Demystifying The Mortgage Process (podcast)

00:35
First, I'm happy to welcome back my colleague, David Walters. David is a senior vice president here at Palisades Hudson. He serves clients on the West Coast and across the country from his home base in Oregon. David, welcome back to “Something Personal.”

David Walters
Hi, Amy. Thanks for having me. And Doug, good morning. It's been a few years, but Doug and I go back 15 years, I think. I looked this morning. So … Working on mortgages for different clients. So good to see you again.

Amy Laburda 01:01
Great. So as David teased, I'm also excited to introduce you all to Doug Kenner. Doug is a private mortgage banker with Wells Fargo. He holds an MBA in finance from Cornell Johnson Graduate School of Management and has more than 15 years of experience helping homebuyers navigate the mortgage process. Like me, he's based in New York. Doug, thanks so much for sitting down with us today. I'm really looking forward to the conversation.

Doug Kenner
Absolutely. Thank you for the invitation.

Amy Laburda 01:26
So Doug, before we dive into the nitty gritty of the mortgage process, I wonder if you could take a moment to explain to listeners, or at least to those like me who've never bought a home, what does a mortgage banker do, in broad strokes? What does your day-to-day look like?

Doug Kenner
Oh, wow. That's a loaded question. So day to day, it's really … I'm in charge of the entire mortgage process, from the genesis of wanting to buy a home all the way to the closing table.

01:53
So I stay involved with customers as they're starting their search, through their search, through contract phase, all the way through the closing process, the closing table, essentially. Yeah.

Amy Laburda
And how long have you been working with mortgages and sort of how did you get into this path?

Doug Kenner
Sure. So I've been in the mortgage business since 2005. But like you mentioned before, I got my MBA from Cornell back in 2000, started working at DLJ [Donaldson, Lufkin & Jenrette], which

02:23
then became Credit Suisse. Unfortunately, the training class that I was in back then got laid off after 9/11, 2001. So I really wanted to stay in New York City. I loved the energy of New York City, really wanted to be in New York City. And so I got into the real estate business, selling and renting apartments in New York City. Loved it.

02:48
But as you know, that … You know, 2001, 2002 was pre-internet, pre-text message. So essentially you're running around Manhattan, you know, using pay phones and hoping people meet you at apartments. And after a few years of doing that, I said, you know what, I need to be in one central location again, sort of get back to my roots of finance. And I saw an opening at a mortgage brokerage company in 2005, and worked there for four years.

03:17
And then eventually the boss, the wife, said in 2009, I think you should be at a bank. You should be working at a large, brand-name company. And we had started looking around, and ultimately I chose Wells Fargo. And that's where I've been since 2009, except for a short pit stop in 2022. After COVID, came back in 2022. But I've really been here

03:45
since 2009, for all intents and purposes, helping people navigate the homebuying process.

Amy Laburda
Nice. So before we jump into the sort of evergreen mortgage process nuts and bolts, I did want to touch a little bit on the housing market. Now, I will say we're not a next-day podcast. We're not “The Daily.” We're recording in early 2026, and this will come out a little later in the spring. So with that caveat, that things can change,

04:12
I just wanted to see if there are any broad trends that you're seeing right now in the housing market. Anything really shifting, anything sort of staying the same as we move from 2025 into 2026?

Doug Kenner
Well, I feel like each year, we as mortgage bankers and I think real estate agents tend to focus on the spring market, the fall market. So there are two, like, huge parts of the year that everybody seems to focus on. And I know as we're coming on the spring market,

04:40
and perhaps that's when bonuses are received and people have a better idea of what their year is going to bring, or school years are starting to close out and they're starting to think about the fall market. People are starting to plan. Most activity doesn't really happen over the summer or the winter, just because of the … People like to take vacations, the winter holidays, etc. So the spring market and the fall market are really the drivers.

05:07
So right now, we're just getting a lot of preapproval calls for people who are trying to prepare. What are going to be my options? What will it look like if rates improve? So we're doing a lot of iterations of likely scenarios for people, helping them to be ready for their homebuying process.

Amy Laburda
And this is just a “my own curiosity” question, but obviously the housing market has to vary a lot depending on where in the country you are. I know

05:34
here in New York, we're often accused of exceptionalism, but I do have to feel like there are some particularities. When you work as a mortgage banker, are you just really locked into where you are geographically, or do you keep an eye kind of on how the country is moving in a larger view?

Doug Kenner
I think we have an eye on other parts of the market, especially when you're from somewhere else. Maybe you have another … like a sense of home somewhere else, and maybe you keep an eye on other markets.

06:01
For us New York City bankers, I think a lot of people focus on second-home regions. Florida. People focus on Colorado; Utah; Jackson, Wyoming; a lot of California. So people focus on second-home markets, vacation regions, and primary residences. So I guess the answer is yes, you can focus on other markets, but predominantly since most of our business is local here, so much

06:30
attention is paid to New York City, Long Island, Westchester, New Jersey, sort of the Tristate area.

