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♪ Got to sort of tell 'em ♪ Two destinations, one loyalty card. Visit yamava.com/palms to discover more. Today on Radical Personal Finance, we tackle the subject of mortgages. For many of us, our housing decisions will be some of the biggest financial transactions in our lives, and the cost associated with those housing decisions will be dramatically affected by our mortgage decisions.

So I'm gonna equip you with some ideas and tools and tactics and information on how to get the best possible mortgage. Conveniently enough, I'm speaking to Casey Fleming, who's the author of a book called "The Loan Guide," "How to Get the Best Possible Mortgage." (upbeat music) Welcome to the Radical Personal Finance Podcast, your personal finance podcast dedicated to helping you figure out how to live a rich life today while building and destroying, in the positive, you know, modern, like, hey, I'm crushing it sense, destroying the path to financial freedom in 10 years or less.

My name is Joshua Sheets. I'm your host, your guide, and your fellow journeyman on this path. (upbeat music) (siren blaring) I don't know about you, but, you know, when I first got my first mortgage, I've only ever had one so far in my life, and I don't have it anymore, but when I first got my first mortgage, I thought I was pretty smart.

I thought I had, you know, I thought I knew what I was doing, because after all, I was just gonna go out and get a 30-year mortgage at a fixed rate interest, right? So it's simple, and I considered getting a 15-year mortgage or a 30-year mortgage, and I decided to get a 30-year mortgage.

I knew that you should never do anything except get a fixed-rate mortgage. I knew that you should only get a 15 or 30-year mortgage, and I didn't want a 15. I got a 30, and I knew that you should put at least 20% down, and I knew that I was making the right decisions.

(laughs) In retrospect, I'll tell you what. I don't think I knew nearly what I wish I had known, and in hindsight, I wish I had done some more study and preparation for that decision. Now, I've tried to make up for lost time and mend the error of my ways with some additional study, and today's show is part of that.

My guest is Casey Fleming, who is the author of "The Loan Guide," how to get the best possible mortgage, which is an excellent book on the subject. If you're gonna buy a house, I recommend you probably. This is a good one for you to read. And we're gonna try to chart the path for you a little bit and help you with some knowledge and wisdom and insight to make your next mortgage a little bit better.

Casey, welcome to Radical Personal Finance. - Well, thank you very much, and thank you for having me. - For sure. So we connected at FinCon 2015 in Charlotte, and you gave me a copy of your book, and we had breakfast together, and I was so impressed with what you talked about that I said, "Let's have you on the show, and let's talk about mortgages." And what I'd like to do quickly before we get started is give a quick background.

What's your background in the mortgage industry? - I started off as an appraiser. And founded a company and built it to one of the largest appraisal and consulting firms in the San Francisco Bay Area back in the '80s. And then in the mid-'90s, I transitioned over into lending. So I've been lending now for a little over 20 years.

- So why did you write a book on lending? 'Cause your book is called "The Loan Guide-- How to Get the Best Possible Mortgage," which is the focus of our conversation. What led to creating the book? - Well, some folks have asked me if it was a labor of love, and actually I answered that no, it was a labor of being really ticked off.

And what I mean by that is everything that led up to the crash was a lot of really bad lending practices on the part of players throughout the entire industry. And it was very frustrating as someone who is very involved in our professional organizations, and I know a lot of really good, ethical, professional loan officers, watching the bad apples ruin everything by essentially taking advantage of the consumers was really maddening.

And obviously we all know how bad the results were. We all know who all got hurt. So the purpose of the book was really to empower consumers to educate themselves so that they can make wise choices regardless of whether or not they're getting good advice from their particular mortgage advisor.

- I think it's a good job, and it's one of the best books on mortgage--I mean, just the mortgage process that I have read. I want to read a quote from "The Forward" to establish the context for our conversation. You wrote this, "Nothing in this book is terribly exciting or sexy.

Reading about mortgages won't keep you up at night. You'll be going through pages excitedly, wondering how it will all turn out. If I had my druthers, I'd rather be reading a tabloid. Yet a mortgage is almost certainly the largest debt you will ever have. There are some sobering implications to this.

You will probably spend more money on your mortgages over your lifetime than you will on anything else. I repeat, you will spend more money on your mortgages over your lifetime than you will on anything else. More of your working hours will be spent earning money to pay your mortgage than any other debt.

Families that manage their mortgage portfolio properly can have tens of thousands, if not hundreds of thousands, more in assets when they retire than those who don't." In case you thought that was a great quote because it sets the context for how important the discussion is, no, it's not exciting or sexy, but it is important.

