Nate Reineke (00:13)
Hello, position moms and dads. I'm Nate Renneke, Certified Financial Planner and Primary Advisor.
(00:19)
And I'm Ben Utley, the service team leader and a certified financial planner here at Physician Family Financial Advisors. Today we have a special guest. β His name is Robert Hedges. Robert and I have been friends going back for at least a decade, β seems like about 20 years. Robert is one of my go-to guys when I have a question about mortgages or I have a situation that I want to get resolved. β He's good.
at regular mortgage stuff and also unique situations. So β he also has a unique backstory that makes him particularly relevant to our physician audience. So I asked him on as a guest. β Robert, introduce yourself and tell us who you are, maybe a tiny snippet about your family. And then let's talk a little bit about kind of your backstory, particularly vis-a-vis your dad and a little bit about β how you got here.
Robert N Hedges (01:15)
Thank you Ben. It's my pleasure to join you today and I look forward to hopefully sharing some information that will be helpful to your listeners about what the mortgage process is and and let you know that we're here to help with any questions they may have. β Specifically, β my family background is a medical background.
My father was a physician and an internist and my grandfather was also a physician and an internist. My mom was β a registered nurse. So our table conversation β invariably revolved around medical conversations on a daily basis. Whether we wanted to have them or not, we had them. β But I ended up with great reverence for physicians and their families. I know how hard they work.
Nate Reineke (02:02)
Yeah.
(02:02)
it.
Robert N Hedges (02:12)
how large their sacrifices are. At one time, I actually considered
(02:16)
you
Robert N Hedges (02:18)
medicine as my career option. β But β at the time I was exploring medicine, DRGs were just coming into β the medical environment and that seemed like β it wasn't a good path for me. So I looked for what I would consider to be the next biggest β
event compared to your well-being and health and that to me was β housing. And so that's what led me into the mortgage business some 30 plus years ago and it's been a fabulous career and I've loved β serving and supporting β physicians and others with their mortgage financing goals.
(03:05)
Great, good answer. Okay. Nate, I'll hand it over to you now.
Nate Reineke (03:10)
Yeah, so β Robert, we have a bunch of questions and we wrote these questions, but the way we came up with these questions was essentially these are the questions we get every day. And just like on our other episodes, β we're taking them straight from the physician's mouth. Okay. So, but before we get into those, I'm curious, what do most physicians get wrong about mortgages?
Robert N Hedges (03:36)
Well, β
On average, physicians are very competent and intelligent people. So if I had to say a couple of things that I feel that perhaps they should rethink as they enter the mortgage process is it's not always about rate and fee and chasing the lowest possible combination. And the other part is learning to perhaps delegate to a professional.
Nate Reineke (03:42)
Mm-hmm.
Robert N Hedges (04:06)
β Because they're β highly intelligent, they often will overanalyze the situation rather than rely on the support that they have in the mortgage professional that's supporting them.
Nate Reineke (04:20)
Mm-hmm.
(04:22)
So, you know, I see what you said about rate and fee, you know, what it costs to get the loan and what it costs to keep the loan. If I'm a physician and I'm choosing to just look at the rate and the fee, I see mortgages more like a commodity, right? Like Robert's mortgages and, you know, bank rates mortgages, whoever's mortgages, if I'm seeing those as all the same, what is the difference?
Like, where am I going to go wrong with that? What's going to... Like, if there's bad stuff that happens with my mortgage, what's the bad stuff when bad stuff happens?
Robert N Hedges (04:53)
Well, mortgages are offered in a lot of different arenas, Ben. You can get them from direct big box banks. You can get them from independent mortgage brokers. You can get them from credit unions. You can get them from my company CMG, which is a very large independent mortgage bank. But I think the most important thing in analyzing
and staying away from a mortgage being a commodity is helping people solve problems with related to their mortgage endeavors. And by that, my example would be if someone were to present, say, a $600,000 loan at a 6.5 % interest rate with a loan fee as compared to a 6.75 %
rate without a loan fee and you looked at a time horizon of five years, many people would want to have the lower interest rate and choose the one with the standard origination or 1 % loan fee. But the reality would be is if in fact they were going to be there for only five years and not accelerate on the prepayment of the loan, they would probably be better served in taking the higher interest rate and saving the upfront $6,000 loan fee.
that very often is not what is offered to not only physicians, but any consumer that's entertaining a mortgage. They're not offered those choices and an opportunity to analyze that information. So that's why I would lean towards whether it be myself with CMG or another skilled professional actively listening as you talk to and look.
look at your options to someone that you think will serve you in that capacity.
(06:48)
So if I'm hearing you correctly, β the rate matters, but it doesn't matter if you're not going to have the loan for very long. I conceivably, you could have an 8 % loan that you're going to keep for a month, in which case you don't really care what the rate is. In that case, the expense of getting the loan is more important. But if you're going to get a 30-year loan, you're going to take 30 years to pay it off, which we almost never see with physicians, then
The rate is really the thing to focus on, in which case maybe you should buy down the rate, right? In which case the fee could be a little bit higher. Is that basically what you're saying?
Robert N Hedges (07:24)
You could do either or bend depending on your time horizon in that home.
(07:28)
Mm-hmm. And Nate, how often do you see physicians hold their mortgages to maturity?
Nate Reineke (07:34)
Never.
