Episode #112: “Mortgages 101: The Loan That Builds (or Breaks) Your Budget”

Find "Your Fiscal Physical" the book on Amazon at: rb.gy/3shpfk

If you have suggestions or feedback, please email us at: Podcast@AlchemyWealth.com

And, as always, STAY THE COURSE!

Transcript

SPEAKER_00 0:23

From budgeting to retirement planning. This podcast is your go-to resource for mastering financial literacy.

Aaron Hoisington 0:33

Welcome everybody. This week's episode of the Fiscal Physical Podcast. My name is Aaron. Still here with uh Mr. Ryan Nelson for another week. Uh Ryan, how's the how's the week? How's the day? How's life treating you, my man?

SPEAKER_02 0:44

Yeah, life's been good. Life's been good. Week's been good. I'm happy. Good.

Today’s Focus: Mortgages 101

Aaron Hoisington 0:48

What about you? I love to hear it, man. Uh, yeah, good good news all around on my end here, I suppose. We're just uh cruising right along through 2026, and uh um just want to make sure to shout out all the listeners who've been you know sticking with us here over two years of doing this and lots of episodes out there. So appreciate you guys. Please please keep uh sending us topics, sending us questions, engaging. We'd love that. Email us, podcast at alchemywealth.com. And uh um today we are going to talk about a subject that uh we've touched on several times throughout this podcast history. A pretty, you know, there's there's homeownership decoded, there's um, you know, paying off your your debts, like all these should I pay off my house? A question Ryan gets all the time. So we've kind of touched on what is a mortgage, you know, the loan that builds or breaks your budget, if you want to call it that. But uh I'm I'm excited to do kind of just a dedicated episode as to, you know, what is a mortgage, Ryan. Like, you know, just so people can kind of understand like what it is is as far as in the financial sense of it and things to kind of, you know, the the parts that make it up. So hoping you can uh dive in a little bit here and uh I'll see if uh see if you can share some insight.

How Mortgages Work And Collateral

PITI: Principal Interest Taxes Insurance

Fixed Vs Adjustable Rate Choices

Amortization Schedules And Reality Check

Ryan Nelson 1:53

Cool, let's do it. So yeah, a mortgage. So the mortgage is the loan that you use to buy a house. Um what's kind of interesting, I think we talked on one of the previous podcasts, is the home is then there for the collateral. So if I go get a mortgage to buy a house and I don't pay my mortgage, uh the bank, of course, cares, but not that much because they'll just take my house from me. Right and then they can sell the house and pay off the mortgage, right? Um so you can you can imagine the bank is taking a little less risk, and that's why your mortgage rate is like always feels lower than maybe your credit card. Sure, right? So again, an example we've used, I think, on a previous episode. Like if I go buy sushi with my credit card and then don't pay my credit card bill, what's the credit card company gonna do? There's nothing they can't sushi, right? Yeah, so there's no collateral there. Whereas with the home, the the bank is taking a lot less risk because they will take over the house. Um, and therefore that's why the mortgage rates are oftentimes lower than something like a credit card. Um so most mortgages are gonna be paid back over a pretty long period of time. The most typical um durations you'll see is either a 15-year mortgage or a 30-year mortgage, 30 being the most common. Uh, there's four parts to a mortgage. So I think we've talked before about pity. So that's gonna be your principal, interest, taxes, and insurance. So the pin principal is the amount um the the principal is the basically the amount that you borrowed, and that's you can almost think of that as like the core of this. This is like what you've borrowed, what you owe. Interest, that's gonna be based on whatever interest rate you owe. You're gonna owe some interest on this principle, right? Um taxes, uh typically, so whenever you have this mortgage payment, they combine all this together. And so the taxes is gonna be a piece of that, depending on where you live. You could be in a state that has high high um property taxes or low property taxes, but that would be whatever the taxes are for your property would be um included in your mortgage payment. And then typically your homeowner's insurance is also gonna be included in that mortgage payment as well, um, which is kind of interesting. So if we think about this, a lot of people, so there's the principal interest mortgage uh I mean, sorry, principal interest taxes and insurance. And so a lot of people think about, man, it'll be nice when I get my house paid off, right? Right. Well, if you think about these four pieces, getting your house paid off r removes principal and removes interest. It actually doesn't get rid of the taxes you're gonna owe on your property, right, nor does it get rid of your insurance. Technically, you most mortgage companies will require you of insurance. If you don't have a mortgage, technically, I suppose you could forego insurance, but most people that's one of their biggest single assets, so they're gonna insure it. So it's interesting is even after you get your house paid off, it's not that you just can live there for free. You're still gonna have to pay your taxes and insurance on that property, which um I a lot of people I find don't actually um uh realize or think about. Yep, that's a good point. Um, but all four of those together, so the pity combined, that's just your total mortgage payment or total housing payment. Um, so a couple of uh kind of key terms, right? So we have the loan amount, that's gonna be the that principal amount that we talked about. That's gonna be the how how big of a loan you take. So in other words, it'll be after you've you know, after you've lived in the house for 10 years, it's gonna be your home price pie price minus what your your equity is, is gonna leave you with your home um amount. Your down payment is the amount of money you put up front to buy the house. Um and so obviously the more money you put up front, the less your payments will be, right? Um your interest rate, that's one of the biggest drivers. It is a large driver when it comes to determining what your um mortgage payment is going to be. So that interest piece is a big piece. That's variable depending on what current market conditions are. Um your loan term, that's that 30 or 15 year, that's the duration of the loan. So that's the that's how many years you have to pay back the loan. Um, one thing uh that you don't hear as much about anymore, but there's fixed rate mortgages and adjustable rate mortgages. So if I got a 30-year fixed rate, let's say I got a 30-year fixed rate at 5%, that means I'm gonna pay 5% interest rate for all 30 years. If I got a variable rate, there's tons of different ways this could be this could be set up, but maybe uh maybe I get a variable rate at uh 3.5%. Well, you say, man, that 3.5% sounds a lot better than 5%, but maybe you're only locked into that for seven years. And so you still have a 30-year mortgage, you're locked in you know at 3.5% for seven years, but then after that, you it could vary to, you know, maybe it goes up to six or seven percent. And you say, Oh my goodness, my mortgage payment just went up a ton. I wasn't bargaining on that, I can't actually afford this, right? Um, or the flip side, you could get lucky, and interest rates could go down and you actually pay less, right? Um, so in adjustable rates are obviously going to be there for higher risk because you don't know what the mortgage payment is gonna be after whatever that fixed um time period is, and there's all sorts of different um um fixed time periods in that adjustable um rate mortgage. Um amortization is uh is an important term when it comes to mortgages. Um, in particular, I like looking at what are called amortization schedules. Oh, yeah. And if you look at, yeah, you're familiar? Oh yeah, they're awesome.