Amy Laburda
Makes sense to me. So let's … I've teased it a couple of times, so let's finally get to it. Let's step back and sort of look at the mortgage process. So… Many of our listeners have probably gone through it, but not all of them. For people who've never done it, or people who are sort of newer to the housing market,

06:54
how can you tell when you're ready to purchase your first home? Are there any particular signs to look for, or is it a thing you just have to decide that you're going to prioritize?

Doug Kenner
I think it's B. I think it's just about being ready to prioritize making that purchase. Getting your ducks in a row, making sure that your credit is good, that you don't sort of have a lot of outstanding liabilities, making sure that you have a work history that will support

07:23
income qualification, saving up money, potentially lining up any gifts that you may be getting for a purchase, potentially researching any homebuyer grants that may be available in certain municipalities. So it's about doing due diligence to figure out what you can do versus what you can't do. Like instead of just saying, I don't have enough money, I can't buy a home. There's always ways,

07:49
especially if you can potentially get family help or there's grants in your area. There are some lenders out there with 3% down, you know, 3% down purchase price. And depending on the prices of the home and the markets, maybe somebody does have that saved up, but because we're so trained to believe that you have to have 20% down, that 3%, you can make that work.

Amy Laburda 08:16
David, from a financial planner's point of view, do you have anything to add or sort of elaborate on with Doug's answer, as far as readiness goes?

David Walters
Yeah, I mean, Doug touched on budgeting. And as a financial adviser, that's kind of where I come into the picture when I'm dealing with our clients and homebuying, and particularly, like you said, first time homebuying, where they might not entirely understand what to expect. And when you're looking at a mortgage, you have

08:44
the mortgage payment, of course. But homebuying is … There's a lot more to it than just the mortgage payment, when we're looking at it from a budgeting perspective. There's other major costs like real estate taxes and homeowners insurance, you know, and stuff that is more expensive when you're maybe shifting from, like, a rental perspective to a homebuying perspective. You know, utilities are often more expensive, depending on what type of property you're moving into. And

09:13
one that I … You know, property maintenance and upkeep is a big deal when you're a homeowner, right? And sometimes people don't really think about that or think about how impactful that can be on their budget. Because when you're renting, the landlord's responsible for that. When you own the home, you're responsible for that. You need a new roof? That's on you. You need a new water heater? That's on you. So when we're looking at budgeting with clients, and younger clients, I always recommend that people build in, you know, a conservative figure for, like, annual ongoing maintenance.

09:41
But from a budgeting perspective, that's kind of like where I jump in, and that's the perspective and the lens that I look at it through.

Amy Laburda
Sure. This is, guess, mostly a question for David, though, Doug, you can jump in if you have any thoughts too. But beyond just the “numbers” readiness, is there a particular emotional component with homebuying, compared to other big financial goals? I feel like, you know,

10:06
anecdotally, sometimes there's a sort of American dream, “own your own home” feeling that isn't necessarily the same with saving for retirement. But am I overblowing that?

David Walters
No.

Amy Laburda
Or is that a thing you've seen?

David Walters
You know, yeah, definitely that. I think that's a big aspect in homeownership where, you know, at a young age, people start to prioritize that. And like you said, whatever, you know, whatever it might .. Is it, you know, the American dream? People don't like throwing away their money on rent? So I think…

10:35
And people want to start building their wealth, right? And they view homeownership as maybe the first step in really starting to do that. So: psychological aspect to it for sure. When they're budgeting and thinking about other things, they might … I see it a lot, where they will kind of kick the can down the road on other things, like retirement and saving for college, maybe, for their children, which in a sense is

11:00
kind of logical, right? It's understandable. Homeownership is a near-term goal for many young people. Retirement and college savings are far off, long-term goals. So it's easy to have that prioritization in mind. And like I said, sometimes I can agree with that. Building savings for a down payment is usually the first big savings priority that many people have. I always recommend that you don't completely forgo the other things, but once

11:28
the goal of saving for a down payment and acquiring your first home is behind you, then the priorities can shift to those other financial planning goals.

Doug Kenner
Yeah, you'd be surprised how many people contact me: We're about to … Our family is about to expand. We need to be in this house before we have this, you know, second child, third child, first child. We're about to get married and we want to move into home so that

11:54
that part of the story plays in with our new relationship as well. Everybody wants to sort of combine it all at once. So we do see that often as well.

Amy Laburda
Yeah. All right. So I'm going to hit you with some terms and some definitions here, for our newer or inexperienced homebuyers. I know that with sort of the shifts we've seen in recent years in interest rates, we've been hearing a lot more about adjustable rate mortgages.

10:21
Or I guess, at least I have. I work at a financial planning firm, so I might be a biased sample. But big picture, what are the differences between a traditional fixed rate mortgage and an adjustable rate mortgage, and which is good for different kinds of situations?

Doug Kenner
So adjustable rate mortgages, typically you'll see them in three different variations: the five-year ARM, a seven-year ARM, and a 10-year ARM.

