Home Mortgages 101 (For First Time Home Buyers)

we’re going to be talking about the ultimate guide to mortgages aka mortgages 101

so a home mortgage or a primary residence mortgage is typically the longest and the largest loan that most people take out

throughout their entire lives a lot of people have basic understanding of what goes into a mortgage

but the more and more i interact with people on social media in my dms or just on twitter for example

i can start to see that they don’t really understand the entire inner workings of a mortgage so in this video we’re going to talk about the four factors that go into a mortgage payment we’re going to talk about the different types of mortgage products out there that way can best suit your needs to know that you’re getting into the best product

possible i’m going to take you through a live demo of my own home affordability spreadsheet

that way we can mess around with the house price the down payment amount the insurance the taxes

all that good stuff and i’m also going to take you through a live demo of an actual amortization schedule between a 15 and a 30 year mortgage

let’s get into it okay so very quickly let’s run through the four

factors that go into a mortgage payment if you understand the acronym of p-i-t-i that simply stands for principal interest taxes and insurance if you’re a real estate investor you know these four letters like the back of your hand

if you don’t let’s run through these very quickly so p

stands for principal this is simply just the amount of money that you owe the bank

for lending you to be able to purchase the house that you’re moving into okay so the example that we’re going to be using for this video

is a 350 000 house and we’re going to be putting 20

down so in the comment section below uh tell me what the down payment amount is if we’re putting down 20 on 350 and what is the mortgage amount going to be you can pause the video here okay so if you answered seventy thousand dollars for the down payment

and you owe 280 on the mortgage that is the correct answer

so moving on what is interest interest is simply just the rate at which you are borrowing the money from the bank you’re paying the bank to borrow their money that is how the bank is compensated okay so the higher risk you are

meaning the lower credit score you are the higher the rate that the bank needs to make in order to compensate themselves for

taking on risk aka you’re going to get a higher interest rate on your mortgage so higher risk higher rate lower risk lower rate the better your credit the lower this interest is going to be so i’ll show you how the affecting the interest numbers

actually affects you in the long term in my spreadsheet later in this video t is taxes this is a no-brainer so property taxes are used to help fund schools

infrastructure government workers things like that

that is why property taxes are a part of owning a home

so these taxes are typically calculated on the assessed value of the home and the lender can actually roll these into your mortgage payment

they’re going to be escrowed meaning they’re going to be set aside in a special account

and once they’re due typically twice a year that’s going to be paid to the municipality that they’re owed so this taxes will actually get rolled into your mortgage payment in most cases and then finally we have insurance so insurance sounds just like

what it is property insurance is if you know a tree falls on your house it’s just like car insurance you’re going to get compensated after some sort of deductible

okay and you pay for it monthly typically however there’s this other thing down here called pmi

which is private mortgage insurance so typically if you put less than 20 percent down on a property

pmi private mortgage insurance is typically there to allow the lender to get some breathing room if you will this doesn’t go towards the principle of your payment it just allows the bank to be able to turn your property into a security and sell that mortgage to other bigger banks

and it also gives them a little bit less risk for taking on that mortgage if you don’t have twenty percent down some cases

uh lenders will allow you to put less money down with no pmi

which we’ll get into right now okay so we have five different types of mortgages there actually are a few more which i’ll list

at the end of this list but these are the five most popular starting with fixed rate mortgages

so fixed rate mortgages i’m sure you’ve heard this this is what most people think of when they

hear mortgages these can be offered typically in

10 15 20 or 30 year increments the most popular

obviously being the 15 and the 30 with the 30 being the most popular overall so this interest rate never changes so if you remember the acronym p-i-t-i principal interest taxes insurance the interest portion of this loan over the course of the term it could be 10 15 30 years

that interest rate never changes that’s why it’s called fixed rate

on the other hand you have number two which is called the adjustable rate mortgage or an

arm so this has a rate that’s fixed for a specific period of time

typically the first number here so you have five years five years i’ll explain that in a second here

it’s fixed for a certain period of time and then it adjusts over time depending on the second number

so for example if we look at a 5-1 arm that means that the first five years is fixed and then it adjusts

annually every year after that so these are typically based on

the one-year treasury bills or libor okay so if you don’t know what libor is it’s just an acronym for london inner bank interbank offered rate so if you want to look at an example of a five five that’s fixed for five years and then it’s also fixed for every five year period

after that it adjusts every five years after that

so this typically benefits people that don’t want to have a mortgage for long or they feel like interest rates are going to be going down and if you’ve been following my channel at all at the time of this recording

you know what i how i feel about interest rates

number three is the fha loan the fha loan is

insured by the federal housing administration this allows down payments all the way down to 3.5 percent so when we talked about a 20 down payment which is the example that we’re going to use

in the beginning of the video and also on the computer this actually allows you to put down three and a half percent so say for example the house is a hundred thousand dollars

if you put three and a half percent down on this what is the number

well simple math tells you that it’s 3 500 bucks and you can get into this property