Aaron Hoisington 7:06

They're super cool. Exactly. So so if you go look You're also kind of scary, if we're being honest with you. You're like, oh, oh no, like that's how much I'm paying in interest? Yeah, like what are you scared of?

Ryan Nelson 7:16

Uh I'm scared of uh clowns or change saws and amortization schedule. Okay, okay. So an amortization schedule basically is gonna show you, and you can ask your your mortgage company for your amortization schedule, and it'll show you every payment you make. Because you might wonder, you say, Oh, I'm paying$2,000 a month, but where's that going? Ryan just said there's the pity, the principal interest, taxes, and insurance, but I don't know how much my money's going towards principal or how much is going towards interest or insurance. And so the amortization schedule will break that out for you. And what's interesting is you can see, like, you know, payment number one, if you get a 30-year mortgage, payment number one, a ton of your payment is going to just paying off interest and very little towards um uh principal. Whereas for a 30-year mortgage, what would that be? Payment 360, your last payment, a whole lot more would be going towards principal, and very little would be going towards interest because you have very little account balance left at that time. Um so those amortization schedules can be really eye-opening and you in, especially when you're new to buying a house and you start looking, you say, Oh wow. So these these first initial payments I'm making are like almost doing nothing to dropping my loan value. It feels like it's just paying interest, um, which is interesting.

Approval Factors Lenders Care About

Aaron Hoisington 8:30

It also can like I think impact on whether you refinance your house or certain things of like how much you've cool, like I've I'm you know, a year into my house. Do I want to refinance that or and you know maybe take on another year like to get back to a 30? Or am I, you know, 10 years, 15 years deep into this schedule? Now I'm really starting to chip away at this. Like, do I want to restart a 30-year mortgage or something like that too? So it's just really interesting. It's always fun to they have like the graphs that like kind of uh overset or overlap about like cool interest, and then it's like, oh, they kind of switch places, if you will, as you get farther into it. So super cool. Like I said, most mortgage companies like have an online thing and they can provide you with that, and it's it's pretty interesting to look at.