(07:35)
Yeah, same, same. In fact, you know, one of the things that I see is physicians will take a 30-year note, which has a higher rate than they would with a 15-year note. You and I know that they're going to pay that loan off in 15 years or less, and yet they'll take the 30-year loan for flexibility, and then they pay the 30 like a 15-year. It's just, I've seen that over and over and over again. Robert, have you seen that?
Robert N Hedges (07:59)
Yeah, and it's not a bad strategy. It allows flexibility and would allow them to β navigate whatever plan you may be establishing for β their long-term financial goals.
Nate Reineke (08:15)
Mm-hmm. Yeah, I oftentimes see it β where they'll just, in the beginning, when they're trying to get a house, lot of times it's trying to get settled in. Settled into a house, settled into a new life. Maybe you changed jobs, had another child or something. And so they need that flexibility upfront and then they get bonuses or something happens throughout their life. Maybe it's not every month, so the monthly payment matters, but... β
(08:35)
So, thank you.
Nate Reineke (08:43)
Probably every year some lump sum of money comes in and you just can decide whether not to pay down your mortgage a little bit early β Robert I'm curious about how So you said a couple things that our listeners can't see me unless you're on YouTube But β I was violently agreeing shaking my head up and down which is I noticed that when I when I look at Mortgage brokers that are communicating with our clients
They, if I, if I have a client that's asking for a rate, they said, I want a 30 year rates. They need a quote. They pretty much will just send them back a 30 year rate. That's all they get. They don't get this conversation that you're talking about where you discuss options and you go pros and cons. How does somebody find other than you, obviously they can call you. How does someone who find a good mortgage broker.
that's willing to discuss this with them and willing to explain things like whether or not an arm is a good idea and adjust for rate mortgage. Like I can, it's difficult to find those people. I'm curious how you might recommend someone look for that.
Robert N Hedges (09:51)
Yeah, I think a lot of it comes through β active referrals from family, friends, real estate professionals, β financial advisors. β Unfortunately, in the mortgage industry, there is no formal blueprinted β path to becoming a mortgage professional. There is no undergraduate degree that would specifically target
Nate Reineke (10:02)
Mm-hmm.
Robert N Hedges (10:18)
β the mortgage industry many people that come in either come in through the real estate side and or they provided support for a mortgage team and then evolved into a loan officer or they go the bank or credit union route where β That's kind of an internal elevation from personal banker to installment loan representative to β either residential
Nate Reineke (10:39)
Mm-hmm.
Robert N Hedges (10:46)
mortgage professional or commercial loan officer. And that's kind of the path over time. It really isn't about the referral base that you have, the professionals that would guide you, and then actively listening β when you begin to have conversations either online or on the phone about, you know, is this a person that I think has my best interest at heart?
and would I be served to work with them because they're gonna try and offer me options and solutions to what I'm presenting to them.
(11:22)
I β want to play devil's advocate here for just a second. So β you mentioned getting referrals from like accountants, CPAs, maybe attorneys. β
financial advisors, you know, I think we are in a position to be able to judge the β kind of the goodness of a mortgage broker, their fitness for the job, maybe having seen their work, we know, you know, whether they're on the take or whether, you know, their rates are reasonable. β I personally know someone in the mortgage space who is well liked, does a lot of business in their sphere of influence with friends and people that are familiar to them. β
I had a conversation with them where they were telling me about how they run their mortgage practice and I just found the fees to be egregious. mean, anyone in their right mind who's really looking at the bottom line or paying attention to the details, would look at that and go, man, you're absolutely being taken here. So if I'm a physician and I'm not super well versed in this world, which is
even to a financial advisor, relatively difficult to understand because the way the fees and the rates all go in together with points. What is like one thing that I can look for as a physician that's gonna give me some heads up that maybe I'm in the wrong place?
Robert N Hedges (12:39)
Well, I would say if the rate and fee looks like it's too good to be true, it probably is, right? mean, 80 to 90 % of mortgages in our national mortgage arena in some way get delivered to Fannie Mae, Freddie Mac, Jenny Mae, in other words, our government. And so...
When I'm competing against others and asked to do comparisons, very often if something is coming, like for example, I saw a quote the other day from North Carolina, it was a mortgage broker that is licensed in Oregon to do business. β The rate and fee combination was so far below the national average that you knew right out of the gate that it was not gonna be a
very good fit. And the best mortgage in the end, Ben, that closes is the best rate and fee, right? The one that successfully achieves the goal of getting someone into the home. β I wish I had a template to tell you how to compare things. I would just say you want to, when you're asking for information, ask for not just your best rate and fee, but
(13:44)
Yeah.
Robert N Hedges (14:01)
show me some options so that I can make an informed decision. And a lot β of the price leaders, the people that would commoditize the mortgage will lead with their best rate and hold back the fee for later, right? That egregious fee that you were speaking of, right? Exactly. So I always like to give people an option. Here's one option, here's a little lower rate in the fee.
(14:05)
I see.
Little bait and switch. Yeah. Yeah.
Robert N Hedges (14:29)
Here's a little slightly higher rate because the investor is not, they're really concerned about the return on the investment, right? So it doesn't matter if it's a rate without a loan fee at all or even the lender credit as opposed to a lower rate with fee. Part of that fee may be going directly to the investor, Fannie Mae or Freddie Mac or a pension fund or insurance company in order to drive their return right out of the gate.