Yet so many of us wander into getting a mortgage and we know nothing about it, nothing about our options. What are the biggest--let me say maybe the two or three biggest mistakes that you see borrowers make when it comes to getting a mortgage? Well, I think probably the first thing is not shopping hard enough.

They'll go off and they'll shop online and they'll end up being drawn in by some great advertising, some great marketing. And there's a lot of money in the mortgage industry, so there's some pretty refined marketing that's very, very well done. And it's pretty easy to draw someone into something that isn't necessarily the best thing that they should do for themselves.

The other thing that folks do, I think, is they walk in with a preconceived notion as to what they want. And I hear these strange rules of thumb all the time. You should never pay points or you should never pay any costs or you should always get a 30-year fixed mortgage.

And the problem is, of course, is if you do that, it really limits your ability to structure a mortgage in a way that gives you the lowest possible lifetime cost for your specific profile and goals and needs. Can you give some examples of perhaps cases that you've worked on where by laying aside the preconceived ideas and just considering the market at the time of purchase, the borrower was able to get a better deal?

Oh, sure. I work with a lot of Silicon Valley engineers, so they do tend to walk in with a lot of preconceived notions because they've done a lot of research. So one of the most common is you should never pay any points. And what I do is we earn the exact same amount, no matter what you choose to do, whether you pay points or not pay points.

And--pardon me. So we're going to earn the same amount no matter what you do. So what I do is I give people options to pay points if they want to, and then I show them how much the various options are going to cost over time. And probably 75%, 80% of the time, engineers who walk in and say, "I don't want to pay any points," will take a look at what it's really going to cost them over whatever they believe their holding period is going to be, say, 7 years or so.

They'll look at the total cost over that holding period, and they will decide to go ahead and pay money to buy down the interest rate by paying points. So they walk in with one notion as to what they think is the best way to go, and they walk out doing something totally different.

So why does that work? Why is that option available? And why would the bank offer that to them to allow them--explain what buying points are and why the bank allows that such that it reduces the costs? So it's actually pretty simple. The bank doesn't keep the loan. They sell the loan off.

And there's a price in the industry we call it par, where if a bank sells a loan off, it's going to be fairly neutral for them. And on a typical loan, the lender is going to earn typically somewhere in the vicinity of about 3% of the loan amount when they sell the loan off.

So what happens is that if the interest rate is higher than that, then the buyer of the mortgage will pay more for that mortgage. And if the interest rate is lower than that, the buyer will pay less for that mortgage. So the bottom line of this is that if the lender has--if you accept a higher interest rate, the lender's going to receive more profit on that.

And what they can do is they can use some of that profit to credit you for closing costs, points, origination fee, even title and escrow fees. If you want to earn--if you want to pay less in interest, then the bank can simply earn their profit by charging you points and then sell the loan off at--because it's a lower interest rate-- at whatever price the buyer is willing to pay for that loan.

Describe a scenario where somebody made a choice other than a 30-year fixed and perhaps it was a better financial choice for them and why. So there's--on adjustable-rate mortgages, you have the option of different fixed periods initially. So it could be a 5-year fixed or a 3-year fixed or a 7-year fixed, where that initial period, it's fixed for that period of time.

So many folks, if they are pretty confident that they're only going to be in that home for 5 years or 7 years, may choose to have a 7-year fixed. And if they save, let's say, half a percent over the course of the first 7 years, what they've done is they've saved thousands of money, knowing--thousands of dollars of money--knowing that they're going to end up selling the property before it turns into an adjustable-rate mortgage anyway.

It's quite common in Silicon Valley because most of the engineers and high-tech folks that work here end up with fairly large occasional windfall income from RSUs or stock options or even bonuses. And I've had quite a few clients who came in and said, "My intention is to actually pay this loan off in 7 years." And because the adjustable-rate mortgage offers a lower interest rate, they can pay it off faster and cheaper if they're fairly confident they're going to be able to pay it off in only 7 years.

The fear with adjustable-rate mortgages is the potential for the mortgage to adjust to crazy levels. And this is the approach, say, "Well, wait a second. If I get an adjustable-rate mortgage and interest rates go up by 3%, all of a sudden my payment is going to be through the roof." How do you actually analyze an adjustable-rate mortgage to figure out if that's the case or if there is a margin of safety?

Great question. It's very important to understand the terms of your adjustable-rate mortgage before you accept one. The most important terms to remember are the index, and this is going to be defined in your actual contract. An index is just simply a measurement of interest rates. What they'll do is they'll say, "We're going to base-- when we do adjust your interest rate, we're going to base it based on this index." The most common index, and it's one probably most folks have heard of, is LIBOR.