Closing Costs And Ongoing Home Expenses

Budget First, Not Bank Pre‑Approval

Ryan Nelson 9:11

Yep, for sure. Um, so if you're looking at getting a mortgage, um, you know, there's a few details or variables that might determine a if you get approved, and then if you do get approved, what your rate would be. So your income and the type of the your your income from work, um, and if you're like if you're self-employed, you need a certain number of years of self-employment income and stuff. So your income and let's call it job stability um will make a difference. Your credit score, um, your debt to income ratio. So how much debt do you have total? So if you're you know, there could be two people, but one has a whole heck of a lot of debt and one, you know, two identical people, one has a whole heck of a lot of debt, the other doesn't. Well, it's probably more secure to lend the person who doesn't have a whole bunch of other debt. Sure. Um, so your debt to income ratio is gonna matter. Um, how much money you're coming with to put down up front. So are you putting a large down payment down is gonna help? Um, what the home value is, of course, and then the loan type. There's a bunch of different loan types that would we wouldn't even have time to get into them all in this podcast, but there's different loan types which are gonna have different rules um for qualification and and different interest rates as well. Um, and then another thing to think about with mortgages would be what does it actually cost? And so there's closing costs. Everybody's probably heard of closing costs, totally those can add up and be a lot more meaningful than people think, right? So there's like lenders' fees, there's title, there's escrow, there's appraisals, um, there's recording fees. And so when you look at all of that together, you're you can end up paying a lot more to close this house than maybe you were originally bargaining for. And that doesn't go towards your down payment, right? That doesn't go toward to furnishing the house. Like that's just basically a transactional cost. Yep, exactly. Um, and then of course, once you move in, you have other costs as well. So you're gonna have repairs and maintenance, which can add up. You're gonna have to pay the utilities. HOAs are feel seemingly more and more popular. Um, so you got HOA dues, um, you have what we mentioned earlier, your insurance and taxes, so the the TI of the pity um are gonna be there basically forever. Um unless you drop your insurance. But uh so one thing I think you mentioned at the beginning of the the the the podcast was around sort of how would you budget like you know, how would you budget for this mortgage? Sure. Yep. And what I find is at least when I got my mortgage, my first my first house, I went um to the mortgage company and they told me how big of a house I could buy. You know, they pre-approve you. So the process is getting pre-approved, they tell you how much you can afford to buy, and they told me the number. And I just remember like going home and thinking, I'm like, there's no way I can afford that. Like, like, how could I possibly afford this? I can't if I bought a house that big, I can't make those monthly payments, right? Um, and so I think a common mistake is sort of relying on the mortgage company to tell you how much you can afford. So oftentimes we haven't done the hard work of analyzing our own budget to know what we can afford. So we go get pre-approved. There's this large institution telling us, hey, we'll give you this much money, and then we just think, oh, okay, cool, that's how much somebody with my income can afford. Right. And that's just uh I I would say uh a common error, but an error you want to avoid.

Stress Testing Your Payment And Reserves

Aaron Hoisington 12:42

Definitely. Yeah. I I I went through a very similar thing when we first my wife and I, we went through to like get look at getting pre-approved, and like the amount that we were like, we're like, oh, well, what if we did like a you know$300,000? The guy's like, absolutely. What about a$400,000? Definitely$500,000? Sure. And I'm like, wait a minute, okay, what time does this number stop? You've seen our pay stuffs. Like, there's just this. I mean, are we just living in there and not eating anything? Right, right. Kind of thing. Like it's like, but I mean, if you're a the bank, the bank's like, I we have the collateral of the house. Like, we'll probably lend you what you want, kind of thing. But yeah, it's a it's a very interesting thing of like that pre-approval. You feel kind of awesome about it, and you're like, wait a minute, I can't, I definitely can't afford the top end of that sometimes.

15-Year Or 30-Year And When ARMs Fit

Ryan Nelson 13:27

Yeah, you're right. I think it's rare that somebody should probably be buying a house that's at the top end of that, right? Yep. Um, and so some things to do. I more so than a rule of thumb, I would say the better best practice would be to again do that deep deep dive into your own personal finances and determine, okay, how much do I need to save for retirement? Right. Um, how much do I need in my emergency fund? How much do I spend you know month to month on my other expenses? And then you can start to figure out, like, okay, this is how much I have left over every month to pay for my mortgage. Then you can start to figure out, well, I need to save up for a down payment, like, right? You can start to figure all that stuff out. Um, but really more so than any like percentage. You'll you you could go Google and find out, oh, percentages of income you should pay for your house and stuff. But all of those, they're fine rules of thumb, but they don't apply to you in your situation, right? Like, do you have a kid? Do you not have kids? Do you are you married? Do you have two incomes? Do you have one income, right? There's just so many variables. Are you living in San Francisco? Are you living in um Nevada, or are you living in Wyoming, or are you living in New York, New York, right? Like there's just so many variables. So I think the best tool is just go through your own kind of budget and figure out how much can I afford to spend every month? And I wouldn't probably allocate every extra penny you have to that mortgage, right? So then the next thing I would say is then you can kind of do some some like a test or uh uh kind of quiz yourself and say, well, what if a paycheck was late? Or what if I was to get laid off, or what if I was to get furloughed, would I still comfortably be able to make this payment? And if, you know, if your employer, if something went wrong with your employer's payroll and your check got there a week late and you were relying on that to make your mortgage payment, you probably bought a house that's too expensive. Sure, yeah. That's a great point.