(14:43)
Mm-hmm.
You know, there's something also, I mean, I want to move off the fee conversation here pretty quick, because it's certainly not all about fees. you know, when I've looked at β mortgage quotes and things that I've seen from you and other folks, it is not uncommon for a physician to say, this fee is really high. And then when I look at the good faith estimate, and I see what the physician is considering to be a, air quotes, fee,
It's things like escrows and impounds. And, you know, there are things in there that don't even look anything like a commission. In fact, there are things that a person would pay whether or not they were refinancing a mortgage. β in layman's terms, you know, don't use our familiar mortgage financial advisor speak. Talk to me in layman's terms about what a person might confuse as a fee and what constitutes an actual
β would say like sales charge on getting along
Robert N Hedges (16:03)
Right. It's a really good point, Ben. There are really three buckets of fees associated with any transaction. There are the lending related fees, there are the title and escrow related fees, and then there are the escrow in pounds, if any, which is really the repetitive cost that you're speaking of. The setup of taxes and insurance within the payment if they choose to have that.
Those those are all reoccurring fees the other fees the escrow and title fees they're going to be Regardless of where you are in the country you're going to have them right whether it be closing with an attorney in the east or if you're using the title company for title and escrow services in the West and then the lender related fees right which would be β
(16:43)
Mm-hmm.
Robert N Hedges (16:56)
an administrative charge, a loan fee or not, an appraisal fee or not.
(17:01)
So what I'm hearing is title in escrow is independent of the mortgage. That's something that you would pay if you're buying a home with cash. Is that correct? Okay. So that's not dependent on the mortgage. The other thing that I heard was taxes and insurance and those. So we use the word impounds and I'm going to break that down for our listener. So these are things that you pay upfront. So for example, you might pay several months or even a year's worth of
Robert N Hedges (17:10)
Correct.
(17:27)
property taxes upfront and there's going to be homeowners insurance because the company lending the money to you wants to make sure that the property is not taken away by the government and doesn't go away β in a fire. So they're going to ask you to pay those things upfront. These are things that you would pay whether or not you had a mortgage, whether or not you were financing. Like these are things you pay when you own the home. And those two things, title and escrow fees, as well as taxes and insurance impounds,
I see very commonly confused for the actual cost of originating a mortgage and it leads people to make improper decisions.
Robert N Hedges (18:06)
I think it's an astute point, especially if the financing is 80 % or less of the purchase price where you have in most states an election as to whether or not you want to put taxes and insurance in your payment, right? So it's someone doing 25 % down, you know, an estimate that was presented by
(18:25)
Right.
Robert N Hedges (18:34)
someone that excludes taxes and insurance because they're not choosing to impound taxes and insurance may look at, you know, β much more attractive than someone that has a standard impound in place.
(18:40)
hehe
Yeah, you know, when I think about this, if I'm a physician listening to financial advisors talk about mortgages, in some sense, I imagine it must be like β financial advisors talking about antibiotics to each other. know, like what do we know? This pill is bigger than the other one, so it must be better, right? I mean, it's that basic because any physician worth their salt would know the difference. But from the outset,
Nate Reineke (19:03)
Mm-hmm.
(19:14)
It looks like a pill. We think it's an antibiotic. You know, we think we know how it works, but it's not really that simple, right? And sometimes you don't know if what's in the bottle is the thing that they even intended to fill. β yeah, just wanted to clear that up because that's something that we do see on pretty regular basis, people misunderstanding it, especially if they're literally just holding up two numbers and comparing like this one's bigger than that one, right?
Nate Reineke (19:37)
Okay, I got some questions for you Robert. This one is sort of time sensitive, but I want to know if you can tell us about what's going on with arms right now and 1530 year fixed rates.
(19:51)
And what's an arm? Yeah.
Nate Reineke (19:53)
what's in it.
Robert N Hedges (19:55)
So let's start with fixed rates. So 30-year fixed rate β is probably the most β widely accepted mortgage, whether it be a conforming loan in our area under $806,500 or... β
Larger which would be a non-conforming or jumbo mortgage and a lot of physicians will actually be entertaining those types of mortgages So the two most readily accepted mortgages in the industry are 30 and 15 year fixed rates 15 year fixed rates are Typically somewhere between 3 8s to 5 8s of a percent lower they get
(20:45)
So
Robert N Hedges (20:49)
a lower interest rate than a 30-year because of the accelerated repayment term. β Adjustables are interesting. Historically, they've served the markets nicely because β they have, β most of them are all 30-year terms, β with varying periods of β initial fixed
rates. So you might have a
a 30-year amortization on a variable that's fixed for five years or seven years or 10 years, and then it gravitates to the variable features. Today, they're not readily used. And the reason is because the market has been anticipating for quite some time a rotation lower in mortgage interest rates. And so even if you're a local credit union, β
The prospect of having a five-year adjustable refinance early within that five-year period is high enough that they don't want to take that risk on. And so if I were to look at a rate grid today and show you arms 30-year and 15-year, you would see the 5.8 % lower 30-year to 15-year in terms of rate improvement.
Nate Reineke (21:58)
Hmm.
