Understanding Mortgage Points and Loan Prep Strategies with Marty Remillard

SPEAKER_01 0:00

Welcome to the Real Estate Explainer podcast where we talk about anything and everything real estate. I'm your host, Brian Kickswell. Welcome back to another episode of The Real Estate Explainer. Today we got Marty Remillard on the podcast, and we are going to be digging into mortgages. Let's jump right into the episode. Marty, just wanted to say hey, thank you for joining me on the podcast today. We got a catch-up not too long ago for personal reasons. It was jury duty. We both got called in and we both had to sit around for literally all day long on a Monday morning holding our breaths, hoping and praying that we didn't get a call because Marty went ahead and pulled up the court records, and it looks like one of the trials was what, three days and the other one was scheduled for three weeks. So what do you do when you get jury duty for three weeks? What do you do there?

SPEAKER_00 0:47

Yeah, it's tough. If you're employed by someone, how are they going to count that leave of absence? Are they still going to count it as your vacation? Or, you know, I don't know these things. I had an employee that had jury duty and they didn't want to do it. I said, Did you want to do it? I'll give you a job when you come back. I just not gonna pay you while you're out.

SPEAKER_01 1:05

You know, and the reality is I'd love to do it. I wouldn't mind actually being on the jury. The problem is, you know, how do you run a business and have like an open-ended jury duty sentence, we'll call it. So yeah. Anyway, so that's ran into Marty not too long ago. Just our background. Marty was actually uh one of the first guys I'd met when I moved to Sarasota back in 10 years ago in 2015. I think you were hosting the Florida Association of Mortgage Brokers.

SPEAKER_00 1:32

Yeah, it was actually mortgage brokers back then. Now it's mortgage professionals. I was running the Suncoast chapter at the time. The Suncoast chapter I don't believe exists anymore.

SPEAKER_01 1:43

Yeah, and we just stayed in contact the whole time. And then through my various jobs, or when I was doing mortgages out here, I actually placed my license with Marty a little while just before I hung it up. I had some health issues, had a step away from the business, and he allowed me to place a license with him. So I was definitely grateful. So thank you.

SPEAKER_00 2:03

Yeah, you're welcome. It was my pleasure.

SPEAKER_01 2:05

Yeah, and I want to jump in really just to get caught up because I haven't been involved in the mortgage world in quite a while now, except for taking a look at interest rates in general. Do you recommend paying points to buy down the interest rate in today's mortgage world where you know rates are high sixes? Is it something that you would recommend doing?

SPEAKER_00 2:26

Well, it's a great question. So we look at the time frame and what type of property you're buying. So if you're buying a primary residence and you got a couple kids in grammar school, chances are you're going to stay in that house for more than seven years. You may look at buying a couple points. If you have the funds to pay that extra, you want that payment a bit lower. You take a risk. So if rates are around 6%, and we anticipate the Fed dropping the rates later this year, at least one or two times, you may not, because it may be more valuable to refinance, but if that's a gamble. So if we're looking at a primary resident, we're gonna stay in that house for more than seven years. Yeah, you definitely want to take a look at paying down some points.

SPEAKER_01 3:14

And I would say the caveat there is it also depends on where you're at in the United States. Here in Florida, the cost of refinancing is much higher than it is in other parts of the country. California specifically, refinancing is a lot cheaper. So just know that if you're planning on paying points here in Florida, for example, you're paying all of that upfront interest. You're probably not going to refinance because you've just dropped $6,000 to $9,000, whatever it might be in points.

SPEAKER_00 3:46

Yeah, and you want to look at points too. You can use points towards your closing cost. So you can say, hey, I think the Fed's going to drop the rates this year. So I might refinance this out in six months and nine months. Why don't I take a higher interest rate today? Okay, grab a couple points from the lender that's they're applying, even though they're giving me a higher interest rate, so I'll absorb a higher payment for the next six months to a year, I can get a several thousand, four, five, six thousand dollars lender credits towards my closing cost and help bring less money to the table.

SPEAKER_01 4:23

So instead of paying points in this case, you're letting the lender pay you to cover the closing cost. The thing is, you want to be kind to your lender, don't refinance within what?

SPEAKER_00 4:33

A year. Yeah, it's six months minimum, but yeah, it's called an early payoff. So your mortgage loan originator can get hurt by it.