12:49
And what that means is that the rate will typically be fixed for five, seven or 10 years and start to adjust. It will have caps based on an index and margin as to what that rate can become in the future. So typically you can't go more than 5% over the start rate, if you keep it into that adjustable period. Now what the bank will offer you in exchange for taking on that risk of a future adjustment rate change,

13:17
will be a lower interest rate. So it really depends on the spread between the adjustable rate mortgage and the fixed rate mortgage as to whether it would make sense for somebody. And then I always bring in the factors, you know, what if you aren't planning to be in that property for a long period of time? If you're going to have a liquidity event that allows you to pay off the mortgage or pay it down substantially within that five, seven or 10 years, that

13:44
once it starts to adjust, maybe you're at a more manageable payment at that period of time. And then sometimes people just want that 30 year fixed. They just don't want the payment to change. They just don't want to have to think about it. You know, I always tell the story about my first homebuying with my wife, and we did the five-year ARM on a one bedroom co-op. And she said, why are we doing a five-year adjustable? I said, if we're in this apartment

14:12
longer than five years, we have bigger problems than the mortgage. So the adjustable rate mortgages have their place. Because why would you want to pay extra money and interest if you just know that either you're not going to be somewhere for that long of a time or that you have the potential to pay it off?

Amy Laburda
Yeah, I imagine … David knows that we talk on this podcast a lot about there's

14:36
no one-size-fits-all answer for almost anything, certainly that we have talked about. And I think that it sounds like obviously you've got the numbers, right? Your plan as to how long you'll be there, what the interest rates are. But I imagine you also have the temperament of the person taking out the mortgage, right? I have friends who are always like, OK, I'm going to … Already planning for the next upgrade. I've got my eye on the horizon. We're going to keep moving.

15:01
And I have other friends who are like, I want to find the right house and stay there until I die. Like, obviously both have factors outside their control, but that sort of internal drive, I imagine, plays into that decision too.

Doug Kenner
It does. I think it's about somebody's level of risk. And if they, if they can sleep at night, knowing that their interest rate could change in the future. But just because it could be your forever home doesn't mean it's a forever mortgage.

15:29
Because you can always refinance, assuming that the value of the home doesn't decrease or decrease dramatically, that you stay working, and you still have income to qualify for a refinance. So there are risks. And we try to explain that to everybody. Like a refinance is not an absolute. Most people operate like it does, but there is definitely some risk when it comes to refinancing a home.

15:56
So, yeah.

David Walters
And timing matters too, right? Like, you know, years ago when interest rates were just as low as they've ever been, like, I imagine you weren't seeing anybody hardly doing it. You know, I would imagine everyone was trying to lock in long-term mortgage rates and not using ARMs. Current environment’s a little bit different. And, you know, it is speculative, when you're looking forward to like, OK, you know, where are interest rates going to be five, seven, 10 years from now compared to where they are today? And

16:22
because, like you said, you pointed out the risk that interest rates could be significantly higher when the rate adjusts. And then all of a sudden, you're in a position where that payment is no longer feasible for you. So, you know, timing matters when — and the interest rate environment matters, when you're looking at ARMs versus fixed income or fixed rate mortgages, of course.

Doug Kenner
Yeah. And I think one, you know, one point to note is that the agencies and most lenders, they do qualify you at a higher qualifying payment

16:51
than your lower adjustable rate actual payment. So they are building in that potential future adjustment, as to whether you even qualify for an adjustable rate mortgage. So there is some sort of mechanism built in place to make sure that we're not putting borrowers at future risk.

Amy Laburda
You know, while we're talking about timing, I'm personally an elder millennial. And I kind of wonder, have you run into, with people who are,

17:20
say, my age or younger and borrowing: We grew up with historically low interest rates kind of as the norm for our early adult life. And I know talking to people in my life who are significantly older than me, they're like, you know, rates change, environments change. There's much more of a sort of built-in sense sometimes of what normal is. Is that a thing you've run into working with homebuyers more broadly, at the risk of overgeneralizing?

Doug Kenner
Yes. I mean, I always try and think of jokes.

17:49
When people talk about historical interest rates, like, yeah, we also used to walk around with Walkmen. You know? Like, everything was different way back when. The world is a completely different place.

Amy Laburda
Yeah. So I want to circle back to the earlier point, Doug, you made about down payments. I certainly have heard the perennial, “you’ve got to have 20%” wisdom. What has really changed as far as that flexibility goes? And what does that look like? What are the consequences for a smaller down payment upfront?

Doug Kenner 18:19
Yep. So most loans that can be done within agency loan sizes — so when we talk about agency loan sizes, we're thinking about Fannie Mae and Freddie Mac, loans that can get sold to the agencies. And those loan sizes, right now for one-family[ home]s, are less than $832,000. There's a whole schedule for two families, three families, four families. And so with agency loan sizes, you can typically put less than 20% down, sometimes as low as 5% down, depending on the property type, and

18:49
whether it's going to be a primary, a second home or an investment, and how many families it is. But typically in exchange for putting less than 20% down, you pay private mortgage insurance to insure the mortgage. So it's an extra payment that you make monthly, and it will depend on credit scores and loan-to-value as to how much that extra mortgage insurance payment could be. But the nice thing is, is that once you get under 80% financing, that mortgage insurance will drop off.

