go back and fix that later on the tax side. So nothing illegal I don't know if the banker you knows bankers are gonna like it but once your deal is done, they're done. So we can go back the other way and actually there's about five or six I've got a white paper of five or six other strategies to to be self employed and still be able to buy a house and that is our downpayment number where the bankers are just like screw it at this down payment number we don't want to want to look at your tax returns like you're good whatever was happen or their morals get a lot looser
Unknown Speaker 39:22
so just so you know, my your phone's cut out during your last conversation so I can probably fries or probably four work for advisor or not advise what you just said that's between you and your financial advisor and accountant. We don't get involved with that but yeah, so is there a magic number
Ron Caruthers 39:41
there isn't when we're talking conventional or jumbo lending I have to at least have some type of assessment of income now. What I will say as for height No. magic number is 100% down. Yeah, you're just like cash then we don't care
Unknown Speaker 39:54
because so I net worth people depending on it. So there's something called a up Asset depletion calculation I can do. So if you have money in the bank, so let's say I got $5 million in some type of business fund or managed account, whatever insurance you have that I can take that amount of money. And what they do is the calculation is pretty simple, I have to take half of that money, so 5,000,002.5. And then I divide that by 360 payments, like the length of the mortgage, and whatever that number is, that's I can use that as like, quote, unquote, income. All right, a lot of mortgage, people don't know that we do that a lot for a lot of self employed people. So let's say you have $5 million in the bank or, you know, whatever inherited this, and you're, you know, you're sitting on it, we can use that as a, as a supplement saying, Hey, I wrote my business income down to, you know, 10 grand a month. But I have four and a half million dollars. And if I deplete that, I get another $7,000 a month in income, I don't have to spend it or put it in an annuity to get started. It's called an asset depletion calculation, we can do that. And then that adds usable income to the calculation. So that's not always an option for everybody. And it's, it's pretty, you take what the number is cut in half, and then divided by 360. So it beats it down pretty far. But we've actually had success with adding the people, you know, they're buying their retirement home, and they're in their late 50s. They, they've accumulated a good amount of savings through retirement, we can actually use that as an illustration of like, hey, you know what, we're buying a 7000 Our house but the guy's got former the family, the married couple, or the white lady's got $3 million. She can write a check for the house, but she wants to utilize long term financing. There's a lot of times there's a way for us to kind of see that through an underwriting. Interesting, good to know.
Ron Caruthers 41:40
Hope you guys were taking notes. By the way, while we're on one thing real quickly. I know poor Dominic, we're not letting you get a word in edgewise today. But just also keep in mind that there is something called the tax code, there's something called acquisition indebtedness. And all that means is under the new well, they're not technically new anymore. But the newest set of IRS codes, you can from 2018, you can only write off the mortgage interest related to your acquisition indebtedness, meaning if you pay cash for a house to avoid just like it, you don't want to deal with Matt, even though maptive super nice guy. And then later go and want to refinance to cash out to pull some of that cash out. And let a portion of it up to I think 100 or 150,000 can be used to remodel your house or make improvements. And you can turn around and write off the interest on that portion of it. But let's say you put 500 or 600,000 out, you are not allowed to write that interest off because it was not acquisition indebtedness. So just so you guys know, we've run into that a couple of times over the last year, where people are like, nobody told me this. You know, I just thought if I had mortgage interest, I could write it off. It's like, yeah, because you didn't use it to buy the place to acquire it. You're screwed on that. Sorry to derail the conversation, Jen. And I just went in, by the way, that's important. Dominic, I'll save Dominic's from seeing this this is the make more keyboard podcast, or Instagram Live. I don't know what they we know that make more keyboard part. We're not really sure about what comes after that. But I Ron Carruthers, that's Dominic Cummins, a real business advisors, and then that we have our guest today, Matt Shanley and a primer as mortgage and again, if you want to chat to Matt afterwards, you know, like jumping in his DMS and anyway tell him tell him you think the Browns are gonna do great this year? Because not just team pastor. What happened with Baker Mayfield like Why did all of a sudden is everybody hating on Baker Mayfield I cannot figure that out. I didn't
Unknown Speaker 43:46
know that there's all these jokes about him putting like a Zillow listing on the brown stadium because he did all those like virtual progressive commercials.
Ron Caruthers 43:56
All right, back to mortgage stocks. Yeah. So we got a couple of questions over some good wire where then I want to talk about 15 versus 30 year mortgage. Great. Yeah. So one of the one of the questions that came up and we talked about this a little bit and a little bit about the last year or last episode, we talked about it for buying a home but just some other things as somebody said, what what should first time homebuyers be looking
Unknown Speaker 44:21
for
Ron Caruthers 44:21
what's what's a good strategy? So you just talked about like, self employed like hey, talk to your advisor, get you involved early, get your tax returns, right figure out some of that stuff so that you can show the right kind of income. But the but then what if I'm just gonna go buy my first house and I'm looking like we already talked about one things we did talk about, you probably don't have to save as much as you think you need to say but then what else would you say that just gives me prep for that?