That's just simply a measure of where interest rates are at any given point in time, just like the Dow Jones Industrial Average is a measure of where stocks might be at any point in time. Then in your contract, they're also going to define the margin. Now, a typical margin on a LIBOR loan is going to be between 2.25 to 2.75.

So you want to look at that margin, and what it says is when we adjust, we're going to take whatever the current value of the index is, and we're going to add the margin. So if the index, let's just say, is 1% and your margin is 2.25%, your new interest rate will be 3.25%.

The reason that this becomes important is today LIBOR is running under 1%. So folks who have an adjustable-rate mortgage that is adjusting today are finding that their loan is adjusting out to lower than where fixed-rate loans are, so it's not exploding at all. The other elements that you really need to understand are your caps, which is the cap on how high the interest rate can go, and there's three caps that are really important.

There's an initial rate cap. So if you have, let's say, a 5-1 arm that's fixed for five years, at the end of five years, then your loan can be adjusted a maximum of either 2% or what's more common now, 5%. Then you have an annual adjustment, and that's always 2%.

And then you have a lifetime cap, which is today in most cases 5% over the start rate. So it's really important to understand those five terms whenever you're looking at an adjustable-rate mortgage. If you're comparing offers, for instance, you should be asking all five of those questions and understand exactly how it's going to adjust.

I had a family member recently, as in the last few days, who's saying, "Okay, I need to refinance my house, and where do I go? Who do I start with?" How would you advise somebody who is looking at their house saying, "I'd like to refinance," and trying to figure out how to approach finding somebody to work with?

How would you advise someone in that situation? I think the best way to do it is to start online just so that you educate yourself a little bit and understand where the various products are. And then really write down, figure out what your real goal is in refinancing because there's a lot of different reasons to refinance.

And when you actually go speak to someone--I'm a brick-and-mortar guy. I prefer working with somebody that I can meet face-to-face and look them in the eye, and that way I get a feel for whether or not they're being honest and ethical. So I would educate--as a consumer, I would educate myself first, figure out why I want to refinance, and then find somebody local, somebody who's referred by a family member or a friend that you trust would be ideal, and ask them sharp questions.

You have the right to ask a lot of questions about why they're recommending whatever they're recommending and about whether or not it's really going to be beneficial for you. Is there a way to know which is the cheaper option, working with a bank, working with a broker? How do you deal with that situation?

A lot of it depends on the circumstances. Generally, we all get our money from the same pool. Ninety percent, roughly, of all loans made today are sold to Fannie Mae, Freddie Mac. At any given day and in any given moment of time, Freddie Mac and Fannie Mae actually advertise what they're willing to pay for loans that are going to be delivered 60 days from now.

So the differences between most lenders are fairly small. The reason there are some differences is some lenders strategically go for the lowest possible cost. Some lenders go for offering the best service. And also, if a lender has been slow over the course of the month, then oftentimes they will narrow their margin a little bit just to fill their pipeline a little bit.

So it's worth shopping. In my experience, brokers have a lower overhead cost and can usually do a better job, especially on conforming loans that are sold to Fannie Mae, Freddie Mac, which would be loans under $417,000 to prime borrowers. Usually, a broker can give you a better deal, but I still think it's worth shopping and comparing.

It's a challenge. I know even here in my local market, when I took out a mortgage on the house that I bought, looking back at it, the process went fine, but I never was confident that the lender knew all the little tricks. And what was the biggest frustration for me was I found out six months after I bought the house about the Florida Mortgage Credit Certificate Program.

And I found out that the house that I purchased and the terms, I would have qualified for the Mortgage Credit Certificate Program, which was a bonus tax credit on top of all of the normal tax deductions that people are aware of. And it was free money that if somebody had just told me about it, I could have gotten and it would have been several thousand dollars a year, but except I had to do it in advance.

And I just remember being so frustrated with the fact that the broker didn't tell me about it, the real estate agent didn't tell me about it, the broker didn't tell me about it. I was just incredibly frustrated and I was like, "Do you guys not do your job?" And even just in terms of the options, I never found a broker who was willing to sit down and say, "Let me talk you through the options." Rather, what happened was, "Well, here's a standard 30-rate fix and here are the three companies," and boom.

And I was looking for more of someone to say, "Let's look through your situation and look at the options." Nobody presented to me a few different adjustable-rate mortgage options and explained to me, "Here are the risks and here are the advantages and here's the price over the holding period." I found it to be a very frustrating experience and I've not known how to advise people to get a better experience.