19:18
Now, there's also government loans, like FHA loans, which: I am not an FHA expert. But you can also put, I'm pretty sure it's 3.5% down and there is mortgage insurance, except for that mortgage insurance, it typically will stay on the mortgage for the life of the loan. You pay that monthly and there's an upfront mortgage insurance premium. So FHA is completely different from agency and jumbo lending.

19:47
I'm not an expert, because in New York City there's not a lot of FHA lending. And I know if customers want experts, I try to usually find them an expert for FHA lending. That's not to say that I couldn't figure it out within a few hours, but FHA lending, I think, requires a little of expertise to make sure that you're helping the customer best.

Amy Laburda
David, from the financial planner's point of view, I have to imagine

20:16
PMI is a thing you probably want to steer away people from, just because you're not building equity with that, right? But are there any other pros and cons that aren't as readily available on the surface, re-PMI?

David Walters
I mean, sure. It's nice if you have the 20% down payment so you can avoid PMI. Of course, I would say, yeah, do that if you can. But not everyone can do that. So I wouldn't say it's critical to the process. And again, it all comes back to

20:42
budgeting, right? If I can't put down 20%, I need to work the PMI into my budget. And that's … that has to be part of the calculation when you're thinking, OK, what can I afford and what is my monthly payment going to look like? Because then, there again, it's another cost in addition to the mortgage that you have to consider, along with the other stuff that we talked about before. So you just don't want to be surprised by it, that's all. And so you know it's out there. And you know, it's like I said, it's fairly common not to have 20%. So, you know,

21:12
PMI is a thing and it's out there. But like I said, it's in no way disastrous to have private mortgage insurance, because when you're entering into the market, that's part of it.

Amy Laburda
So I imagine this comes up way less often. But if you happen to have more than the 20% down payment available, are there any advantages to putting more money down upfront?

Doug Kenner
Yeah. So what you'll see, especially with the agency loan sizes, is that by putting more down,

21:40
you may be able to do better on the interest rates. It depends on what your credit scores are as well. So for example, if you put 40% down, so 60% financing, you can usually make sure that you have a better interest rate, because the lower loan-to-value will help reduce the effect of your potential lower credit scores. Not only that, but by putting more down, your monthly payment will be lower, which like David said, will help with budgeting.

22:08
So it really depends on what somebody's budget is, as to potentially putting more down to even help qualify and help potentially lower the interest rate.

David Walters
And I often come at it from … I'll make the counterargument to that, as far as putting more down rather than less, is that as a financial planner, I often look at liquidity too. So, you know, anything that you're, you know … If I'm putting down more than the 20%, I'm putting more of my liquid assets into an illiquid asset that

22:38
I can't really get that money back out, until I either sell the house or refi the loan. It becomes funds that are then no longer available to me. So, you know, there's the question of what else would I be doing with those funds? Would they be invested somewhere else if they weren't invested in the house? Because like I said, once you put the money in, you can't really... or it's difficult to get it back out. So, liquidity is... I like to stay liquid if I can. So that's always a consideration.

Doug Kenner
Which, you know...

23:06
piggybacking off of David's comment is that yes, sometimes when people are interested in lower interest rates because they can put more down, what I always introduce is, well, instead of putting 5% extra down, or 20% extra down, potentially we can help, you know, lower your interest rate by using points. So points would be a… You know, potentially one point equals 1% of the loan size, to impact the same as putting 5% of equity down.

23:33
So potentially increasing your liquidity, but also allowing you to buy down interest rates by using points to buy down rates. Again, it's always a borrower decision as to whether they use points or not, but sometimes that's the place where we bring that up, especially if they want to have a lower payment.

Amy Laburda
So just to clarify for those of us who haven't bought a home before, how exactly do points work?

Doug Kenner
So most of the time we will quote interest rates with zero points.

24:01
And what zero points means: There's no extra costs for that interest rate. On some days, there may not be a true zero-point option that we can quote. So it may include a fractional point. So if one point equals 1% of the loan size, a half a point would be equal to half a percent of loan size. But then in the same vein, if we can't offer that true zero-point rate, sometimes people will accept a higher interest rate for a credit back towards closing costs.

24:31
So it really depends on what a bank's rate sheet is on that day as to how we can quote. Most of the time, people want the zero-point or as close to zero-point option as possible, because they're already saving up. They already have closing costs. They already have plans on what they want to do to move in, that they don't want to create extra closing costs for themselves. But sometimes they have a place where, you know, if you really want to be within a specific budget. Then

25:00
by putting a little bit extra down upfront, either via equity or via that extra cost, you can get to a lower monthly payment. It almost works in the same way as a car lease, right? Like everybody wants to sign and drive, and nobody wants to come out of pocket that extra $3,000 for the lease signing. But you're going to have a higher monthly payment if you don't put that extra down.