Unknown Speaker 44:46
You know, for the home buying process like we we talked about beginning like trying to adviser, loan officer like, get those people established early, come up with a game plan, and then honestly, do We'll make an emotional decision. Bingo, I know it's a hot thing and go, there's so much stuff going on right now where people are lighting cash on fire buying houses overvalued, giving appraisal gaps, which is means if it appraises for 100,000. But I bought it for 130. I'll give you 30 grand, and then I'll put my downpayment down. Yeah, that's a, that's a pretty highly leveraged position you're walking into. So I think the biggest thing is, if you involve your advisor, who's got your long term plan, your advisor, Bob, a loan officer that has relationship with your advisor, so they're on the same page, and then bring your real estate agent in there too. So they don't start showing you houses. Remember real estate agent, we love them, but they're there. They're paid on commission. So they're going to use a your budgets 500 Guess what, they're going to show you the house at 540. Right? Yes, you know, and, or what we can say is, hey, at the current marketplace, because of the payment I want, it's gotta be here, make sure everybody's on the same team. And you know, like I said, begin before, downpayment assistance programs every state has them. For instance, like the state of Maryland has this ridiculous one, which is amazing. If you're a first time homebuyer and you have college loans, if you meet this requirement, it's pretty, pretty strict. But if you do meet the requirements, they will actually let you buy a house for I think it's 1% down, but they will then actually pay off up to $30,000 of student loans that were State student loans. So you can buy a house and liquidate student loans. Through this program, if you qualify for it. Now, most people just don't know to look at it, or they go to their leg, local bank, and the local bank says FHA, conventional VA, that's what we have. Or within conventional, there's many different programs. Within FHA, there's even renovation loans where you can buy a house that needs some TLC, and kind of finance, some of the upgrades to it. And so there's all of these products that are available to you. My thing is like, don't wait till you find a house on Zillow and go, Oh, no, I need to buy a house tomorrow. Who can who can give me a letter to buy a house, they can't decision that you're going to enter the home buying pool, take your time, bring your advisors all from all sides together on it, make sure that you were marrying correct product to correct need. And like some people like hey, this is where we're two newly people like in a relationship, we don't have any kids, maybe we got a dog, this house is good for now. Or it's like, hey, you know, we just stablished a family, we want to be in the school district I don't and every move, that's a completely different first time homebuyer transaction, then suddenly, they're just like, hey, I want to get I want to stop paying rent. And so make sure but his needs are assessed and on the same page. And that's your best pathway to success. And then don't be emotional, be willing to let go one house because some that's it's outside of their mind about the purchase price,
Ron Caruthers 47:44
that's the best advice that I get my clients too is like, it's a business decision that you're going to be stuck with and living with for a while, particularly if if market values go down, you may not be able to easily sell your house and make a bunch of money on it. And so don't you know, do your best to have a business plan a max price, have your ducks in a row before you go looking and be just stick to that entire picture.
Unknown Speaker 48:13
When you have your advisor and your loan officer and your realtor all know the goal, we can all keep each other accountable to you as a buyer, we can't have the realtor by and show you houses outside your budget. If we all are on the same page, you know, you're not, you're not going to be able to, you know, stretch retirement asset out if your advisor knows why you're doing it. Like it just keeps everybody accountable to what's really right for the borrower and their needs. And then you're gonna win when that happens. But if if one of us is pushing a higher price and telling you Oh, well, we could do this or what if you ask your mom for money, because they don't know the strings that are gonna come attached to that and the emotional side of things. Like it's just being on the same page. And and, you know, I was gonna say this earlier, wealthy people have advised people who are business owners that I know that are multi multi multi millionaires. They don't make a business decision without either if they have a board of directors, but even if that without their financial advisor, their attorney, their accountant, they're not going to just go around there and just make like, oh, well, this feels good. They're gonna make a really smart decision. That's how wealthy people operate. And so you're, you're buying your home is your like, really your first step to generational wealth because you're building equity and an asset that you can utilize later or pass on to your next generation. Act like a wealthy person in that transaction and get your advisement under wraps so you know, what you need to do so it's Coronavirus, same thing so like that. I mean, I'm really passionate about that. But that's I mean, that's how every wealthy person you've ever met. I'm telling you, they got three guys or gals that they have on speed dial when they're making a big decision that everybody we all powwow they all get together and we weigh the pros and cons and then they that person takes that advisement under, you know, under them and they make the decision. Do that as yourself. Even if you're like, Man, I'm a school teacher, I make 80 grand a year. You need an advisor, you should know an attorney, you should you should not I hate said, quote, h&r block, have a good CPA that can help you out and let them know when you're making a big decision. So you have all of your information at your at your waist, to you know, make the right decision?
