Mortgage Refinancing and New Loans

I often hear about crew buying or refinancing a house.  In production we work in a system of inconsistent income across many employers that produces multiple W2s in a single year.  There is nothing wrong with having a goal of buying or refinancing a house, my suggestion is to do it wisely and do it with a mortgage broker who understand our income cycle and who do not run a business designed to rip you off.

Mortgage refinancing needs to be compared apples to apples to ensure you are not getting cheated.  If you buy a house, and 10 years go by, and you are in a 30-year amortization (meaning your loan will be paid over 30 years), that means you now have 20 years left to pay your mortgage back.

But then, a mortgage broker might come to you and say, “hey buddy, I got your mortgage payment down, 600 bucks a month.” If you agree to that deal, you will plunge yourself into more debt.  That’s because your mortgage broker and your banker just took a mortgage that you currently have 20 years to pay off and they extended it to 30 years (adding 10 years of monthly interest).

When you want to refinance your mortgage, compare the new monthly payment apples to apples.  For example, if you have 16 years left on your mortgage, have your mortgage broker or banker run the amort schedule on a 16-year mortgage and compare your monthly payment to the new monthly payment.  If they are the same or less (it really should be a lot less) then it is okay to refinance your mortgage.  But if it is more, then the bank and your broker are shoving more profit, at your expense, into their pockets!  Because you are paying the banks more interest and paying for the mortgage broker’s commission again.

This is the biggest grift in the mortgage banking sector.  You buy a house, you finance it for 30 years, then you finance the next house for 30 years again.  It’s not smart to keep rolling into a 30-year mortgage, don’t do it.  If you’re buying a house when you’re 30, you should have your property paid off when you’re 60.  That means, if you go buy a bigger house, you need to take that last mortgage and roll it into the new one.

Again, using the same example, if you bought your house when you were 30, and five years later, when you are 35, you roll into a new house, you want to have an amortization that is the same as your last house which will now be 30 – 5 = 25 years.  That’s how much you have left to pay off on your loan.

Don’t get carried away by thoughts like “oh, but we get so much more house for the same amount of money” or you are going to be 65 years old when that mortgage comes due assuming you started buying houses when you were 30.  This is how bankers screw you on a regular basis.  But if you are smart and get into a similar kind of amortization schedule (as your original loan) you will avoid the added interest and commission costs.

If you work in the film industry, you will need to demonstrate that you can earn income because your W2’s will look weird.  They won’t look the same as the W2’s of someone who has worked at GE for 10 years.  You’re going to get three or four W2’s from probably the three or four major payroll companies and or studios in a particular year.  So it’s going to look a little strange to a banker who does traditional home loans.

Find a mortgage broker, a banker or a credit union (like: First Entertainment) that specialize with people who work in production.  They all understand how to deal with proving income for people who work in production.  If you have a tax return where one year it says you made $100,000, the next year; it says you made $75,000, and the next says you made $150,000, and the year after that, it says you made $40,000.  They will be able to look at the numbers, find the average and figure out how much money you really earn and what your regular income averages out to.

Student loans.

Paying off student debt isn’t as easy as getting student loans so, if you are going to take out a student loan, please don’t borrow $100,000.  Borrow some lower amount like $20,000 or $30,000.  That’s easier to pay off when you start earning.  And if you can swing it, borrow nothing to get educated

Before applying for a student loan, consider the market value of the major you want to study in college.

If you want to be a philosophy major and work in the field of philosophy, it’s probably best if you don’t take any loans.  Working in the area of philosophy when you get out of school isn’t going to earn you enough money to pay for the loan you took without causing you major financial problems.

If you are, on the other hand, you are getting an MBA and you want to be a business head, then it’s probably okay to take a loan because your capacity to pay it back is much greater than many other pursuits and disciplines.

Personally, I wouldn’t take any loans.  I would rather go to a school that I can afford to avoid being buried in debt for decades.

Although banks are getting paid by the government to lend you money, taking that money will saddle you with ridiculous fees and interest for decades.  And if your payments are late or you can’t make a payment, your rates increase.  It quadruples in many cases.

Credit Cards

This is obvious and there are TONS of places to find information about the use (or misuse) or credit cards, but credit cards can do some serious damage to your financial health despite how harmless they seem.  That’s why it is advisable to get a credit card you can use and pay it off every single month.  Don’t let the balance carry or you’d be forced to pay interest on the unpaid balance.

Never make the mistake of thinking of credit cards as free money because; eventually, you are going to have to pay it back.  So, cut down on buying unnecessary shit and if you don’t have money to purchase something, don’t buy it unless maybe it is something that could benefit you or your career.  Maybe like furniture.