Amy Laburda 25:25
OK, so earlier you mentioned that as we're coming into spring, you're getting a lot of preapproval applications. So I think it's probably best we briefly touch on preapproval, prequalification. What's the difference? What are each of those? And do people need to do them as part of the process?

Doug Kenner
Sure. So a prequalification is typically the lightest level of pre-decision, if you will. And it's usually just a letter saying that you've spoken to a bank, you qualify for X mortgage,

25:54
and you have enough saved up in the bank. And it's just a letter. It doesn't mean that any system decision has run. It doesn't mean that any credit scores have run. It's literally just a letter that lenders will supply just to help somebody understand where they might be. It's a very informal process. The preapproval is when we actually take a loan application, run credit scores, and get a system-based decision based off of the inputs

26:22
of the application. So a borrower puts in their employment, they put in their assets, we get their soft credit scores and are able to run a preapproval. We can typically amend that preapproval letter that's needed for any specific scenarios that they might have, but really the preapproval typically signifies that they're ready in the process. And real estate agents will typically want that preapproval, because then they know that their buyers are serious

26:47
and that they've spoken to a bank, and at least put pen to paper as far as what they can afford on a monthly basis and what they might have as far as assets for a down payment. And for some people, we advise sort of a next-level preapproval, where we actually collect documentation — income documentation, asset documentation — and present that to an underwriter for an underwritten preapproval. I recommend that a lot for self-employed borrowers.

27:15
You know, people who may not know what their actual income is for qualifying. I love self-employed borrowers, but I've yet to have one that actually puts their actual income on an actual application, because there's so many write-offs. There's so many ad-backs that we can do from a tax return perspective, that it's very rare that a self-employed borrower knows their mortgage qualification income. They know their income qualification for tax returns. So

27:44
we'd like to gather that documentation so that we're not generating a false positive preapproval letter, so that they can actually get out and make that property purchase. What we never want to do is have somebody get emotional about a home purchase based on a preapproval that may not be accurate, because we didn't have the income documentation to support that actual preapproval.

Amy Laburda
That makes sense. So if I'm hearing you correctly, prequalification is kind of more a

28:13
“what can I probably expect,” like, an informational piece of documentation for the potential borrower. Versus preapprovals or the underwritten preapprovals are things that you'll be handing to other people in the process.

Doug Kenner
Yes, the preapproval letter you typically would share with your real estate agent. And sometimes the real estate agents will even present that preapproval as part of the actual offer.

Amy Laburda
So we've been chatting about basic mortgages for a while, and I want to take a step into

28:42
slightly less common situations, maybe a little bit. Or maybe more common in certain sets of people than others, depending on how you want to look at it. I think one thing that's been on my mind with this conversation is, I know that people traditionally buy a house either solo or with someone they're married to. But in my own life, I know people who have looked at buying with a long-term romantic partner to whom they're not married, or a close friend, or even a sibling.

29:10
And I know that that can be more complicated. So I wanted to know from the mortgage banker point of view, are there any particularities about non-married people applying together to be aware of? Is this a thing that is really hard to do? Is possible to do, but complicated? Something that you haven't seen, and that I'm just out in left field about? So I'd be interested to hear.

Doug Kenner
No, I really don't think that there's any complications with adding…

29:38
You know, with having co-borrowers that aren't married. That's usually not an issue. Where it can be a little complicated is, let's say that you're a husband and wife, or boyfriend and girlfriend, and you're looking to buy a property and potentially you don't qualify. And you have a parent that says, look, I'll jump in and I'll help. I don't want to just give a gift, but I'll go on the loan with you to help qualify.

Amy Laburda
Yeah.

Doug Kenner
So where that does become

30:05
challenging, we call that the nonoccupying co-borrowers situation. Where that does become complicated is that we're also looking at nonoccupying co-borrower’s income assets, credit. We're doing a full analysis on them as well. And that can become complicated. Sometimes they don't know what they're signing up for in this scenario. But we do the full probe of them as well.

30:33
It's not like a rental, where you just get a guarantor and they just sign one page on the bottom. It's a full analysis and full work up on the nonoccupying co-borrowers as well.

Amy Laburda
David, you and I talked about prenuptial agreements, or prenups, on an earlier episode of this podcast. And Doug's example kind of got me thinking: If a parent is signing up, as he was saying, as a co-borrower, or if they're even helping with an outright gift,

31:02
is it common that they then have opinions about what happens to the property, if the marriage or the relationship breaks up later? Obviously, if the couple's prenup includes language about that upfront, they're golden; there's nothing else to do. But if the situation is more complicated or if they get the house later, is there something they should look for? Is a post-nup an option? What have you kind of seen in this area?