Ron Caruthers 50:25
Well, I'll tell you, that's such great. I mean, everybody that that is like, right there, we can just end the show. And that would be your one takeaway. I would say, as an entrepreneur, we started our business in 2014, I think it was. And I will tell you over the last couple of years, finally putting the advisor team it's made it that much easier to run the business, because you have some people you talk to on these decisions, because you know, look at us entrepreneurs, we get shiny object syndrome, you know, we get with that thing. Oh my God, that's a great idea. And you get, let me try that and I on your own soil. Exactly. And you get so excited about these ideas. And you think that's really cool. Or you read an article somewhere, and you're like, oh, I can buy that. And that's a write off. And, I mean, there's just so many things that go on. And I think now that like I have, I have kind of an informal board of directors. Now I've got some a couple of guys that I talked to that, you know, are just good friends, highly successful business owners themselves. And they'll be like, Dude, don't do that. That's a bad idea. I've got you know, I call Ron for over 90% of my tax questions. 100% of my tax questions now. You know, so that was that was been even even a couple of years ago, and I didn't have somebody as good as Ron like, just having somebody to run something by and he'd be like, Okay, well, here's a couple things to just consider, oh, shoot, I thought that, like, you just can't know everything as an entrepreneur. And, and now you're my mortgage guy. So sorry, Matt, like you're just gonna have to deal with. And let me tell you,
Unknown Speaker 51:53
I really didn't want that to happen. I was hoping.
Ron Caruthers 51:56
Let me tell you some of them that the one thing I like about that is if Matt tells you, Dominic, and this applies to any of you guys on here, because we've worked with Matt forever. If Matt goes, Listen, man, you know, hey, we're gonna close this loan, Dominique, as long as you do X, Y, and Z for your Nevada, we're gonna close this loan on July 23, at four o'clock in the afternoon, he can tell you that Finnick and we're gonna close it at this interest rate, and your closing costs are going to be this and, and this, you will have a knock on your door at 2:59pm on July 23. And it's going to be a notary, like Okay, Mr. Mrs. Cohen, I need you to sign here, here here to appear in here, and your loans done. And we had a client get pissed one time at math. It was it was some what it was, as the notary was, you know, some freak, they got up the street, you know, just didn't look professional. That wasn't Matt's fault. It was the title company or the escrow company or something screwed that up. But my client called just kind of freaking out. And he's like, what it was as we were pulling some cash to pay for college, and he's just nervous about it. I don't know if I'm like, okay, man, we can start over. But hold on. We pulled his closing sheet out. We pulled the term sheet out that might have given him two months earlier. Line for freaking line. It was too depending. So I'm like, man, what are you like, upset about? And he's like, I'm freaking out. Like, all right. Look, man, I appreciate you admitted they have Yeah, that's cool. Have a drink. Call me in the morning. And, you know, let me know what you want to do. But we can we can start over. But we are starting over and right suit gone out. So I just got I feel compelled to say that, Matt. Because you've earned you've earned that. That trust and respect. Hey, Dominic, I don't know if I cut you off. And if I did, I don't really care. But yeah, we got one last thing here. Which is, and by the way, I've moved inside could Dominic shame me because I have air pods on so I couldn't hear how loud it was because they were noise cancelling. So sorry about that. Are you living running by ready? So anyway? What do you say first of all, Matt, is it harder to qualify for a 15 year mortgage over a 30 year mortgage because of the higher payment?
Unknown Speaker 54:14
Yes. So how we calculate if you're eligible to buy a home like your qualifications, we use something called a debt ratio, your debt to income. So what your monthly payments on your debts are against the income that you receive. So there's a percentage that we have to stay below to qualify, you know, a 15 year mortgage is always going to have a lower interest rate than a 30 year mortgage, but it's going to have a half the term. And so generally speaking, if your mortgage payment on 30 years is 1000, your mortgage payment on 15 years is going to be like 16 or 1700. So you're adding the cost. But one of the things we want to teach our clients we talk to our advisors all the time about this is understanding that a 30 year fixed mortgage mortgage does not have a prepayment penalty. Now, I will make a caveat, it has a prepayment penalty in the first 60 days. So if you buy it, get a third
Ron Caruthers 55:09
figure pay it off in 60 days, what the hell are you getting a mortgage for?