Well, and that's a good question. I think as a consumer, what you have to do is you have to be ready, willing, and able to shop and talk to different people until you find somebody that you're pretty confident will do that. One of the tricks about going to the real estate agent, if you're purchasing a home and your real estate agent is steering you towards a particular lender, which is very, very common, we work as partners with real estate agents.

One of the challenges to that is that it's in everyone's interest except yours to make the deal as smooth and effortless as possible because that gets us to close faster so everybody gets paid sooner and more reliably because the longer a deal is in escrow, the more chances there are for it to fall apart for any reason, for some reason.

So what you're going to find is complicated elements like the mortgage credit certificate program are rarely brought up at that point in the process because, quite frankly, it adds a lot of complexity and a lot of time to the process of getting your loan approved and through the system.

So my advice is if you educate yourself and understand that you have the right to understand a bunch of different options, then find somebody who's willing to present you with at least three different options. - Right. Yeah, as with anything, I can't blame other people for my lack of homework.

It's just I wasn't aware of it. But it definitely – it just seems like in so many industries, I'm sure in the service industry too, it should be pretty easy to stand out. But you got to bring value. So let's talk about types of loans. I'd like you to give just an overview, a few minutes of discussion of each of the types of loans and thinking about what to do and how to approach it.

I want to start with the one that's abnormal but I get a lot of questions about reverse mortgages. Explain what a reverse mortgage is and how to approach the decision of whether or not you should take one out. - Okay. A reverse mortgage is simply a mortgage where you do not have to make the mortgage payments.

The interest on the loan accrues and simply eats into your equity on the property. So it's for older folks who do not have enough income to live. And there's four different ways that a reverse mortgage can be structured. And very briefly, one is just simply a lump sum payment.

And that's an ideal situation for someone who has a relatively large mortgage. They're having difficulty making the payment. They can get a one-time lump sum reverse mortgage which pays that off. And then from then on, they simply have no mortgage payments at all. There's also one where you get payments for your lifetime.

So you get monthly payments for as long as you live. That's ideal for someone who has a little bit more equity in their property and needs basically supplemental monthly income in order to be able to just live life normally and have a nice life. The third is set up as an equity line.

And the equity line is perfect for folks that are okay on a monthly basis but have occasional needs. And a good example is a couple that I worked with where the husband had a stroke. So all of a sudden, they had some large medical bills. And they were fine except for that.

So they used an equity line but they ran it all the way up to the limit and they were not qualified to increase that limit. And they were looking at large medical bills that they simply couldn't pay but a tremendous amount of equity in their home. So we set up a reverse mortgage to pay off the equity line and then give them -- to pay off the existing equity line and then give them another equity line or let's just say it's all one loan but they had enough room to be able to draw off money whenever they needed it for medical expenses.

And they would never have to make a payment for the rest of their life. So it allowed them to stay in the home for as long as they wanted. So the point here and I flipped it just in hopes of keeping the conversation interesting but I may have made it more confusing.

The point of a reverse mortgage is to take equity that you own out of a house and basically give it away to the bank in exchange for money now in one of those forms. So this is the exact opposite of a mainstream mortgage. You see the value but you also see some dangers.

So what would be -- what are some reasons why people would choose not to get a reverse mortgage? Well, it is the most expensive mortgage available and that's because virtually all reverse mortgages today are FHA insured and that FHA insurance is fairly expensive. So the rest of the costs are more or less the same as a forward mortgage or conventional mortgage.

But on the reverse mortgage, what we find is that you have -- it's a very, very high cost mortgage. The second thing is it does eat up your equity. So if you have concerns about that, if you have children that you want to leave your property to, you'll have less equity when you're ready to leave that to your children than you would if you didn't do the reverse mortgage.

Reverse mortgages today are designed so that it would be virtually impossible to eat up 100% of your equity but not completely impossible. So there is some risk there as well. And then finally, the last bit is the -- the last thing that's important is that the reverse mortgage is still the one product that the -- where the lender can actually earn more money by selling you a higher interest rate.

On all other products, especially for brokers, we're unable to increase our revenue in any way. We have to make the exact same amount on everything. That rule doesn't apply to banks and mortgage bankers, large mortgage bankers, but it applies to brokers. With reverse mortgages, you can actually earn huge incomes by selling a very high interest rate.

And because the consumer doesn't make any payments, often they don't actually care or they don't know that they care. So it's sort of a little trap that's important to understand so that you can avoid it if you're actually shopping for a reverse mortgage. - Are the costs of mortgages declining, meaning as they've become more popular, is the cost of insurance declining and is the cost of taking out the mortgage declining at all?

