Master Your Mortgage: What the Bank Won’t Tell You About Buying the Right Home
Master Your Mortgage is a book that helps Canadian homeowners live the lifestyle they want by teaching them what the bank doesn’t want them to know about their mortgage. Author Brighton Gbarazia has over a decade of financial experience as a mortgage underwriter and financial advisor. He details everything he’s learned about mortgages and wealth creation while working for some of Canada’s largest banks.
This blog post highlights some critical aspects of my book I wanted readers to take away when reading the book. Two people can experience the same thing but have entirely different interpretations of how they experience those things. Homeownership is the same for me. We try to portray a universal experience for everyone regarding their homeownership journey, but the reality is everyone’s homeownership journey is unique and specific to their situation at the time.
But at a high level, I wanted the book to help homeowners understand what’s going on behind the scene to reduce their knowledge gap around mortgages and homeownership. When you have the proper knowledge, you can see things for what they are, not how you wish they were. If homeowners understand how things work, they will become less emotional about their home, see it for what it is, and make better financial decisions.
A home, in my opinion, is one of the most emotionally charged purchases anyone will make.
Your Home is not An Investment
This concept can bring up a lot of emotions. However, I felt it was important for me to alert homeowners to understand how to define an investment, such as a home. Most homeowners refer to their principal residence as an investment. While a home can be a good investment, a principal residence is more of a lifestyle purchase than an investment. In Master Your Mortgage, I explain why homeowners need to view their home as a lifestyle purchase rather than an asset.
If a homeowner wants to be successful in their real estate purchase, then they first must accept the reality that they are not investors but rather an individual seeking shelter in the form of homeownership.
An asset for me is determined by the cash flow stream and who pays and receives those cash flow streams. A principal residence home isn’t an asset because the homeowner pays the lender a cash flow stream in the form of mortgage payment. In contrast, the lender receives the cash flow stream to cover their initial capital and additional profit. Therefore, homeowners need to view their purchase as a lifestyle purchase that enables them to have a particular lifestyle they desire in a community where they would like to place roots. The amount of mortgage debt a person takes on determines the type of lifestyle they can have. To be successful at your home purchase, you have to obtain a mortgage debt that enables you to live the lifestyle you want and not the loan the lender approves for you.
Banks Make Money When You Refinance
The second concept I wanted to draw to readers’ attention was constant refinancing. When I worked at the bank, I often completed refinancing applications for debt consolidation. Customers often felt they were doing the right thing, but the opposite was frequently occurring. In Master Your Mortgage, I detailed a typical example of someone refinancing their car loan into their mortgage payment. In the example, I show how sometimes refinancing can increase the overall debt and interest payments.
A refinance is essentially you taking away from whatever profit you’ve made on your home, then giving that back to the lender, and, worse, letting them charge you more interest to utilize those funds!
This occurs because most people often unintentionally increase their loan term for a longer period. In the example used in the book, the individual had a car loan for eight years with an annual interest rate of 7%. In year 3, they decided to refinance the loan into their mortgage to take advantage of the lower mortgage rate of 3%. While this appears to be a good decision on the surface, what ends up happening is they extend the car loan term from 8 years to 25 years at a lower interest rate of 3%. While the rate is lower, they are now paying interest for a longer period.
Extending the loan years usually erases any interest savings. You end up paying less interest per year while paying more interest overall at the end of the loan. However, most borrowers do not see this as the new car loan is wrapped into the mortgage payment, which provides increased cash flow savings.
So should you never refinance? No, that’s not what I am saying here. In the book, I mention one worthwhile purpose to refinance if you don’t take out the equity in your home but rather take advantage of lower interest rates while keeping the same or fewer mortgage amortization.
But when I worked at the bank, most of the refinance I was dealing with was due to debt consolidation, which meant people were taking the equity gains from their home and then giving it back to the lender.
Lenders and some professionals attempt to sell the idea that refinancing your debt is the same as paying off your debt. They are not. There are no shortcuts to paying off debt, and sometimes refinance provides the illusion that there is, and the banks are happy to give that illusion.
Master Your Mortgage to Live the Lifestyle you want
Most homeowners focus their attention on securing the best mortgage rate but less time understanding how they get approved.
Mortgages are approved based on a system. Underwriters at the bank are trained to underwrite mortgage applications following a particular method. This system assesses a potential borrower in a specific area with specific requirements that the borrower must meet.
This mortgage approval system is known as the 5 C’s of credit. In no particular order, the 5 C’s of credit are credit, character, capital, collateral, and capacity. In Master Your Mortgage, I explain each of these Cs in detail and what the bank is looking for in each of these areas.
Mortgage applications are not necessarily declined or approved based on one factor. When you understand the 5 C’s and what they are, you will better understand what areas of your application you are strong in and what weaknesses you might have and need to work on.
…lenders approve your mortgage loan based on your gross income and expect you to make payments based on your after-tax net income.
It’s important to understand these areas because, as I write in the book, mortgage applications are approved based on people’s gross income while the lender expects them to make payments based on their net income. If you take the loan the lender approves you for without doing any due diligence, you have been approved for a loan you cannot afford because it was based on an income amount you do not take home.
These are just some of the big things I wanted readers to take away, but the book offers much more. Master Your Mortgage was written to increase homeowners’ knowledge of the mortgage approval process. I want homeowners to be educated about their mortgages, which will enable them to ask the right questions to determine the right mortgage that will work for them.
I believe that the mortgage debt you have will determine the kind of lifestyle you can live. Therefore, understanding how you get approved for a mortgage isn’t a nice thing but rather a necessary knowledge. When you read Master Your Mortgage, you will also discover;
- What the bank is looking for in a mortgage application.
- Know the difference between affording your mortgage and getting it approved.
- Understand how banks look at your income and avoid getting over your head.
- Learn how to create lasting wealth.
The book isn’t about real estate; it’s a book for real people. Discover the financial freedom that’s within reach in Master Your Mortgage!
You can pick up Master Your Mortgage: What the Bank Won’t Tell You About Buying the Right Home from Amazon.