Unknown Speaker 55:13
My job is to get a mortgage and you hit the lottery, go to Aruba for two months or go to Bob come back and pay your mortgage off or whatever they do. But the reason that is that's that's a failsafe for people like it's a fraud failsafe so like I'm not doing a loan that I know is gonna get paid off super quick that I can profit from. So there's no prepayment penalty from all intents and purposes on a 30 year mortgage. And so when I look at it and say, the 30 year mortgage is the lowest payment. And so therefore you have the most cashflow freedom, you can if you choose now, I don't love this idea, but it's available to you and your advisor can advise you whether it's smart or not. You can always pay a 30 year mortgage like a 15. Think of it this way, no, you can always free pace. But that's option to you. The thing is, if you pay a 15 year mortgage like a 30, that is called foreclosure, they take your home, you can't do a 15 year mortgage you go, you know, I'm supposed to pay you 1700. But unless you just pay 1000 a month and just pay it for a longer time they take your house. And so 30 year gives you the leverage and liquidity to make a decision whether to pay your mortgage off quickly or not. But if you it allows you to divert as much funds to retirement or your financial plan that you need. In another time period, you accumulate money on accident, you get an inheritance. And by golly, you don't want to listen to Ron and you want to buy your house, pay your house off, you just write a check for your balance and it's done. There's no prepayment on it. But a 15 year mortgage traps you into a higher payment that can like when you face things like your kids get old enough to go to college, they gave an order they get married. And I don't know if you guys know how expensive weddings are right now. Nobody's nobody's serving KFC at weddings anymore. And so you get yourself with a 15 year mortgage, you go geez, I could have been saving that 800 bucks a month, just in that for the last 15 years. And boy, I would have had $150,000 Even if I just put it under my mattress and didn't even have a plan for it. And all I have is equity and you can't use equity like as a theory to pay for college, like inside your home, you have to pull it back out and play call center, you have to pull it back out and have a new interest rate. So we said you have to qualify
Ron Caruthers 57:24
you have to qualify qualify or which you may not either because of your income changing or you move to self employed or something like that, or because the house went down in value. So just keep in mind, my recommendation number one, I will just throw this in here. And Matt, you can comment again on it is least amount down longest term. And if you truly want to pay it off early, do not lock yourself into a 15 year mortgage, put the money into a side fund, we can get more sophisticated if you did nothing but put it into a s&p 500 index fund. And you got 6% which is probably lower than average. And yeah, markets go up and down. But not the math supports that on any home, you will have enough cash to pay off that house in 13 and a half years. So in other words, on the same dollars, if you just took the difference on the same dollars that you would have a 15 year mortgage, you actually save a year and a half of your payments by doing the 30 and then routing the payments somewhere else because that's how that works. And nobody tells you that Dominic can bounce just hang up on your dog will be will be done in a moment. Don't one thing I'm gonna say is I had a professor in college I got a finance degree, he would make us write two things on the top of every every test. Back when tests were on paper. I know I'm 37.
Unknown Speaker 58:56
And we would always have to say I love leverage and I love liquidity and the 30 year mortgage. It was it was not heroes. It was my faves. It was my global finance professor. And the whole the whole point of it. It's like people are always under cotton businesses are always under capitalized, they have lack of resources, they'll have lack of avenues. And leverage and liquidity provides avenues when things are good or bad growing or waging through bad times. And so there's so many times we've had people call us and say hey, man, I had this 15 year mortgage. Dave Ramsey, I got a photo of him over my bed. And by the way, I'm two years away from paying my house off. And I just got a letter that I got laid off. Can I get some of this equity out? I got 300,000 No, you don't have any income. Because your mortgage is a loan against your income secured by your house. They don't have any leverage, no leverage and liquidity in their lifestyle. So we want to maximize that because maybe that is As you want to do down the road is pay your house off in a lump sum. Or maybe you just look at how much it's grown into, well, if I could write a check to pay off my house today, and I have a loan for it, in theory at that money that I have set aside is growing. I have in theory paid my house off because I have the assets there to do it. And I can control of when I want to do it. Not the bank saying Hey, mister missus. This is when you have to serve up or else Or we're taking it back. And so we want to make sure that we are always like leveraging and look liquid in our finances. And that's what we'd love to help our advisors. Teacher borrowers.
Ron Caruthers 1:00:38
Brilliant. I love it. Excellent, please. Yeah, so I gotta go. That's an excellent time to end the show. Anyways, Dominic take off. I'll wrap this up here. All right, this board keep more podcast with myself. Ron Carruthers and Dominic have real biz advisors and we were with Matt Shandling and a prime res mortgage at Matt Shanley and.com. Or no just that Matt Shandling on Instagram. And that this was a great show. I hope you guys if you thought I'm done with it, please go back and listen to this. There was so much good stuff in there. You're more than welcome. Luckily CJP one. And Dominic and I didn't get a chance to chat about what we're going to talk about next week. But we will make it informative and profitable so you can make more and keep more. Thank you again, Matt for jumping on the show. We really appreciate it. All right. Take care.
Unknown Speaker 1:01:31
Thank you.
Transcribed by https://otter.ai