Robert N Hedges (22:15)
but you would see no elevation or improvement for taking a loan that's only protected for five years or seven years. When I've recommended those in the past is when people were able to share with me that, gosh, Robert, I'm only gonna be in this house five years. I know that because my last child is graduating from college in three years and will move to a smaller home in a couple of years thereafter. I would really wanna see them benefit, right?
(22:20)
So, thank
Nate Reineke (22:23)
Mm.
Robert N Hedges (22:45)
If you're gonna take a five-year fixed rate, I would like to see at
least 5 eighths to 3 quarters of a percent lower rate and perhaps no loan fee associated with that rate because I know that I'm gonna face the reality in five years, I'll have that mortgage in five years and I'll be subject to the parameters of the adjustable or I'll be rotating into a new mortgage.
Nate Reineke (23:12)
Mm-hmm. Yeah.
(23:13)
Okay, so break it
down for me a little further. So what I'm hearing is that arms, adjustable rate mortgages, you're not recommending those right now because the rate is very close to like a 15 year fix. Is that correct so far?
Robert N Hedges (23:27)
It's even higher than that, Ben. There would be no improvement with an arm over a 30-year fixed rate at this time. In fact, the appetite is so β lacking for arms in the overall mortgage market that you can actually see an arm rate equivalent to a 30-year fixed but significantly higher loan fee.
(23:53)
I see. So if I'm, if I'm the lender, I'm pricing my arms prohibitively expensive because, β I'm expecting that interest rates might go down and people would refinance those arms and I wouldn't recoup my costs of, delivering that into the market. What it sounds, is that correct? Okay. And so in practically speaking, if I'm that physician and I'm thinking, I'm going to be out of here in five years, β you know, ordinarily a five year arm would be
Robert N Hedges (24:11)
That is correct.
Nate Reineke (24:12)
Wow.
(24:22)
the right thing to do. But what I'm hearing is that, you the rates on those are actually worse in some cases. And that β now I'm still bearing the risk that interest rates could shoot up in my sixth year and then I'm stuck with this thing. Right. So it's just not only you not recommending these, we're not seeing them and it's like everybody's anticipating rates to go down in the markets. And so that's why these are just not available.
And you know, I've talked on the show before about having purchased my, β the home that I intend to retire in, though not my retirement home. And you and I went through this on my note. I called you up. had a, I had my order. wanted you to fill my order. Hey, Robert, I want a three or five year arm. And you're like, hold, hold, hold on a minute. That's not such a great idea here. And I wound up taking a longer note.
Robert N Hedges (25:10)
Right, that's right. And we stayed away from upfront loan fees. And it remains that I think that that was the best informed decision.
(25:21)
Yeah, yeah, good.
Nate Reineke (25:22)
I want to highlight
something that β you both are saying, but I don't know if it's totally obvious to our listeners. So an arm is an adjustable rate mortgage. And the people that I speak with every day, when they hear that, they get very nervous. They don't like the idea of an adjustable rate mortgage. what I think, my hypothesis about this is that during the 2008
mortgage crash or just for rate mortgages were abused. And therefore everyone thinks that is this nasty product. But I actually think that the abuse was the problem, not the actual product. And that β what you're saying, Robert, is that if you know, you're going to move from a house in five to 10 years for a variety of reasons, physicians move all the time. And Ben and I looked this up once, I think the average person stays in a house for seven years. So in that
(25:57)
Please.
Robert N Hedges (26:20)
That's correct.
Nate Reineke (26:20)
In a different market,
Robert N Hedges (26:21)
Four to seven years.
Nate Reineke (26:23)
in a different market, someone could most likely get a seven or 10 year arm, save a little bit. you know, right now that's not the case, but generally usually that it is. And use this as a tool rather than some yucky product. Is that what I'm hearing you say? Okay.
(26:32)
Okay.
Robert N Hedges (26:41)
Absolutely, Yeah,
it could be a great product. It's just right now there is no significant market. Now there will be occasions where you will see a regional bank or β a credit union that has a specific amount of funds that they want to hold a loan in portfolio and it may be that they offer something that can be attractive. But when I recommend
Nate Reineke (27:07)
Mm-hmm.
Robert N Hedges (27:09)
adjustable rate mortgages, I like to see a pretty significant improvement over a standard 30 or fixed rate mortgage, either in interest rate and or loan fee, before I would have someone gravitate to that that bucket of financing option.
Nate Reineke (27:28)
Okay, okay, I have β another question that I wanted to circle back to and β this is on my mind all the time. I want to know when is the right time to buy points.
(27:43)
Yes, yes, I want to know too.
Robert N Hedges (27:45)
Well,
(27:49)
And first, what are they? Right? I'm gonna be the educator and questioner in chief here on stuff that's like, β I appreciate the industry jargon, but I wanna make sure that I break it down. Like, what is the point of a point? What is the point?
Nate Reineke (27:51)
Yeah, what are they? What the heck are they, Robert?
Robert N Hedges (28:04)
Yeah. Well.
Point is 1 % of the targeted loan amount. So it's a prepaid finance charge that presumably goes towards lowering the interest rate over the life of the loan. So for example, let's say we had a 6.25 % interest rate and a 1 % loan fee, or a 6.5 % rate and no...
percent loan fee, no points, either origination or discount. You see those terms thrown around a lot. Well, we don't charge an origination fee or no upfront points. But then on the other side of that, you'll hear the term discount fee and discount fee really is equivalent to loan fee, right? So when you're shopping for that mortgage, you want to look for, okay, are there any points associated with loan? Origination,
and or discount. You'll see those β both of those terms presented.