SPEAKER_01 4:41

Yeah, they're gonna pull back all of the points that you paid and charge the broker or lender because you took the points up front to pay your closing costs and then you paid off the loan. Your mortgage guy probably did a lot of work before you found the property and then all the way through your closing, and you'll know them for years to come. So do the mortgage guy a favor and don't pay off that loan within the first year. But then certainly once rates drop, go ahead and refinance. But to get back to what I said is do you pay down points? It's kind of a gamble. Do you pay points on a loan? If you think that you're going to be in that loan for three plus years, then you might want to look at paying points. But if you think that you're only going to be in that loan for a very short time, don't pay any points, or perhaps let the lender cover your closing costs so that once the rates do settle back down, then you know you can refinance.

SPEAKER_00 5:34

Yeah, a lot of things, especially here in Florida or the vacation states, whether you're up north and you move into Arizona or Florida, you're buying that second home. You don't know how long you're going to have that second home. So if something happens, the first thing is, let's get rid of the second home. So you're only in that home two, four, or five years. Paying a point is broken out, is equal to the interest that you would pay over a seven-year period of time. So that's the equivalent. So if you're going to have the house in that mortgage for more than seven years, go ahead and pay the point. If you're not, don't pay the point. It's bad math.

SPEAKER_01 6:14

Makes sense. So it's really just running the numbers at the end of the day. Transition to another question that I have. A lot of my clients are real estate investors across the United States. You know, I do cost segregation studies on the properties that they acquire. Most of them are small business owners. How can business owners really protect themselves or prepare themselves for getting a loan? I've seen it go both ways. A lot of business owners, they plan to pay as little in taxes as possible, but sometimes by doing that, they are shooting themselves in the foot, especially if they're real estate investors, because they're trying to show money so that they can acquire more and more property. So what's your thoughts?

SPEAKER_00 6:57

There's several things they need to look at. A lot of times investors make the mistake saying, hey, I'm buying a $300,000 house and they're getting a mortgage loan on this house, right? So their cost is the closing cost and their down payment. That's the money they have vested in it, not the $300,000. So you want to look at your rate of return based on the money that you're investing. The rest, the $300,000 purchase, you're hoping to pick up capital gains on the whole $300 at that time. Okay. But your investment, if you're putting down 20%, you got $60,000 down and then maybe $10,000 in closing costs. So your rate of return should be based on the $70,000 you have invested, plus whatever fix-up you need to put into that house. Does that make sense? So that's one of the places you need to start. The other thing is if it's an investment, if you're getting a great rate of return on the income of that property, you may look at getting the bank to give you a point instead of you paying points towards your closing cost. All right. Little higher interest rate is not bad because you have to look at the timing of how long you're going to keep that property for. If you're going to keep it less than three years, again, you still want maybe to collect money from the lender to reduce your closing cost because you're getting for capital gain, or you're trying to generate a stable income for that property to sell it off with a tenant, especially if you're buying a four-family or more. You want to rehab that property, load it up with tenants, and then dump it off. I shouldn't say don't care about the interest rate, but a higher interest rate may not be a bad thing because you're using less of your money. So you have more money to put towards your next project while this one's still growing for you.

SPEAKER_01 8:48

So you're keeping the money in the bank in this scenario. So you're not using all of your cash to buy the property. So you have more money to buy more investment properties.

SPEAKER_00 8:56

Correct. So one of the other things you look at is how many properties can I have? So Fannie Mae allows up to five properties that you can own and still have a Fannie Mae loan. Okay. Freddie Mac allows 10. So you look at, well, I can do Freddie Mac 10 to 5 Fannie Mae. But I always tell the investors you get seven to 10 homes, refinance those into a commercial loan with a big bridge loan is another way to get out of it. Now you free up money because now you have the cash flow from those. Now you can go get a good Fannie Mae or a good Freddie Mac loan for your next set or 10 properties. And it's not uncommon for good investors to have 40 or 50 properties.

SPEAKER_01 9:37

So you're saying start out with the conventional financing, max that piece out, and then roll it in and just roll it into a commercial loan and then start taking advantage of conventional financing again.

SPEAKER_00 9:49

Yes.

SPEAKER_01 9:50

Okay, so conventional financing. And the reason there is because conventional rates are better.