- In terms of the reverse mortgage? - Yes. - Yes. The upfront cost of a reverse mortgage declined this year. FHA sets the insurance premium and it declined this year. And now it's down, your upfront premium is down to one-half of 1% of the value of your home. And it was at one point as much as 2.5%.

So in virtually all cases, there's some exceptions, but in virtually all cases today, the upfront insurance is actually considerably less than what it used to be. - That's what has confused me about the reverse mortgage market, and I'm not in it every day, but it just seems to me that it's a useful tool and you've got to analyze it each time, but the prices shouldn't remain high forever.

Like there should be competition and there should be reasons why the prices would be declining. So yes, when it was a newer product, I could understand why the costs would be high, but I'd like to see it coming down and being possible. I want to transition. I want to describe a scenario and you can tell me what's available in the market today.

And this is the thing I've kind of puzzled over. But in my ideal world, if I were a traditional retiree, say 65-ish, whatever, I would, and assuming most people today, the concept of the family house that the kids want to inherit is for most people dead and gone. Maybe that was the case when you had the family farmstead and your kids were going to take over.

But today, most of us, the houses we live in are a commodity. They're nice, but it's not like we're going to pass them on through the generations. So most of the time, if I die and leave behind a house to my 45-year-old kids, they just got to go through the hassle of selling it and getting rid of it.

And they just got to deal with that and then they split up the money. So in some ways, my ideal scenario if I were a retiree would be to have either a rental house, which is less than normal because of the risks there. Most retirees aren't willing to face the prospect of a landlord adjusting things on them.

But I'd like to have either a maximum interest only mortgage or some way set up with maybe a reverse mortgage where I don't own the property. I just simply live in the property and I have a maximum mortgage on it possible so that my assets are somewhere else that's a little bit easier to deal with than a personal house, but minimum payments possible and to do that for the longest period possible.

If you get the scenario, what would be the best way to set that up if I were going to try to accomplish that? Would it be through using a reverse mortgage product? Would it be through an interest only loan of some kind? How would I set that up in today, 2015, 2016?

Just to clarify, so one of your goals is to not make payments or just you don't really care whether you're leaving equity or not? I have enough money. I don't care about equity. I want to strip the equity out of the house. So $300,000 house, I want the maximum equity out of the house.

And I'm willing to make payments, but I don't want to make principal payments if possible. I want to make minimum payments. It's not a problem to make some payments, but I want to make either minimum payments or no payments. Well, an interest only loan would be significantly cheaper. As a matter of fact, an equity line would actually be, by far and away, the least expensive way to do that.

And with an equity line, you can certainly get -- with a conventional equity line, you can get significantly more money out of your property than you could with a reverse mortgage. So -- oh, go ahead. No, so then I would take the maximum equity line out and just pay the interest payments on that line on an ongoing basis?

Is that what you're saying? Yes. And the only caveat to that would be that within 10 years, usually exactly 10 years, the equity line draw period will be over. And so you'll have to change your strategy at that point. And possibly you could refinance if you still qualify. You could just roll it into a new equity line.

Or at that point, you could go out and get a reverse mortgage, too. Interesting. And could -- in an equity line, can they lower -- I guess it would depend on the terms of the contract, but wouldn't it be normal that they could lower the amount of the line and forced repayment of some kind?

They can. But historically, the only time that's happened is when we saw large declines in the value of the homes back in 2008, 2009. Okay. Because I know that's something that I did see happen with some clients. I was just asking you because you're a creative thinker and it's a scenario that I've changed my tune on.

And the basic scenario has been this. I used to think that the goal for a retiree would be to have a paid off home mortgage, that this is the ideal scenario, have a paid off home mortgage and then eliminate the risk. But what I've realized is when you're living off of the investment income from a portfolio, you don't have the same risk that somebody who's living off of the income from wages has.

So for me, I'm 30 years old, it would be very valuable to have a paid for house. And I'm not saying that if I had abundant other money that at 65, if I had a paid off house from 30 to 65 that I'd go borrow money on it. I might not.

But I would consider it because if I'm living on a portfolio of income, then by definition I have income and I no longer have -- the mortgage is just a cost of financing. And houses are really clumsy as far as passing along generationally. And so I've looked for strategies to say, "What's the best way to cut the cost down on this thing?" So I've really looked for ways to do that.

So that was the scenario. Walk through some of the different options. So in your book, you talk about fixed rate mortgages, adjustable rate mortgages, interest only loans, option arms, private money, second mortgages, and equity lines. Let's walk through those options. And if you were approaching it, what are the pros and cons that an individual borrower would need to understand when thinking through their decisions?