(29:06)
I
think the same, our origination and discount the same.
Robert N Hedges (29:10)
To me they are Ben because they're an upfront cost to achieve presumably a lower interest rate. I like points when we have a buyer's market and the seller's willing to participate in the buy down of the rate and you can get them to do that. I also like β and will look at with borrowers upfront origination fees if I can recapture
those upfront costs within a very short period of time. For example, if I could achieve an interest rate of 6.375 % and it only cost me one quarter, 1 % loan fee, I might recommend that because when we look at how quickly you get ahead with that loan based on the lower payment, it makes sense to me. And to me,
I like to see that recapture period be within 12 to 18 months.
(30:13)
So it's paraphrased here, you're talking about when you say recapture period, you're saying you're basically saying break even, which is to say, if I got to pay a little more upfront to get a β little bit lower rate, how long is it going to be before that breaks even with not paying some upfront and paying a little bit higher interest over time? It's your break even period, right?
Robert N Hedges (30:35)
That's right.
(30:36)
And I also heard you use the word discount. And I think if I'm just a standard physician, I hear the word discount and I think, oh goody, I'm going to pay less. But what you meant when you said origination and discount fees, it's not an actual discount. is a fee you pay to get a discounted rate. And so if I'm getting the broad takeaway here, it's really when it's what you pay for the mortgage.
Robert N Hedges (30:46)
Yeah.
Correct.
(31:06)
and what you pay on the mortgage, the lenders kind of don't really care about that. They want to put together the combination that works for them and for the borrower. And it could be that you pay more upfront or you pay more later. It's like pay me now or pay me later, but you're going to pay me. And it's just a matter of the planning around the mortgage for like how long you're going to hold it and what your intentions are for the home that really makes a difference between this balancing act of what you pay upfront and what you pay later on.
Robert N Hedges (31:35)
That's correct.
Nate Reineke (31:36)
Okay, I have another question about points. β
(31:39)
wait wait wait, we didn't
answer the question. When do you pay points?
Nate Reineke (31:43)
yeah, when should you? Well, he said payback period of 12 to 18 months. So got to do some math.
(31:47)
Okay, got it. So.
Robert N Hedges (31:49)
And then
also if we have a seller that's willing to participate in your upfront loan fee, right? That's the best of all worlds.
Nate Reineke (31:54)
That's right.
(31:54)
β
Nate Reineke (31:55)
Yeah.
(31:55)
Yeah.
Nate Reineke (31:56)
So I have been seeing quotes from mortgage brokers across the country. And sometimes these quotes come back and it's required that you pay points. Is that just a fee or is that some, is there some program that makes them get the rate down to certain amount? Like tell me why a mortgage broker would require paying points.
Robert N Hedges (32:21)
Well, it may be the way their β organization is set up in terms of they're just not in a position to offer a slightly higher interest rate and avoid the loan fee entirely. β Mortgage brokers essentially arrange the mortgage in the marketplace for you. They submit it to a wholesaler that then delivers it into the secondary mortgage market, right? So there may be some limitations there.
(32:34)
Okay.
Robert N Hedges (32:51)
In the last couple of years, post the really low interest rate environment that we had during COVID, β a lot
of the investors are requiring some upfront fee because of the concern about rates rolling over, the economy rolling over, β rates going down, and the β rush to prepayment. So the servicers of the mortgages are saying they really need to see some level of return right out of the gate.
Nate Reineke (33:19)
Mmm.
Mmm.
That's interesting. I had never heard that before.
(33:24)
You know, Nate, as I'm hearing this conversation, I'm wondering
how things would look in another country where we don't have this kind of put option on mortgages, where we don't have a fixed rate mortgage. Because I know that overseas, variable rate mortgages are like pretty much all that's there. And I'm just hedging because I would say everywhere outside the United States, it seems to be a unique thing that we have here.
Nate Reineke (33:46)
Hmm.
Robert N Hedges (33:47)
It's an unparalleled system. If you were to go to Europe or Canada or other β environments, you'll see they may do a 30 year or 25 year mortgage, but they might only fix the rate for three years, Ben, and then it's a reset to where the market is. They also require a significantly higher down payment β in most cases.
(34:07)
Mm-hmm.
Nate Reineke (34:12)
Hmm. Okay. All right. β I want to know about construction loans. So they're complicated. know this. β I'm curious, just a high level view of what they are, but also how many people need to be involved to actually successfully get a construction loan to help someone build a house.
Robert N Hedges (34:33)
β It's a question, Nate. I would suggest that there are three types of construction-related loans. The first and simplest is the builder builds it and you buy it. And so we're looking at β potentially protecting a rate environment for the borrower for the duration of the bill.
(34:42)
So
Robert N Hedges (35:03)
You don't have to protect it, but in many instances
you will want to protect it with the ability to have that interest rate renegotiated as the project is completed. So that's the simplest form. Builder builds it, β buyer buys it, right? That's one option. Another option is a loan that's called an all-in-one loan. That's a loan that serves as, to help you with the construction
of your home, but at completion it rolls
(35:35)
So
Robert N Hedges (35:36)
to permanent financing. So that's why it's called an all-in-one loan. And that loan closes as if the new house is already there, right? So we underwrite it, appraise it, close the loan, set the residual funds in an account to be drawn out monthly until the house is completed. And then it goes directly to β
your permanent financing. And then the third option is what we call a two-step mortgage work. There actually is a construction loan followed by permanent financing at the completion of the new home.