David Walters
For sure. And like, especially with prenups, prenups are often going to deal with real estate or a family home,

31:31
especially a family home. When children are contemplated and the type of thing of, you know, who stays in home. There are lots of different variations and options that will be, that could be discussed and negotiated with the attorneys. You know, especially when you think about situations kind of like what we're touching on, where maybe one spouse or one family is more moneyed, or one spouse is expected to earn more income and pay for the house, perhaps. And so protection for the non-moneyed spouse, when it comes to the home,

32:01
is most certainly something that would be addressed in a prenup. It's usually one of the key provisions. And oftentimes, one of the things that can get hung up in a prenup, and there's many things that can hang up a prenup, right? But the home, the family home, is often a key one.

Amy Laburda
Well, I have to imagine it comes back to two things you've touched on before, which is liquidity, right? Like, you can't just saw the home in half, King Solomon style.

32:26
But also the emotions that get tied up in a home, I imagine, are in play, that it can be an asset that people have a lot of connection to, in a way they might not stock position, for example.

David Walters
Sure. When you're thinking about prenups, you’re thinking about what could go wrong. When you're thinking of divorce negotiations and stuff like that, what happens with the family home is always a point of contention, or often point of contention.

Amy Laburda
Yeah. While we're here talking about

32:56
parents maybe helping out, I know in other venues we've talked about intrafamily loans, and the pros and cons of them, a lot. If, as Doug said, the co-borrower doesn't want to go through that entire process but would rather just set up an intrafamily loan, while we're here, are there any particular pros and cons they should be looking for, as far as how to set that up, tax downfalls that could come along if it's done improperly, those sorts of things?

David Walters
I mean

33:22
I probably see … I imagine when we're talking about family loans, which is something I see quite a bit, Doug might not see that. You know, you don't need a Doug when you have a family loan, right? If the money is coming from the family, you don't need financing from the bank. So. I've been seeing a lot of that lately. Maybe it's particularly the baby boomer generation who want to help fund a purchase for their children. But the bank of mom and dad is a very real thing in the current environment. But when I look at it from

33:52
an estate planning perspective, or a family wealth perspective, it can be a great thing. There are minimum interest rates that you need to charge on the family loan, called the AFR rate, but it's going to be lower than the rate that you can get from a bank. And so usually mom and dad are pretty open to making the rate as low as possible. So from the kid's perspective, they get a lower interest rate than they would from the bank. They are making their payments back into the family. It’s not going to an outside third party, the bank. It's going

34:22
back up to mom and dad, which … Families with wealth that will eventually likely come back to them in some form when they get an inheritance, or at least some portion of that, if they have siblings. So it's keeping the money in the family. So usually both generations like that aspect of it. And from the parent's perspective, often how I discuss it with them is: It's like a bond in their portfolio. You can have a bond paying 4 or 5%.

34:48
Or you can have a home loan to your kids that pays 4 or 5%. From an investment portfolio perspective, it's kind of the same, yet this has other benefits. Now, clearly we're talking about a certain subset of society that can do this kind of thing. This is not an option that's available to everyone, but for those families in that position, it's usually viewed, in my experience, as a win-win for both generations.

Amy Laburda
Yeah. Do you usually just see it for that subset who can do

35:17
basically the entire home loan? Or have you ever seen a situation where someone basically loaned the down payment, a smaller helping hand?

David Walters
I've seen that and you have to go… And so we'll talk about one thing we’ve got to consider there. Is it secured debt or … Is it legitimately attached to the home like a normal mortgage, which, you know, especially if you're lending the whole thing upfront, like, that's something we absolutely recommend. You want it to be a legitimate loan.

35:44
You file, you record it with the county, just like you would a normal mortgage. Like mom and dad are serving as a bank, and kids are serving as the borrower. It needs to be legit and you need to dot those I's and cross those T's. If you're talking about a smaller loan for a down payment, what I've seen in those cases is it might not be attached to the home or the secured mortgage, but they might just be like a personal loan. And you can have also, you know, you still need to charge that minimum interest rate, but it … because it's for a smaller amount,

36:14
It's … The parents are often willing to do that in an unsecured arrangement.

Amy Laburda
Yeah. And you and I have already talked about gift and estate taxes, so I won't make you go deeply into it again. I'll just link that episode. But while we're here, what should parents or other relatives be aware of, if they're just gifting the down payment or help towards it to their kids or grandkids?

David Walters
Right. So there's an annual exclusion amount, which … I think

36:40
this year, it's $19,000 per person. So that's the maximum amount of money you can give someone, where it's a freebie in a sense. It doesn't use your lifetime gift tax exclusion, and it doesn't need to be reported on a gift tax return to the IRS. And so that's $19,000 per person. So parents could each give $19,000 to their child. So double that to $38,000.

37:05
If parents are making gifts to a married couple, then you can double that again. So that's the maximum you can do without gift tax consequences. If you go over that amount, the amount that's over the annual exclusion is what's considered a taxable gift that needs to be reported to the IRS. That doesn't necessarily mean you're going to pay tax on the amount that is over the annual exclusion. All it means is that you're going to need to report it on a gift tax return. And that excess amount will count against your lifetime

37:35
exclusion for estate and gift taxes, which [the] current amount is like $15 million per person. So it's usually not an issue for most people to do that. You just have to report it properly for tax purposes, gift tax purposes, I should say.