So what I like to do is I like to start off with finding out what a borrower's goals are. Most borrowers will say their goal is to have the lowest interest rate possible. But that doesn't really tell me a lot. What I need to know and what they need to know is, you know, are you looking for the lowest monthly payment, the lowest upfront cost, the lowest lifetime cost, or do you want to pay it off as fast as possible, or something else.

But it's usually one of those four things that becomes most important to them. So that's the first thing I look at. With a 30-year fixed mortgage, obviously the greatest advantage is the interest rate's never going to change, your payment's never going to change. It's a very secure mortgage. But it is the most expensive mortgage out there, unless in the future interest rates just go through the roof.

And given the fact that in the last 20 years they've been extremely low, maybe the odds of them going through the roof are not that high. The adjustable-rate mortgages we've kind of already touched on, the greatest advantage to them is they're significantly less expensive, at least for the fixed period.

And as it turns out, over the last 10 years they've been significantly cheaper even after they begin adjusting, as long as it's not one of the toxic adjustable-rate mortgages. Option arms are no longer an option today. There was actually nothing wrong with the product. Unfortunately, they were sold improperly to people that shouldn't have had them.

And so those are considered toxic loan products today, and they're not available, so that's kind of off the table. And then private money is very expensive. You would only use that if you can't qualify in any other way. But I think for each person individually what they have to figure out is what really is their goal.

And then I do take a look at their income and spending profile. If somebody has abundant disposable income, for instance, some folks are really conservative and instead of spending 40% of their gross income on housing debt, they only want to spend 30% or something. Or if they have large bonuses or stock options, RSUs, somebody with those kinds of income profiles usually have a higher risk tolerance, so doing something like an interest-only adjustable-rate mortgage could be a really good option for them.

If someone has really thin disposable income, like they're really stretching out their qualifying and they're qualifying for as much house as they can possibly buy, or if they have bad spending habits, they've got a lot of credit card debt, that tells me that they're likely to continue spending and they could get into trouble.

Or if they have uncertain employment. I mean, here in Silicon Valley we have a lot of layoffs, and certain companies are more prone to it than others, for instance. Well, if someone has those elements in their income and spending profile, I would say they'd have a lower risk tolerance and I would be more inclined to recommend a fixed-rate loan for someone like that.

You work in an interesting mortgage environment. I mean, again, Silicon Valley. So you're not dealing with somebody in the Midwest who's taken out a $75,000 mortgage. You're more likely to be working with a $750,000 mortgage. How does that affect the mortgage decision process? Well, the bigger the mortgage, the bigger the risk/reward equation becomes.

So it's a great point if someone's got a $75,000 mortgage in the Midwest, their savings potential from getting an adjustable-rate mortgage is really very small, as is the risk if it begins to adjust. With a $750,000 loan, which isn't uncommon at all here, you can save tens of thousands of dollars over the next seven years is a typical period for what people kind of look at here because they figure they'll be moving up within seven years or paying it off.

And you've got tens of thousands of dollars in potential savings and significantly greater risk unless you manage it properly. And the best way to manage risk on an adjustable-rate mortgage is to have a plan to pay the balance down as fast as possible because, just like with a Midwest person, the lower the principal balance when it begins to adjust, the lower the impact is if interest rates happen to go way up.

I love my favorite chapter in your book is Chapter 19, and I'd recommend listeners buy it if for no other reason than just to get Chapter 19 where you talk through the money-saving strategies. And you walk through these scenarios step by step. So you talk about the holding period, just like you're doing just now.

If you're going to hold the house for longer, do this. If you're going to hold the house for shorter, do this. You walk through the life stage and the different products and price recommendations for life stages, risk tolerance. You even have a section on if you're going to have babies, having a baby.

If you're going to have a baby -- and here I'll read just -- this is the shortest one. But if you're going to have a baby and lose one income for a while, get an adjustable-rate mortgage with an initial fixed period that is longer than the time you want to spend at home.

If you think you want to stay at home indefinitely, get a fixed-rate mortgage. And if you decide you want to have lots of babies, you may want to consider the possibility that you'll want to add on to your house in a few years. If this is the case, then now might be a good time for an adjustable-rate mortgage.

When the time comes to build on, you're very likely to refinance again to pay for an addition. And you go on and give these examples for each one. In my mind, this is the whole key. This is a really important aspect of financial planning. And listeners would be well-served to pick up your book and work through those situations.

Because as mortgage costs are going to be a big deal for you in the grand scope of your life and in your life plan, it's important to get them right. Well, exactly. And all of the elements that I discussed in Chapter 19, every one of them reflects a real-life client situation that I had.