Nate Reineke (36:14)
So β in the third scenario, you would buy a piece of land, I assume first. β So there might be two loans that you're floating and then you combine it all at the end.
Robert N Hedges (36:29)
No, there's just one loan. β In all cases, there's one loan because we're always going to appraise the house as if it's there, right? And so in some instances, you might have a client that doesn't have a strong enough down payment to pay for the land all at once, right? So when we close either the all-in-one loan or the construction loan, we're going to pay off residually what's the difference between the property cost, the bare land.
Nate Reineke (36:31)
Okay.
Robert N Hedges (37:00)
and what they're able to put down.
Nate Reineke (37:02)
Okay. This is a question that does come from construction situations, construction loan situations, but also β with real estate agents. So a lot of times what I'll see is the builder or the real estate agent has a preferred lender. And my interpretation of this, this is just purely,
I haven't heard anyone actually say this, but what I take from their preferred lenders is not really that they are the best fit for the person getting the loan. They don't maybe don't offer the best rates or fees. They simply can fund the the, the, the person, the builder or the real estate agents has confidence in that lender that they will get the loan through. Therefore that person will get their money is, is.
Did that make sense and do you see that?
(37:59)
So kind of the question is almost like, do, why do real estate agents favor a particular mortgage broker? Is that kind of the nature of your question, Nate, or did I get it wrong? Yeah.
Nate Reineke (38:07)
That is the nature of the question. So why do
they favor someone? And it is oftentimes pitched to them that this is the only person that can do the job, meaning that can get them the loan successfully or get they're the best for whatever reason. So I'm wondering how does someone go out and choose someone else other than the preferred lender and have confidence the loan will be funded and they will do a good job.
Robert N Hedges (38:30)
Well, it's relationship business like you'd indicated, Nate, where the realtors had a positive experience and may know β the mortgage professional personally. you know, it is, you know, they are as interested in anybody and making certain that that transaction is successful and results in the physician or buyer owning that home. β But my experience with realtors and or builders is if
Nate Reineke (38:49)
Mm-hmm.
Robert N Hedges (39:00)
The borrower says, I'd really like to have an informed conversation with at least one or two other professionals so that I can do some comparison and get some coaching from my financial advisor. You'll quickly see that in most cases, they'll back away from it. I don't think it's in stone. I really don't.
Nate Reineke (39:20)
Okay.
Okay.
For construction loans, β do you think it is beneficial to go with β a mortgage company that specializes in construction loans or can most mortgage brokers do this β pretty well?
Robert N Hedges (39:40)
It's a specialty product, and you want to vet out a lender that does a lot of construction lending. β There are more steps involved in a construction loan by far. As a matter of fact, just in our area, β I know of three regional banks that used to do thoughtful construction lending that have β
Nate Reineke (39:52)
Okay.
Robert N Hedges (40:09)
virtually remove themselves from the marketplace. They're no longer doing it because of the risk. You're closing the loan as if the house is already there. And there's no way to deliver that loan to the secondary market until the house is complete. So in many instances, it's even tighter than it was way back when we had the financial crisis, right? Just outside of that timeframe. are just fewer people.
Nate Reineke (40:17)
Mm-hmm.
Mm-hmm.
Robert N Hedges (40:37)
wanting to participate in that market. But it comes and goes. You'll see for a while somebody is not doing it. You know, I know of a national bank right now that just has electively chosen not to do home equity loans. They just not consistent with what their goals are. But you'll see them come back as demand comes up for them.
Nate Reineke (40:53)
Hmm.
(40:56)
So speaking of big national banks, one of the questions I have is about the choice of the venue where a physician gets a loan.
And I'm not talking about a physician loan or a doctor loan. I'm talking about just a standard, maybe a refinance. Somebody's got 25 or 30 or 40 % equity in a home. Like let's say maybe a million dollar home. They've got 400,000 in equity in it. So they need a $600,000 mortgage. And they're looking at a choice between going to, I wouldn't even say looking at a choice. Sometimes I just see them go straight to the bank. You know, they'll go to a big box national bank because that's where they're doing their banking relationship.
Or maybe they have a business, like it's a self-employed physician and their business is bankrolled through a community bank. And other times, you know, maybe they have a friend who's a mortgage broker or real estate agent who sent them to a mortgage broker, or they come to us. you know, Robert, you're unique in that you have experience in multiple environments, having been a lender or a loan officer in those environments through, gosh, a wide variety of...
β interest rates, economic, geopolitical environments. In terms of today, like if I'm that physician with a million dollar home, a $600,000 mortgage, and I'm looking to begin my refinance journey tomorrow, what is the difference between using someone who is in your stead versus going to the big bank, or what Nate would call the big evil bank?
Robert N Hedges (42:23)
Well, β an independent mortgage bank like CMG does nothing but mortgages, right? So if we don't do those very, very well, we're not going to be around very long. β So I would say you want a specialist, someone that does mortgages. There's no reason not to entertain where you do β your local banking or have β relationships. However,
I think it's always advisable to at least sound out two or three different sources so that you can make an informed decision.