Amy Laburda
Makes sense. All right. So in sort of talking about these more complicated scenarios and estate planning, I imagine trusts sometimes come into play, maybe closely held businesses. Doug,

38:05
from your point of view, if you're dealing with a house purchase made by an entity rather than by a person, is there any extra complications in particular, or is the process mainly the same? It's just happening through the entity instead.

Doug Kenner
So it can depend. So some lenders who only lend to individuals but allow for vesting to be in the trust or the LLC, it's your normal

38:31
borrower documentation, just an extra level of trust or LLC reviews. But there are some lenders out there who will lend to a trust or to an LLC. And I'm not 100% familiar on those processes, about an LLC buying a home. I'm going through the scenario now that trusts … It can be a little bit more complicated, because you're looking at more documentation,

38:59
and whether it's revocable or irrevocable, and who the beneficiaries are, etc. So it definitely can get more in depth, and it goes through a whole legal review process. So it can be more complex, and it definitely adds a layer of review. But, you know, for estate planning, if that's what people want to go through, we're always happy to take that extra level of step for trusts and/or LLCs.

Amy Laburda
Yeah.

39:23
I think I'm safe to assert that this sounds like a situation where you definitely want to call the professionals, probably both of you or your counterparts, rather than trying to do this on your own.

Doug Kenner
Yes.

David Walters
For sure. I always recommend calling the professionals. You want things done properly, and you don't want to unwittingly trip over some technicality that results in unintended consequences. So especially when you're adding a layer of complexity like a trust or an LLC, it needs to be done right.

Amy Laburda 39:52
All right, so this is possibly more a question for David, though if either of you would like to chime in, you're welcome. Since 2017, the mortgage interest deduction for federal income taxes has been capped at a slightly lower rate than it was before: $750,000 for new borrowers. There's some exceptions for older mortgages. This was going to go away at the end of 2025, but the One Big Beautiful Bill Act made it permanent.

40:18
So I just was wondering, has this caused any concerns or changes in strategy, or is it kind of a situation where we don't let the tax tail wag the dog, we're just going to do what we're going to do and this is a new thing to be aware of?

David Walters
Yeah, I view it as the latter. I view it as more something to keep in mind. I haven't seen it really dictate the change in behavior by homeowners in my experience. People are generally going to buy what they're going to buy based on their lifestyle and aren't particularly influenced by shifts in tax deductions necessarily.

40:48
They might not like it compared to what the higher deduction used to be. So I hear complaints about it. But tax laws and limitations are changing and shifting all the time. It's just something you adjust to and make sure you're properly applying the deduction limits. Like I said, I haven't seen it dictate a change in behavior necessarily.

Doug Kenner
You know, when you wrote it in the email, about talking about the MID [mortgage interest deduction], I was like, oh, my gosh, I can't remember the last time I spoke about that or somebody had,

41:16
you know, a question about what the interest rate … you know, max interest rate deduction is. And then sure enough, the next day, somebody was deciding on a refinance, and he was trying to pick the right loan size because of, you know, the $750,000 [cap]. And I was like, you know, that's something you need to speak to your CPA about. It's … We can't advise. While I did take classes in accounting, I am not a CPA and cannot advise on any tax or,

41:43
separately, legal advice either.

Amy Laburda
Of course. All right, so let's touch on what I would term a good problem to have. If a homeowner finds themselves in a position where they can pay off the mortgage faster than they planned, for a variety of reasons, and the terms of the mortgage allow that, since I know every mortgage is a little different. If they can, is it generally financially a good idea to do that? And if not, what should they do instead? And if so, why?

David Walters 42:10
I guess I can tackle that first, since that's kind of a financial planning thing. It depends. That's always the answer, right? It depends. If it's high-interest debt, getting rid of that sooner rather than later can be an OK idea. At the same time, which I kind of touched on this before, to prepay in long term debt is taking liquid funds that can be used for other things, maybe other investments, and locking them into something illiquid. We can return to kind of the psychological thing too, like,

42:38
people do like being debt-free, so that plays into it too. So that … I've seen people, regardless of the math, whether it's, you know, what's the best financial decision, they might prioritize it because they just like the idea of not having any more debt. But from a pure financial perspective, for example, you know, paying down 8% debt might not make the most sense if you could invest the money and make 10% on it.

43:04
And also don't forget that the tax benefit, that mortgage interest, you know, because it's deductible. So if a mortgage rate is 8%, the after-tax rate, once you consider your tax benefit, is actually something lower. So again, I don't always jump at taking liquid funds and throwing them into something that is going to be locked in and illiquid, but it always depends. You crunch the numbers and you see what makes sense in your situation.