And the more somebody talks to me about, "Here's what I'm thinking about doing," the more we can sit down and talk about how the various options are going to impact them. A good example is somebody that wants to start a business, because that's really common. And someone that wants to start a business, for God's sake, get a fixed-rate mortgage and make sure you get it before you start your business.

Because once you start your business, you will not be financiable for at least three years. So it's just little things like that. Talk to your mortgage advisor about your plans and make sure that they are part of the consideration in terms of your strategy. Why get a fixed-rate mortgage in that context?

Explain that scenario. Well, because I guess it depends on the time frame. But the main reason I would say get a fixed-rate mortgage if you're about to start your own business is businesses, when you first start them, have a way of sucking up a lot of cash. And sometimes it takes a long time before you're actually generating any income.

So your risk tolerance on a mortgage might be significantly lower if you're about to go into the self-employment world. - Yeah. It's amazing how no matter how hard you try to predict the future, things can change. And my final question, and I'll give you a longer intro to it, my final question is, do you have some strategies to create maximum flexibility for people and minimum cost?

And I'll explain the scenario. As we record this, we're recording this on December 1, 2015. This will likely air either later in December or in January. Hopefully, by the time we record this, I will have sold the house that I bought a few years ago. But when I bought that house, I chose the house very, very carefully.

I didn't intend to do a short-term house. I didn't intend to do a -- it wasn't intended to be a starter house. It was intended to be a long-time house. I didn't have any reason why I didn't expect to be in that house for 20, 30 years, 40 years, who knows.

I bought a house that was big enough. I would be happy in it for a long time, nice enough and be happy, but not so big. Without going through the whole list, I chose the house really carefully. And I intended to make a -- I made a 20% down payment.

I got a 30-year fixed-rate mortgage. I was intending it to be the long play. Well, a year after I bought the house, I wound up completely changing everything, deciding to close the business I'd been running for five or six years and start Radical Personal Finance, which adjusted everything. I had no need to live in the neighborhood where I wanted to live.

I wanted my money back out of the house, et cetera, and I looked at different strategies and ultimately decided to just go ahead and sell the house. And so what was funny is I've ended up owning the house, and there were some timing strategies as well. I had some -- it's a good time to sell as far as assuming the contract goes through as planned.

I'll have made a healthy profit on the house and some kind of timing the market a little bit to take some tax-free income as well. But all of my plans -- I'm glad that I had some flexibility because even though I had my plan set in one way, life changed.

And I couldn't have anticipated that. So the question is do you have some suggestions and strategies that would help listeners always keep flexibility so that no matter how much they're planning, if their circumstances do indeed change -- they do what I did, they start a business, they decide to move to another state to take a better job, et cetera -- that they have more options?

Any suggestions for them? Sure. One of the things that I like to do -- I work with financial planners a lot where we kind of partner on strategy and we sit down and kind of think about things. And financial planners that I work with tend to really like the idea of having an equity line, which provides a tremendous amount of flexibility.

So it's not uncommon for us to use two different loans for financing a property, whether it's a refinance or a purchase, especially if there's a break at which your first mortgage becomes quite a bit cheaper because it's in a certain category, in which case we could limit that and we use the rest as an equity line.

Or sometimes we just refinance your mortgage into the lowest rate possible. But then add an equity line on top of that. Because the equity line, essentially if you're not using it, doesn't cost you anything. But provides you with a great deal of flexibility. So I think the first thing I would say is in your situation is consider having two loans, which means that you've got access to cash, especially if you're starting a business, where you have quick access to cash.

Another probably very important consideration would be is if you end up owning two homes, I'm not sure if you were going there or not, but if you end up owning two homes, I like diversification in my debt portfolio as much as I do in my investment portfolio. So it might be a really good idea to have one fixed loan and one variable rate loan so that if rates go up, you're protected on one.

If rates go down, you get the benefit on the other. - That's an interesting approach. I hadn't considered that. No, I went from owning to renting. I was able to find a rental deal that worked. But that's an interesting approach to consider to diversifying that. Are there other approaches?

Let's say that I were a real estate investor with a portfolio of loans. Are there other approaches to intelligent diversification that you would consider on managing rental properties? - Well, I do own rental properties. That's a good question. What do you have in mind? - I guess I'm just thinking my scenario of real estate investment is borrow a million dollars and let your tenants pay it off.

So if you don't manage, however, your risks carefully on that million bucks, it'll sink you. And so as you're working into it, you've got to build safety for yourself. You've got to build flexibility. And if you're starting without a ton of money, you're going to be borrowing a good amount of money.