(42:59)
Hmm.
Yeah, I guess if I'm with the big bank for my checking and my savings and that kind of stuff, it's really easy for me to open a statement stuffer and see β interest rates now, blah, blah, low down loans, that kind of stuff, and just automatically hop to them. In which case, they don't really have any competition. If I'm opening a statement stuffer, I'm calling the 800 number, then I'm immediately a fish on their line.
Nate Reineke (43:03)
Mm-hmm.
(43:28)
β as opposed to someone who's being studious about this and intentional about getting their their mortgage in which case they evaluate all the options i guess in that case there's a chance that that that that β rate and fee combination could be β not as advantageous as if i went and i and i looked at the competitive market i did i basically chopped around
Robert N Hedges (43:49)
Absolutely correct.
(43:51)
So I know that not even in mortgage brokers, you know, let's say that this we're talking about your kind. I know that even from one mortgage broker to the next, assuming that you even had the same access to the products, I know that there's something about the relationship with an appraiser that makes a real difference in terms of a home buying experience. Can you talk to our listeners a little bit about
the relationship between lenders and appraisers and basically getting the job done, getting the home bought.
Robert N Hedges (44:23)
Right, well, β it's somewhat of delicate conversation, Ben, post 2007 and eight, where there was some abuses that took place between β direct dialogue between appraisers and mortgage and real estate professionals in terms of β what the goal was. And a lot of legislation actually came out of that with Dodd-Frank and other β
(44:45)
Mm-hmm.
Robert N Hedges (44:53)
β new regulations that require some level of autonomy and independence between the mortgage arena and the appraisal arena. What I can say is that if you're serving a particular geographical region, β you have the ability to choose how
(44:56)
Mm-hmm.
Robert N Hedges (45:16)
and who you want to work with in terms of appraisers. So I wouldn't necessarily be able to speak to the appraiser directly about an assignment, but we do have the ability to β vet who we want to have on our panel. And so we would look at the highest quality appraisers that we can find in our area and make certain that we invite them to be on our panel so that they're in the rotation.
And so that we know that if they receive an assignment, they're going to be professional, turn it in timely, and do the very best they can to fulfill β what the obligations of the assignment are. If you were to go through an appraisal management company, β they also do some vetting, but they're not as directly correlated as, say, β
an independent mortgage bank would be. β They can develop their own panels as well. β But, you know, I would say that, you know, local whenever possible is better, right? The challenge is when you have an appraiser from 50 to 75 miles away comes into your market and assumes that they're knowledgeable about your market. And it's really β much more about β
(46:17)
Mm-hmm.
Robert N Hedges (46:44)
having local knowledge and experience in that market for appraisers.
(46:48)
So assuming a fair and unbiased appraisal, then what I'm hearing here is that basically whether or not the appraiser really cares
about the deal, whether they're attentive to details, whether they kind of are fast and efficient versus kind of slow and unreliable. It sounds to me like that could make or break a housing deal.
Robert N Hedges (47:10)
Absolutely.
Nate Reineke (47:11)
Okay, I want to talk and kind of face our conversation toward physicians starting out. So a physician just starting out, they got out of residency, you know, they haven't even enough money to buy their first couch yet, or they're just about to get it, right? But they want to buy a house and they're convinced that it's time because they've waited long enough. What's the smallest amount of money a brand new physician can put toward their first home purchase?
Robert N Hedges (47:37)
So if they're buying a home that would be, and this is regionally based, Nate, but in general, a conforming loan limit today is $806,500. That means that Fannie Mae and Freddie Mac, if you originate a loan that fits their guidelines, are willing to do up to 97 % loan to value, whether you're a physician.
Nate Reineke (47:46)
Mm-hmm.
Robert N Hedges (48:05)
or an allied health professional or not. So that would put you in the $830,000 roughly bucket, 3 % down. Most physician loans, the vast majority that I've had experience with or have β found in the marketplace, and they come and they go, by the way, β at times.
Nate Reineke (48:13)
Mm-hmm.
Mm-hmm.
Robert N Hedges (48:27)
there'll be a hot product that you'll hear about and it'll be offered for a while and then it goes away, would be approximately 5 % down. So those non-conforming loans that we talked about earlier or jumbo loans would be 5%. But with physician loans, they're very encouraging in terms of debt to income ratios and qualification. But because there's a higher risk associated with lower down payment,
They are interested in the physician having some level of payment reserve at the time that they close those transactions.
Nate Reineke (49:03)
Hmm. Okay. So I think what I'm hearing you say is that β the physician loan, the structure of physician loans change or the programs change. So five years ago, I saw zero down physician loans all the time. And nowadays, maybe it's more like three or 5%. And that could change again, as time goes on. Is that correct? Okay. Speaking of physician loans, I have another theory.
(49:17)
So.
Robert N Hedges (49:26)
Yeah, that is correct.
Nate Reineke (49:32)
that isn't exactly tested, I believe when I
look at physician loans, that a lot of times it is thrown around that you don't have to pay PMI, so private mortgage insurance, and that's what, for our listeners, that's what you pay if you don't have 20 % down, you to pay some form of PMI. But a lot of times I look at these physician loans and the rates are just higher. Am I getting that right or is that just...
apples and oranges and I'm comparing one bank to a different bank and they just have different rates.