SPEAKER_00 9:55

Yeah. It's better. It's a great way to get into a property, usually less so. At commercial loans, they usually like to see 30, 40, or 50% loan to value versus Fannie Man, Freddie Mac. If your credit score is right, your income is right, you may be able to get into those houses for as little as 10% down. You're going to have MI if you don't put down 20%, but it's less money out of your pocket. And you're hoping that after a year or two, you develop that capital appreciation to refinance it out. So now you refinance it out. You may not be able to get pull money out, but you have less money that you're putting into a property. So it allows you to go out and buy more properties and be more successful.

SPEAKER_01 10:36

And the downside with conventional financing is, you know, let's be real, is they can be a pain in the butt to qualify for. So you have to show supporting documents. You're showing that you can afford this property and the other ones that you own based on the debt service. Getting back to my question earlier, we're expanding on it, is how business owners can prepare themselves or protect themselves when getting a mortgage. We had talked about specifically, I think it was one of your past clients, it had to do with something as simple as the way he wrote off his mileage. So he was writing off his mileage. I think it was under his business versus personal, and he wasn't allowed an ad back, essentially, and he was getting hit with the expense. And it was just another ding to his debt-to-income ratio.

SPEAKER_00 11:24

Yeah, absolutely. So if you go out and you buy two or three trucks for your business, or you have your car for your wife at home, and then you have a car, you use them for real estate or mortgages or whatever, you're an attorney, and you're using that car, you're using your business to make that monthly payment. That's a mistake. Okay. Your write-off is actually only the interest payment, not the whole payment, just the interest portion of the payment. And you might not qualify, you have to ask the CPA about it. You're not likely to qualify for that depreciation. So one of the things you want to do is take depreciation on that vehicle and do mileage. You get the 55 cents or whatever it is back towards your income. So you're better off doing that. So you have more money added into your income. And the same thing with depreciation, you're really not spending money on depreciation, even though you have a usage. That depreciation gets added back in. So they take a two-year average on the depreciation and mileage and put it back in. And that counts as your income. It raises your income even though you're paying less on taxes.

SPEAKER_01 12:34

I'd like to thank today's sponsor, CostSegRX, a cost segregation company. If you're interested in getting a cost segregation study, or if you'd like a free estimate, a benefit, log on to realestateexplainer.com and click the cost segregation link at the top of the page. So two things. One is the actual payment itself. If you can pay for it personally, that might be the better option because you're getting to add back the 55 or 65 cents per mile. Or on the depreciation, it's strictly a paper loss. So if you bought the vehicle with your business and depreciated it, then it would be an add back. But are you saying to take the depreciation on your personal returns?

SPEAKER_00 13:24

No, I take the depreciation on a vehicle. I've seen some people lease their car to their business. And a lot of underridges don't accept it. You're better off just putting, even though you own that debt for that vehicle, just put that vehicle in service to the business so you get the depreciation and you're right off the miles both out of the business. Okay, that gets added back.

SPEAKER_01 13:50

So it's one of those things that when you're looking at, again, being a business owner and you're looking to acquire property using conventional financing or traditional mortgages, when you're talking to your mortgage lender, you also want to have the conversation with your tax advisor to make sure that at the end of the day, you're accomplishing your overall strategy, meaning you want to buy the property, paying less in taxes is super important as well.

SPEAKER_00 14:18

I mean, CPAs are great. They're awesome at reducing your tax liability. And they're going to search for that highest deduction. So the depreciation in mileage, they're not as big as a deduction if you're doing payments or if you have the vehicle purchased through the company. You won't get that big of a deduction, but then that reduces your income and it gives you less purchasing power. So the difference on a vehicle may be $1,000 or $2,000 a year that you may have in uh tax liability, but in the same breath, you just may have lost $10,000 to $30,000 in purchasing power in the house.

SPEAKER_01 14:58

And what do you see the biggest mistake or the most common mistakes people make when they're looking to buy a home and just getting a mortgage on it?

SPEAKER_00 15:08

Several things. They don't balance debt and savings. Okay. Sometimes they think I'll just go pay off all my debt, I'll have a higher credit score, but now you don't have enough money for down payment and closing costs. So now you're getting a loan with mortgage insurance on it. So you want to find that balance of getting a middle to a high credit score is always excellent. So if you can get over 720, you're better off than having a 640. But not necessarily the difference between a 720 and a 780 may be only a quarter percent or two. But instead of paying off $30,000 in credit card, you could use $5,000 of that to buy down the interest rate to make up that difference in your credit score.