Doug Kenner 43:32
Yeah, and just to piggyback off that, is that if you do pay down the debt on your home and then you change your mind later, and you say, well, let's do a refinance to extract the cash, it will most likely have a cost to to reacquire the funds that you just used to pay off. So you could be in a situation where you're throwing money away, especially if you did what we call a cash-out refinance. And if you're in a high closing cost state, definitely not doing good things to yourself.

David Walters 44:00
Right. Refinances aren't free, right?

Doug Kenner
No.

Amy Laburda
Do you see people tend to … Do people refinance specifically to shorten the term of their remaining mortgage? Or is it usually about interest rates and their monthly payments? Or is that too varied to have a sensible answer?

Doug Kenner
To use David's words, it depends. I think it depends on … So people who bought within the last few years, that may have rates in the high sixes.

44:29
And as rates start to come down, potentially the 15-year fixed starts to make an option, as it's a lower rate usually than the 30. And if there's enough spread in the rate, and maybe your payment doesn't increase by too much, then going into the 15-year fixed could make more sense. So sometimes people can get double the help at once: shortening the term, lowering the rate, slightly increasing their payment, but they could afford it.

44:57
Sometimes the shorter terms make more sense.

Amy Laburda
So before we go, we're coming up to the end of the time, but I did want to briefly touch on second mortgages, or I think home equity loans as they're more often termed these days. In general, is there any sign that someone is a good candidate for this? Are there any particular risks people should look out for? David, I'll kick it to you first, but Doug, you may have some thoughts as well afterwards.

David Walters
This is another one where

45:25
there's so many situations, and it depends on the situation. When I think of risks, I'm thinking of broad risks, like over-leveraging yourself. What are you using the funds for? If you're doing a home equity loan for needed repairs, that's something that can be great and makes sense. If you're doing it to … over-leveraging yourself for something that's more… I don't want to use the word frivolous, but maybe not needed, then you want to consider that from a broad

45:54
financial planning perspective and whether that's a wise move. But every situation is unique. So I don't look at it from a broad-based risk thing. It's more specific to whatever the particular situation is.

Amy Laburda
That makes sense. I think those of us who were adults during the financial crisis of 2008-2009, there might have been sort of a gun-shyness. I know some people my own age sometimes are worried about a second mortgage,

46:23
but it sounds like from what you're saying, you really just have to look at your particular circumstances, what you plan to use the loan for, your broader situation.

David Walters
Absolutely.

Amy Laburda
So regular listeners know I like to give my guests the last word in the podcast. Now, David's been on before, so he knew this was coming and I didn't take him totally off guard with it. So I'll let him go first. David, are there any points about

46:47
mortgages and housing that we haven't touched on that you'd like to, or any final questions for Doug you'd like to ask before we wrap up today?

David Walters
I don't have any questions. I guess just my broad observation is that this stuff doesn't need to be daunting, although many people find it that it is. But lean on professionals like Doug. Go find yourself a Doug. Get a good mortgage broker, and that can go a long way in helping you understand the products, what's available, what the important factors should be to you, and kind of

47:17
apply it to your specific situation. As with anything financial, if you're well-prepared and have done your due diligence, it doesn't have to be overwhelming. At the end of the day, this is all just math, and they're kind of knowable answers, right? And you can compare options and you can crunch numbers and apply them to your situation. So that would be my broad observation.

Amy Laburda
Great. And Doug, I'll give you the very last word today. No pressure.

47:45
But do you have any final observations, any last questions, or just any sort of broad thoughts about people looking into the housing market and looking to get their feet wet?

Doug Kenner
Yeah, I would say the most important thing to do is start early. And by doing that preapproval process early, it really allows you to, not to use the term again, but really get your ducks in a row and identify any potential pitfalls that you might have, as well. Potentially, there might be,

48:12
you know, something on your credit report that you didn't anticipate that's really impacting your scores and that you may need some time to fix. You know, maybe you had identity theft or something like that, where your scores are a lot lower than they should be and you might need six months to get them back, you know, to a level where you won't have such an interest rate impact. So starting early and really uncovering, you know, any risk factors is, I think, the smartest thing you can do.

48:40
A lot of lenders these days offer soft credit inquiries, so it doesn't impact your credit score if you do a preapproval with them. And it at least allows you to get the ball rolling, to set yourself up for success when buying a home.

Amy Laburda
Great. Well, thank you both so much for sitting down with me today. I found it really educational, and I hope our listeners did too.

Doug KennerThank you so much.

David Walters
Thanks, Doug.

Doug Kenner
Anytime.

Amy Laburda 49:06
“Something Personal” is a production of Palisades Hudson Financial Group, a financial planning and investment firm headquartered in South Florida. Our other offices are in Atlanta; Austin; the Portland, Oregon metropolitan area; and the New York City metro area. “Something Personal” is hosted by me: Amy Laburda. Our producers are Ali Elkin and Joseph Ranghelli. Joseph Ranghelli is also our director, editor and mixer. If you enjoyed this podcast, please take a moment to rate and review us wherever you're listening.

49:36
It's a simple way to help new listeners find the show, and we really do appreciate it. Thank you.