Robert N Hedges (50:05)
No, what's happening there, that they're self-insuring that loan. So they're going to increase that interest rate in order to bridge that normal β private mortgage insurance that you would see. And so this very astute observation of yours, because that's one way you can self-insure. In other words, you're going to absorb the risk with a higher rate.
Nate Reineke (50:21)
Mm-hmm.
(50:30)
So
Nate Reineke (50:34)
Yeah, okay. So once again, what you said at the beginning of this, of our show is that you don't want a broker who is just going to give you, give you the quote you asked for.
If I could choose any broker or one quality of a broker would be, they would understand that someone going in to buy their first house doesn't really exactly know what they need.
They know what they've been told that they need. They know they've been told they should go get a doctor loan, but they don't even know if that is best for them. So a lot of times I think you should, you can correct me if I'm wrong, but physicians should ask for a doctor loan program compared to just a regular conventional loan with PMI attached to it.
Robert N Hedges (51:26)
100 % correct.
Nate Reineke (51:28)
Okay, got it. Glad I could confirm that. Okay, β I have one last question before β we're going to do rapid fire questions after this. should be fun. But one more question. β It seems like β times are changing right now. Things are β a lot different than they were even just a few years ago. Some uncertainty, people hearing about stagflation. β
I expect rates to change pretty soon, but if a physician is looking to buy a house, say in the next 90 days, what should they be looking out for with rates and how they approach the mortgage?
Robert N Hedges (52:09)
Well, I would suggest that one, don't wait for rates to enact your purchase, right? If you're ready to buy a home, β it is a form of an investment, but it provides the shelter for your family. I wouldn't wait. Real estate has a tendency to do pretty well in β recessionary periods. you look over... β
Nate Reineke (52:19)
Mm-hmm.
Robert N Hedges (52:37)
long periods of time. So I wouldn't wait. I would stay away from upfront loan fees because our expectation is that when rates do roll over, there will be a nice refinance opportunity. We just don't know if it's six months from now, 18 months from now, or 30 months from now, but it will be available. So if I had to guide someone, I would say be sensitive to how much you pay in upfront fees because I don't believe one like you do.
that they'll be in the house for 30 years if it's their first home. And two, it's very likely that we'll revisit that note rate and that loan within a short period of time.
Nate Reineke (53:09)
Mm-hmm.
Okay. Okay, thanks for that. You ready for our rapid fire real estate mini round? That's what we called it.
(53:25)
Wait a minute, wait a minute, wait
for it. It's time for the rapid fire real estate mini round.
Nate Reineke (53:29)
Alright,
cool. I have four quick questions. So, Anne, so you can answer them fast. What's the most surprising home buying myth?
Robert N Hedges (53:32)
I think I'm ready. All right.
that you need a giant down payment to buy a home.
Nate Reineke (53:46)
β What's your dream city to live in?
Robert N Hedges (53:49)
I went to UC Santa Barbara and that was a pretty neat city to hang out in.
Nate Reineke (53:55)
Yeah, okay. That is a dream. California prices. Let's see, one home feature that's totally overrated.
Robert N Hedges (54:05)
I would say formal living room.
Nate Reineke (54:08)
Ooh, love it. All right, and last question, beach house or mountain cabin?
Robert N Hedges (54:13)
toss-up but I'm going to go with mountain cab and beach houses are brutal on maintenance and repair.
Nate Reineke (54:21)
seen that more than once. Okay Robert, β thank you for your time. want to know, can you let our listeners know how they get in touch with you?
Robert N Hedges (54:30)
Yeah, thank you, Nate. It's been a pleasure to be with you and Ben today. β You can find me at, β you can email me at rhedges at cmghomeloans.com. You can call me at 541-515-8026. That's my cell phone. Or you can Google me at roberthedges at cmghomeloans.
Nate Reineke (54:53)
And we'll put that in our show notes as well if you want to get in touch with you.
(54:57)
We got the direct dial mobile number. Nate, when we're talking about like, what do you want in a mortgage broker? I want the mobile phone.
Nate Reineke (55:03)
Yeah.
(55:03)
So that way I
can pester him if something's going wrong in the middle of the night, I can be like, hey, my mortgage is not going right. I want to be able to reach out to you. So, right Robert? Yeah. Okay. Well, thanks for listening to the show folks. I'm going to start to take us out here. So if you're looking for a mortgage broker, you could do worse than meeting with Robert. You know, he's been great. I've known him for years. I've done a few homes with them.
Robert N Hedges (55:10)
Absolutely, man. 100%.
Nate Reineke (55:11)
That's right.
(55:30)
And we've had a number of clients who have gone through Robert and said great things about him, which is how he made it onto the show. β If you are looking for a financial advisor who has a depth of home buying, refinancing, second home purchase knowledge, Nate Renneke is our in-house housing and home loan guru. He regularly speaks with people like Robert on our coast, which is West Coast, as well as East Coast, South Central, all over, as long as it's the United States.
He's my go-to β mortgage info guy. So β if you're looking for a financial advisor who has that type of knowledge in house, as well as other things, maybe you should consider us. You can visit physicianfamily.com, tap on the get started button, and schedule a time to see if we're a match. Or if you're not ready for that and you'd like to ask your own question, you can email us at podcast at physicianfamily.com. And until next time, remember, you're not just making a living, you're making a life.