SPEAKER_01 15:50

And what I'd recommend, and I'm sure you would as well, is before you pay down any debt as a business owner or a W-2 employee, if you're buying a property, is make sure you're running a report. They can go in and run scenarios for a rapid rescore to see what you need to do to bring up your credit score. So it's not a guessing game. Well, it's a little bit of a guessing game, but the scenarios are pretty spot on. And they'll tell you, hey, pay down this balance by $2,000, pay down this balance by $5,000. And at the end of the day, your credit score is going to get up and you'll qualify for that better rate. So that's good advice.

SPEAKER_00 16:28

If you got a credit score of $716, you want to hit that $720 credit score, be at a $721. So the difference of five points can make a difference of a quarter percent on the interest rate. So ask your lender what their breakpoints are on the credit score. So the difference between a 780 credit score and a 640 is a little more than a full percent interest rate. So that's huge.

SPEAKER_01 16:54

In between the credit score brackets, really figure that out. So yep. And then what scams are you seeing out there right now?

SPEAKER_00 17:01

Advertisement, like if you go down the road and you see an advertiser, hey, we want to buy a house, we got rates at 5%. Well, that's great. What's the qualifying factors for that? So they go in and you say, hey, I want to buy this house for $400,000, and they'll say, Well, how much do you have to put down? You might have to put down 50% in order to get that rate of 5%. Okay? Or you may have to have a credit score over 780. So a difference between 780 and 810 is nothing. So 780 is usually generally the highest bracket.

SPEAKER_01 17:37

I wouldn't say that's a scam, then. I mean, it's just an incentive if you're putting a larger down payment on a property, or they're doing uh, you know, a lender or a builder buy down. We're seeing a lot of those in today's market where the builders are buying down the rate. Ultimately, it is baked in the purchase price of the property. So you're paying more and they're buying down your rate. Again, if it's a long-term play and you're planning on staying in that house, might not be a bad idea.

SPEAKER_00 18:04

Builders are different because the larger builders are controlled by their stockholders and their board of directors. So for them, it's selling units. That everything's built into the price at a home, but it's easier for them to take a hit on the interest rate or to give you points back or pay your closing costs so they can sell the number of units. Because if a unit sits there longer, that costs them more than it would be to pay it off. So you're going to see better deals when you go to the builders.

SPEAKER_01 18:33

Yeah, what's your thought with buying from a builder? I think is a great thing. The only caution I would have when you buy from a builder direct is just look at the area, really make sure that's the area that you want to buy in. I know, especially here in all over Florida, actually, it's all over the United States. They have beautiful homes, but sometimes they are in the middle of nowhere, and you have really bad congestion on some of these back roads until the infrastructure catches up with the construction.

SPEAKER_00 19:01

Yeah, I don't mean to get sidetracked, but I did a whole thing before on builder developments. So where are you in that home? So we look at it as a bell curve. So as the project starts, the builder puts a lot of specials out to get those first houses out to market and get them sold. So they're rushing to get it. They start building, so the prices are low. So if they're building a thousand homes, the first hundred homes may be a great deal. Then the home prices start going up as that project develops along. The builder can start breaking up and those pushes the prices up. So a $300,000 home halfway through the project is now $380,390. And then the last hundred homes, they may want to fire sale them because they're the lots that no one wanted. But when its appraisal is done on the square footage of the home, not necessarily where that home is stationed in that development, prices are back down to 300. But two months ago you bought a house at 390. Now your home is only worth 300,000 because of built a fire sale to get the heck out of Dodge.

SPEAKER_01 20:09

Yeah, and you're competing with the builder if you want to sell, because, like you said, if they're selling a thousand homes in that neighborhood and you're, you know, unit number 250 or 100, you probably got a pretty good deal on the property because they're pushing the prices up, but you're gonna have a really difficult time if you need to sell in year three, four, or five, if they still have 500 homes left to build, because they're gonna beat you out on pricing and amenities most of the time. So definitely a little bit different of an animal when you're buying from a builder in a larger community. What bad deals are you seeing?

SPEAKER_00 20:46

A lot of the 100% financing. A lot of first-time home buyers get nailed on them.

SPEAKER_01 20:51

What 100% financing is there out there right now? I thought it was only VA deals that were 100% financing.