And so you're going to be steadily managing your properties and kind of adjusting your financing. And I just was curious if you had any big picture suggestions. - Well, you hit the nail on the head with regards to risk. I mean, you have no idea with a rental property how much it's going to throw off every month.

In the long run, you can make some fairly accurate projections most of the time. But on a month-by-month basis, you just never know. So an excellent strategy there is to start off with an interest-only adjustable-rate mortgage. For instance, a 711 arm that's adjustable for...or that's interest-only for 10 years.

And the reason that that might work is that you have the option of making a minimum payment for those first 10 years. So you save a little bit of money because it's an adjustable-rate mortgage. And what you do is when the property is performing well and throwing off a lot of cash, you use that cash to buy down the principal as fast as you can in order to mitigate any risk that you have once it begins to adjust.

But then if you have a bad month, you know, the property is vacant for a month or requires a lot of repairs, you can make just the minimum payment, which is going to be only whatever interest is due for that month. So it's a way of reducing your cost and reducing your risk, or at least your monthly risk, at the same time.

If that's your strategy, however, I certainly wouldn't finance all your properties using the same thing only because at some point the loans begin to adjust. And once they do begin to adjust, if the rates have gone up, all of a sudden what you've done is you've converted all of your debt into extremely expensive debt.

Right. High risk. Well, Casey, thank you so much for sharing some of your insights and wisdom with the audience. The book is definitely a great book. If you're going to buy a house, I definitely recommend reading the book. It's called "The Loan Guide." I'll link to it in the blog post for today's show and in the show notes on your phone.

And then you also blog and have a site at LoanGuide.com. Do you work with clients across -- you said you prefer to work locally. Do you work with clients across the country or just primarily in California? I work only in California. Licensing today is state by state, and I am only licensed in California.

Our company is licensed in several other states as well, but I personally work only with California clients, but anywhere in California. I regularly finance all over the state. Great. Well, any California listeners would definitely encourage them. Check out LoanGuide.com, and if you're looking for a good broker, talk to Casey, and you can provide the same kind of personalized advice that we all wish that we had.

Anywhere else that you want people to connect with you or any final words of advice, Casey? No, as far as connecting, the best way to reach me is through LoanGuide.com, and the final words of advice I think are don't be afraid to shop, don't be afraid to ask sharp questions.

Many of the loan officers you talk to don't know any more than you do, so do not be intimidated by them and hold their feet to the fire. Sounds like the insurance industry, sounds like the investments industry. We're all the same. Yes, it does. All the same. Well, Casey, thanks for coming on the show today.

Thanks so much for having me, Joshua. It was a pleasure. As we go today, I encourage you to check out Casey's book, and I encourage you to think deeply and always look for a way of optimizing your scenario. I don't know what's right for you. Every decision has pros and cons, and that's not just some random disclaimer.

I killed all the stupid disclaimers. You've got to figure out your situation. Guess what? It's your money, it's your life, and you are responsible. You're the one who's going to sign on the dotted line, so do a little research before you sign and make sure that you have a little bit of a sense of what's going on.

Buying a book, let's see, on Amazon right now, this book is $25. Paperback, shippable with Amazon Prime, $25. 15 used from 1881, I wouldn't bother with those. There's not enough of a savings there. But $25 might be worth investing in for an education that will impact the potential expenditure or savings of thousands, tens of thousands, or hundreds of thousands of dollars on the cost of your next mortgage.

Do a little research. Become a person who researches things intensely. You can't always be successful at always making the right decision. We all make mistakes. But at least be somebody who does your best to do research. I encourage you to do that. Don't make big financial decisions without spending time and spending a little bit of money on your education.

Definitely encourage you to get Jake Casey's book. Books are going to be the best investment you're going to make. $25 in, plus shipping if you don't have Amazon Prime or wherever you buy your books. $25 in and thousands of dollars of potential savings out. I'll take that trade any day.

So, Casey, thanks for coming on the show. Thank you for listening to today's show. If you have enjoyed and appreciated our content, please consider becoming a supporter and patron of Radical Personal Finance. You can find all of those details at radicalpersonalfinance.com/patron, radicalpersonalfinance.com/patron. We'd be thrilled to have you there.

Come on by and become a patron of the show so you can join our Facebook group. Lots of interesting conversations there happening regarding real estate, a lot of real estate investment discussions, some interesting conversations regarding GDP growth. So I'd encourage you to consider becoming a patron of the show at radicalpersonalfinance.com/patron.

Have a great day, everybody. Thank you for listening. ♪ Thank you.