okay this is typically for people with low credit scores

uh you’re gonna pay pmi the private mortgage insurance that we talked about but it’s a good way for people who have the lower credit scores and not 20 down to get into their first home so fourth is a va mortgage this is just basically insured by the department of veteran affairs

so veteran meaning you know military service people that kind of a thing the nice thing about a va loan is that you don’t have to have any down payment whatsoever you can actually put down zero percent okay so on a hundred thousand dollar house you can put down zero if that makes sense you will have to pay a va funding fee

it changes all the time there’s a table that i can link down in the description below

and there’s also no pmi on this zero percent down payment so basically the va loan is a great way to get into a home with very little money down yes your mortgage payment is going to be higher which will go over in the spreadsheet but you have very little money out of pocket which actually allows you to potentially invest that difference so this is a very good loan and then fifth we have the usda loan this is actually

backed by the department of agriculture yes the

that usda and basically this allows you to get into a home with no down payment as well

however you are limited uh to basically home improvement loans or purchase loans but it has to fall within a certain income limit certain geography limit and then also there’s a

property value cap so you can’t be buying you know mansions in the suburbs with this kind of a loan is typically more rural areas okay

so this benefits people who want to live a little bit more rural

and have a very little down payment out of pocket and finally there are two more loans that i didn’t talk about just because if you need these kinds of loans you’re typically

i don’t want to say well off but you’re buying you know pretty expensive houses or you’re very disciplined with your money and you have a lot of cash so that is a jumbo loan

and then also a interest only mortgage so if you want to learn a little bit more about those feel free to google that

but let’s get into the live demo right now in the home affordability spreadsheet

using our 350 000 house as an example okay thanks for joining me in the second part of the video we’re gonna go through my live home

affordability spreadsheet right here this spreadsheet is actually available for you to get for free through my newsletter

so if you sign up to the newsletter it comes in 24 hours

or you can get it instantly if you become a patron it’s literally four dollars it’s the best four dollars you’ll ever spend

because this could potentially save you tens of thousands if not hundreds of thousands of dollars

okay so let’s run through this real quick so um if you want to watch the original video where i use this you can click on the link right here when you get the spreadsheet or you can literally just refer to this video obviously so earlier in this video we talked about this couple or this individual buying a three hundred fifty thousand dollar house which you can see right here

they’re putting down twenty percent which results in a seventy thousand dollar down payment

uh that actually results in a principal loan amount or a mortgage amount of two hundred and eighty thousand dollars so if you remember the acronym that we talked about with the p

i t i uh that is simply just the p in that acronym

so moving forward you can see here that the interest rate that we’re going to use is 2.89

and we’re also going to use that on a 30 year fixed rate mortgage

so typically the most popular mortgage that is used by people out there is a 30-year mortgage

and i’ll play around with these numbers you can see how everything changes uh we’re going with 12 payments per year aka once a month which results in a mortgage payment of 1 164

um the interest costs over this 30 years which people never think about is actually a hundred thirty nine thousand dollars uh so let that sink in if you put if you pay the minimum amount over 30 years

your interest on this loan is going to be a hundred thirty nine thousand dollars

resulting in a total cash outlay of four hundred and nineteen thousand dollars um outside of the down payment okay it’s basically just the loan amount plus the interest gets you this number right here now what most calculators don’t take into

um calculation is that they don’t ask you for the amount of taxes so let’s just take this home let’s pretend like we’re in a certain county that charges you know

x amount of dollars let’s just call it 6500 per year now

the insurance on this house will just use a thousand as easy numbers and maybe a little bit more depending on if you live in like a flood zone or a hurricane area

or if you’re somewhere in the midwest with tornadoes i don’t know but we’ll just use a thousand bucks for easy numbers

this is all editable uh let’s assume that this house is not in an hoa if you did have an hoa

you can bump it up right here 25 bucks a month for example if you’re in california

here’s 300 i’m just going to keep it at zero right now so now what this spits out is

right here you can see that this cell is incorporating

all these numbers right here and i’m just exploding that by double clicking it

you’re getting mortgage taxes insurance and hoa monthly payment of 1789.

and i basically added four hundred dollars of utilities here

you can change that right here in the top left you can make it 300 you can make it you know 500 you can make it whatever you want i just used 400 as a nice even number

and that’s typically what utilities are where i live maybe a little bit less but that’s not the point

so anyway this spits out two different numbers you have

everything all in right here this is a majority of your housing costs and then you have just the

mortgage tax insurance and hoa now what we have

over in columns uh g through i actually provided three different scenarios of person one

person two and any potential income so if you’re a single person

you basically put zero you make 50 grand a year this is what the numbers look like okay

very simple let’s just pretend like we have a couple here

um and they both make equally fifty thousand dollars a year

this make gives you a gross income of a hundred thousand dollars

this is where you can edit this if you want the total net

income all these numbers are based on net income this is where a lot of people get into a lot of trouble

because they start going off gross income which is not correct okay so i basically took the gross income multiplied it by