SPEAKER_00 20:58

Well, you have your traditional VA and USDA. USDA is based on density. You may want to ask the realtor you're working with or your mortgage broker or lender that you're working with, is the area in the USDA area to get that 100% financing. You can do FHA. A lot of lenders have programs, it's 100%, but it's the 96.5% FHA loan plus the piggyback second. And a lot of these piggyback seconds, they'll say it's 2%, but you're going to have the house and not refinance out for 10 years. So if you're getting into a house and you're getting 6.5% or 7%, and the interest rates drop a year later, that 3.5% originally, okay, you have to watch that, is now all that interest may come due as well as that 2% or 5%, and maybe 2% higher. Also, what happens is when you have a piggyback second, if you don't put down money because you're getting a second loan, it changes your CLTV. So when that happens, you're at 100%. That first mortgage, instead of being at 6%, you're now getting six and a half or six and three quarters because you're not putting any skin in the game, so to speak.

SPEAKER_01 22:14

So just really understanding the financing that you're getting into, if you're looking for lower down payment type loan, make sure that you're getting a good deal. Make sure that you're not going to get hosed in five years and you're kind of trapped in a property that, you know, you're you're not really gaining equity in. And I tell you, that's a challenge because right now you talk about the cost of housing more or less across the country. There are some still very affordable markets, but it just seems like everything's gone up. Then interest rates have gone up too. So if I were a first-time home buyer or someone looking to buy a home, a young family, and I said, I'm going to jump in, they're offering me 90% or 100% financing. I would really want to jump into it. I guess that's the takeaway. You just have to really make sure that you're researching the loan program that you're getting into, so that down the road, two, three, four, five years, you're really in an equity position. You don't want to be upside down in equity or perpetually house poor.

SPEAKER_00 23:15

Yeah, one of the things that I always teach people is you want to make sure the investor for you loan, whether you go to a bank, whether you go to a lender, you go to a mortgage broker, the investor behind the lender, is it Fannie Mae or Freddie Mac? You want a Fannie Mae or Freddie Mac. What we've experienced with the market crash in 2007 through 2012, the people that had the chance to do the government programs, the bailout programs, if they didn't have a Fannie Mae or Freddie Mac loan, they didn't qualify those. So they've lost those homes. They went into bankruptcy, they had a foreclosure, they did it a deed in lieu, or they did some type of short sale, and they were stuck with the deficiency. So not knowing who is the backer, who is the true investor of that loan is really important.

SPEAKER_01 24:10

Yeah, that seems like a lifetime ago, too. And you'd think that, hey, that would never happen again. Things tend to come in cycles. So it is really protecting yourself. And then you had mentioned shell games too. I thought that was an interesting word to bring up. What type of shell games would be cautious of?

SPEAKER_00 24:25

We talked about earlier of going down the road and seeing a loan for 5%, and you go in there, and they're offering the rate, but when you go in, a lot of banks will tell you what your credit score is or what the rate is based on your credit score. So what happens is when they advertise a rate of 5% or 6%, and you think you're going to get that rate, they just charge those additional bank fees. They just charge those other underwriting and processing fees. Whereas someone can tell you they don't have those fees and they just blend them into the rate as well. So it's no different than going to a car dealership and buying that car. When they walk in and you say, How much is that car? And they say, What do you want your payment to be? They didn't answer your question. They want to find out which the simplest way, and they just shuffle that money around. So a lender can cover the underwriting fee. So they can say, Well, we don't have an underwriting fee, and they can put it in the interest rate. They can put the processing fee in the interest rate. There's a lot of things they can do, whether that's hiding it. That's what I call the shell game. You don't want to pay underwriting fee, you don't want to pay a processing fee. That's fine. We don't have one. But all of a sudden your interest rate's a quarter percent higher.

SPEAKER_01 25:38

Perfect. Before we wrap up today's podcast on mortgages, is there anything that you wanted to add back into it or add to it?

SPEAKER_00 25:45

I always enjoy doing this. I always enjoy helping people. I tell people find out what your credit score is, find out the neighborhood you want to be in first, find a good realtor, a seasoned professional, and find a good mortgage lender. Don't be afraid to shop around. Know your credit score, know how much you have put down, and balance paying off your debt and the amount of money you need to save. You should always go into a house with at least six months' savings beyond your down payment and closing cost.

SPEAKER_01 26:14

Perfect. Well, thank you for being on the podcast today.

SPEAKER_00 26:16

Great speaking with you, Brian. Thank you for having me.

SPEAKER_01 26:19

If you'd like to get connected with today's guest, log on to realestateexplainer.com and click the Get Connected button on the homepage.