Get a card with a limit that is related to your earning potential.  For example, if you make $25,000 per year, find a card with a limit of $1,500 not $15,000 (which the credit card companies are more than willing to hand out).

Take Away

Sleazy bankers and mortgage brokers look for ways to screw you every chance they get.  Don’t let them steal your money.  In the last statistic I saw, the banking sector or Wall Street in general, was pulling 40% of the total profit in America out of the U.S economy and putting it in their pocket.  Not 40% of the income, not 40% of the top line, but 40% of THE PROFIT.  They are taking that much of a percentage of the aggregate profit and pocketing it.  How are they doing that?  They are doing that by exploiting you on a gargantuan scale.  Don’t let it happen.

Deep Dive – Mortgage Payment Examples

To help you get a clearer picture of how mortgage brokers and bankers rip people off, here’s an example with tangible numbers of how mortgage calculations work.

Let’s say you buy a house for $300,000 and the interest rate is 5% on a 30-year amortization – (based on the prices and rates of the past 10 years, this is a phantom example, but let’s use it for round numbers).

So if you buy a property for $300,000 and pay 5% interest amortized over 30 years, your monthly payment will be $1,610.  Now, 10 years on, if you’ve been making your $1,600 per month payments the balance you will need to pay off the loan is $244,000.

You will be required to pay some fees for the mortgage broker and various other extraneous fees for refinancing.  If the broker’s fees and other charges cost $6,000, the total new mortgage you’re about to have is $250,000.

What a mortgage broker will do is, they will put you back into a $250,000 loan at 5% interest over 30 years, which makes your monthly rate $1,342, then they come to you and say, “oh my God, I saved you so much money” but in reality, they just plunged you into more debt and you will be stuck paying for the cost of that interest you’ve largely paid down in the beginning of the previous loan and the commission to the broker.  It’s a grift they run all day, every day!  Don’t fall for it.  In my opinion, the regulation should require them to show you an apples to apples comparison and noncompliance should be considered FRAUD (with the commensurate jail time and fines).  If that were the case the practice would end tomorrow.

Yes, the new mortgage is going to be less when you compare apples to oranges, but it’s actually not going to be less – it’s going to be more.  That’s because, if we run that same calculation again using a 5% interest, you refinance $250,000 because you’ve already paid into the system for 10 years.  If we run the same calculation of what’s left at 5% or even 4% let’s say you do actually get a lower interest rate and the interest rate is now 4% and you run it on a 20-year amortization because that’s how much time you have left to pay off your previous loan (20 years) since you’ve paid down 10 years on a 30-year amortization, your monthly payment would now be $1,515.

What you have done is basically paid the mortgage broker a commission of about $5,000.  You have paid a bunch of fees to a title insurance, escrow agents – fees of all different forms to people who get paid in the transaction of selling or refinancing a house.

While paying all those people, you have also added the cost of your loan to the tune of $6,000 and in over 30 years you will have paid more in interest and everything else by a substantial margin.

But if we compare 20 years to the 20 years that are left on your original $300,000 loan, the cost of your monthly payment is roughly the same.  They’re going to save you $100 a month because the original $300,000 loan, 5% interest over a 30-year amortization is $1,600.

If we rerun the calculation at $250,000 having a 1% interest reduction, which brings the interest rate down to 4% on a 20-year amortization because you have already paid down 10 years, your monthly payment is going to be $1,500.  You have essentially saved $100 per month, but you would have also squandered about $6,000 because you are paying all these people $6,000.

So if you take the $6,000 and you divide it by 240 months (20 years), you get a savings, but a good chunk of that savings was eaten up in spending an additional $6,000 to get that loan executed.

Carefully compare apples to apples.  You’re going to want to compare your payoff of $244,000 against the 20-year amortization on the new interest schedule.  If your monthly payment for originally borrowing $300,000 at 5% on a 30-year amortization is $1,600, then after 10 years of paying your loan, the balance you need to payoff will be $244,000.

When comparing apples to apples, you want to look at that $244,000 and you want to look at and the new interest rate, and then compare it to a 20-year amortization because you have already paid down 10 years out of 30.

What mortgage brokers will often do is show you a 30-year amortization on the new lower amount of $244,000 and they’ll say, “hey man, I saved you 500 bucks a month” because your new monthly payment is now $1,100 not $1,600.

But the truth is they haven’t saved you anything, they have actually stolen about $6,000 from you.

If you run the calculation, comparing it to 20 years on the balances leftover, they are only saving you less than $100 per month.  The majority of that new loan is adding new interest, for the bank, and commissions to be pocketed by the broker who actually set you up.