Aaron Hoisington 15:10

Really well thought out kind of way of thinking of that. Like, oh, like am I reliant specifically on this? And if that's gone, am I just in trouble? Right. When it comes to that, that's a really, really good point. Yeah, and and I would say that yeah.

Rate Shopping And Credit Prep

Should You Pay Off Early Or Invest

Key Takeaway: Buy For Your Whole Life

Ryan Nelson 15:26

So just make sure that you have a little bit of budget, a little bit of wiggle room there, if you will. Um, you know, you're gonna have repairs on this, you should be budgeting those house repairs into your budget. But um, you know, if if something came up and you had a$10,000 repair or replaced something, could you do that? And again, if the answer is no, you've probably overspent on your house. Right. Um, as far as choosing a mortgage, again, we talked you're gonna choose either a 15 or 30 year fifteen years can oftentimes give you a lower interest rate, but you're gonna be paying more per month because you're getting this thing paid off twice as fast. Therefore, you're gonna be paying a lot more per month, right? Um, also choosing between fix or adjustable. Um, you know, you probably want to work with a mortgage expert on that. The adjustable is gonna be higher risk, but also, hey, if you say, hey, I'm I'm moving to this location, I'm only gonna live here for two years, and then I know I'm gonna be relocating, maybe you don't care. If you're locking into an adjustable rate that's gonna lock you into something for five years, you say, Well, I'm only living there for two. I'm fine with that, right? So there's certainly scenarios where that could make sense. Um, but you definitely want to do your due diligence there and realize that the adjustable is going to be a little bit uh a little bit riskier. Um, I'd make sure if I'm going into this, you know, shopping rates, talk to different lenders. You don't just want to necessarily work with the first lender you see, you want to go out and do your due diligence, shop different way, uh different rates, um, you know, do a little uh analysis of your own credit. Um oftentimes you can boost your own credit by just you know paying down your credit card if you're gonna pay down your credit card anyways, paying it down before they run your credit can help. Right, right. So there's a couple things you could do um just to make give your kind of increase your odds. Um and then you you you mentioned at the top of the podcast, right? One of the most common questions I get is should I pay my house off early, right? So I know we've gone into more detail um in previous episodes, so I'll keep it quick here. But you know, paying off that mortgage can oftentimes be like a more of an emotional decision than a rational decision. Um it can feel really good to not have that weight because these are oftentimes big pieces of debt. For most people, it's their biggest piece of debt. And so if you're debt adverse, this this could feel really kind of looming hanging over your head. And so getting it paid off can feel really great. Um, but doing a comparison between what your current interest rate is on the house and what your expected returns in investment accounts could be, and doing a comparison there could help you determine kind of what um you know makes the most sense in the spreadsheet. Yep. And then again, you can make your own decision um based on on your own personal values. Um but uh yeah, what so whatever supports your whatever is in alignment with your values, I'm good with. And and I think the reality is we've gone into a lot more detail than that in a previous podcast. Um, so you know, all in all, I'd say, you know, don't just buy the biggest house the bank will let you. Like make sure that like the house A supports your lifestyle and and and goals and family goals, but also fits your retirement goals and your travel goals and all your other finances. And so again, if you start at that level of deter walking through your budget, figuring out how much you can spend and coming up with your own number as opposed to relying on somebody else, I'd say that's probably the biggest takeaway.

Aaron Hoisington 18:28

Yep. No, I think that that's all super well said. And I remember I I I think we talked about it on the previous episode about like, should I pay this off? You know, you think if you have a$500,000 mortgage that's like, wow, that's a really big number, like I want to pay that off. I want to be free of that, if you will. But you're never quite free of it because you got your, you know, you still got your property tax, you got your insurance you're gonna have to pay for. And then you think about like, you know, if I spend the next 10 years paying off$500,000, for example, like what is my rate of return on that? Is my house gonna go up potentially 7% a year? Maybe, I don't know. But like historically, like with the stock market, you put maybe you pivot and put$500,000 of that over the next 10 years into your retirement. Probably over the next 20 years, you're gonna see a little bit better return on that kind of investment.