0.68 which you can see up here and that is a fair estimation of

taxes you know insurance you know all that stuff that comes out of your paycheck

you know no one really makes 100 of what they um their annual salary is okay so if you want to adjust that accordingly you can do so in the top left

this results in a monthly net income based on these numbers of roughly five thousand

six hundred sixty seven dollars now the beauty of this is that you can actually see

what percentage of the mortgage income so you can see here with the mortgage taxes insurance and hoa

are taking up of your net income and then you can see the second number with the all-in number with utilities so you can see what pretty much your all-in housing cost is going to be in terms of monthly net income okay the nice thing about this is that it shows you what the monthly income is after your housing expense so this is what these people have

uh monthly net minus the all in with the utilities

and then the the final row down here is actually saying

okay you make a hundred grand a year uh but the house costs 350 so it’s 3.5 times your income makes sense and now the reason i provided three different scenarios is because

what if you get a raise and the other person you know changes their career and doubles their income

and you can just mess around with this so on and so forth the thing is though the reason why i’m showing you this is not to you know just advertise the spreadsheet i couldn’t care less about that

it’s by showing you what interest rates and term and down payment does on a mortgage

so let’s pretend that this is an fha home and now we have

3.5 percent down you see how this affects the numbers

so they put less money down they have a higher interest cost

it’s taking up a bigger way bigger chunk of their monthly net income because they have less

money down and it’s basically creating a less money outlay because they’re only putting out 12

250 but they’re also paying a lot more in interest over the course of those 30 years

and this is not accounting for pmi which you have to add a couple hundred bucks more on top of this

now let’s take a look at someone who puts down if you want to go crazy and you have

just a big amount of cash you put down 50 on this home

the down payment is 175 but it also gets you closer to 30 percent

all in and you pay significantly less interest over the course those 30 years let’s stick with our example of 20 percent and let’s just turn this into a 15-year mortgage let’s keep the interest rate the same

right now you can see that we went from 139 thousand dollars

in interest all the way down to 65 just by cutting the payments in half and by payments i mean term excuse me if you want to make this even more realistic a 15-year mortgage right now is trading at 2.59 percent which makes this

interest even cheaper however look at the monthly income it went from basically in the 30s

uh to 51 of your income when you’re accounting for the utilities as well leaving you with only 2 700 bucks a month to work with

so this is a pretty cool spreadsheet the reason i’m showing you this is because i just want you to actually experiment with this and see what fits within your budget

the typical rule of thumb that i like to go off of is your all

in housing payments shouldn’t be any more than thirty percent of your net income

and when i say housing payments i’m talking about everything i’m not talking about just the interest

the mortgage i’m talking about excuse me my hair is falling apart here i’m talking about everything mortgage insurance taxes utilities hoa anything that goes towards housing should be accounted for

now let’s move on to excuse me an amortization schedule okay

a lot of people they don’t really understand or study these amortization charts

so the first one we’re going to do is a obligation of 280

000 on a 30 year i’m going to go with our example of 2.89

and we’re going to calculate this so our monthly payment is right it’s 11.63 you can see here when you put 20 percent down on 2.89

it’s 11.63 same number so our chart is right

over the course of 30 years or 360 months and we owe

280 on it now if you look at a 30-year mortgage let me see if you can see this okay

okay looks good on a 30-year mortgage you can see that

a majority of your payment goes towards interest

although your payment is 1163 dollars only 489 is going towards the principal meaning you’re only building equity on 489

as opposed to 1163 so why is that it’s because these mortgages are front loaded to pay

more interest especially on a longer term

and then you can see as time goes on you can see your balance going down the funny thing is well not so funny but just the truth

is that your principal payments only exceed your interest payments six years later

in september of 2026. so let that sink in you’re paying more on

interest all throughout the course of this loan

um for six years does that make sense now let’s see what happens if the same exact scenario goes to a 15-year mortgage

yes the monthly payment is going to be higher as you can see there however you’re paying more on principal from day one do you see that so your payment is obviously higher these two numbers equal 1918 but a majority of your payment is going towards principal as opposed to interest so if we go six years down the road again just to make an apples-to-apples comparison let’s find september right here

you can see that almost fifteen hundred dollars of this nineteen hundred dollars is going towards principal as opposed to interest

now let’s just get super crazy and say you took out a ten-year mortgage okay at 2.89 oh and i apologize i didn’t change the 15 to 2.59

which is going to make that interest even smaller

so let’s just call this 2.59 right now calculate

boom you can see that your payment is 2600 right here

however two grand is going towards principal and only 600 is going towards interest

so that’s all i got for you guys today i hope you found value in the acronym of piti

i hope you found value in understanding the different types of mortgages and i hope you found value in my spreadsheet which you can get down in the description below

and then also obviously the amortization schedule that i just showed you so please share the video with a friend that’s in the market for a home this is a very valuable video and it helps break down a lot of the confusion that people have with mortgages

also share the video on social media and as always have a prosperous day you guys i hope to have provided value in the video

thank you

man these people going broke out here man people taking 30-year mortgages putting 10 percent down they broke everybody’s bro

oh i think this is still recording oops you

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