Ryan Nelson 19:16

Uh it what's interesting though, yeah, I don't want to go too far down this trigger hole, but what's interesting is let's pretend your house did get a 7% return and your investment account got a 7% return. Your house gets that 7% return whether or not you put, say, an extra$1,000 in it or not. You're right, if in your retirement account, let's say a brokerage account, if you don't put that thousand dollars in the brokerage account, that that thousand dollars is not growing. Right. Right. The value of your house, you own your house, if it if it grows by 7%, it grows by 7%, whether or not you have a mortgage on it or not, or whether you put the extra thousand dollars in it or not. Um, so your comparison, you would want to make sure you're not comparing what you think the house rates are gonna grow by to what market rates are gonna grow by. You'd want to compare Compare what the interest rate of your house is sure compared to um uh investment returns.

Aaron Hoisington 20:05

So small nuance there, but absolutely but important as well, too, to kind of kinda call that out for sure. So awesome, Ryan. Well, I feel like I I learned something here. Uh we'll go ahead and uh take a quick pause here, back on the other side of this, and uh everybody hang tight with us.

SPEAKER_00 20:19

And now to put the personal in personal finance.

Aaron Hoisington 20:26

Welcome back to this side of the physical physical podcast, the personal side, if you will. Um so Ryan, this one uh you know, a lot of these questions revolve around food. I like that for sure. But uh I'm curious with this uh question here. Do you have a comfort food? You know, something that stands out, maybe something your parents made back in the day, or your significant other, or something that just, you know, you're like, I'm sick, I want to eat this, or I'm you know, I had a hard day, I want to get this. Do you have a comfort food that you have a go-to for?

Ryan Nelson 20:56

Not really. Um I don't know that, yeah, I don't know that I necessarily have a comfort food. I like pizza. Sure. Pizza is my favorite food. So I guess if like something that'd be like, I suppose by default my comfort food. Um but yeah, I don't know that I have like yeah, like in a time of stress or something, I want a particular food. It's just like I always want pizza regardless of the situation.

Aaron Hoisington 21:20

Exactly. Whatever it is.

Ryan Nelson 21:21

So there's no situation. So yeah, it it happens to check the stress box or the uh yeah, the like the comfort food box, but just because it checks every food box, yeah, yeah. That checks out, yeah, for sure.

Schedule, Subscribe, And Disclaimers

Aaron Hoisington 21:31

No, I mean I'm similar, I don't really have something that I'm like, oh, you know, I I really want this, but you know, a lot of times when I'm not feeling super well or it's it's cold, I I like soups a lot. Like I and my wife makes a like an Olive Garden like recipe soup. Exactly, exactly. Yeah, that uh um if we're actually having it tomorrow, um, and I'm really excited about it. So I get super excited about that, super excited, if you will. And uh um that's one of my just go-to's when I'm it's cold. I'm maybe not feeling well, I want like a hearty meal. That just almost makes me feel good, like that first bite. I'm like, oh yeah, warms me right up and everything. So um if I had to choose what I'm guessing, that's probably my comfort food, if you will. But um I'm curious about there. A lot of times people have you know things that their their parents used to make or their mom or dad or whatever it might be, like grandparents, like my grandmom used to make this pasta that I really used to like. So um super curious to see what everybody else has to say out there. We'd love to love to hear your thoughts and uh around that uh comfort food there. But uh uh other than that, Ryan, uh, I'm just gonna let the listeners know these podcasts drop every Tuesday morning. Set your watch to that. We appreciate everybody out there getting uh absorbing this content, whether it be through Spotify, Apple Podcasts, wherever you get your your listens, and uh um I'll uh let you, Ryan, uh, play us out to end the episode here. As always, stay the course.

SPEAKER_00 22:51

Thank you for joining us for the Fiscal Physical Podcast. Until next time, happy listening. And as always, stay the course. If you have a question or topic suggestions, please email us at podcast at alchemywealth.com. If you enjoyed today's discussion, subscribe to the podcast to ensure you never miss an episode. And consider leaving us a rating and review on your favorite platform. This helps other listeners like you find the show. For more resources, you can visit Alchemy Wealth Management's website at www.alchemywealth.com or find your fiscal physical, the book on Amazon. We'd be remiss if we didn't mention that personal finance is just that. Personal, please don't take anything we say as advice. The presenting content is for informational and entertainment purposes only. It's not an offer or a solicitation, nor should it be construed or relied upon for tax, legal, or investment advice. It doesn't consider your personal financial situation or objectives and may not be suitable for you.