Escrow

WEBVTT
Kind: captions
Language: en

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- [Voiceover] So the house that's you are

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interested on the market

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asking 310,000, you offered 300,000,

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and so you make an offer contract,

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you dated, you give all
the right information,

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you say what your offer is,

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you give a deposit to show
that you're an earnest

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that you're serious about this.

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But then you list your contingencies and,

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"Hey look, I want to buy this house

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"unless it doesn't pass inspection,

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"unless I'm not able to get financing,

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"unless I'm not to be
able to get insurance.

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"Unless the title is somehow not clear,

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"but if all of this does
happen in a favorable way,

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"then we're going to close
two months in the future."

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Now the seller has three options,

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they could accept your offer.

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They could say, "Okay, you know I agree

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"to this offer contract, and then you all

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"we'll both sign it.

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So this is you know you
could put your signature,

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and the seller would put their signature

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and so everyone agrees to this happening,

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and then, and the your
deposit will essentially

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be taken and we'll talk in a second

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about where that deposit goes.

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Another option is that the seller

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might just outright reject your offer.

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Says, "No, no, no, no, this is an insult,

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"this house has been
in our family forever.

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"310,000 is my bargain basement price,

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"I don't even want to, I
don't even want to give

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"credit to this offer by even

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"you know doing anything else."

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So they just reject it out, right?

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And then the third options is that

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they could give a counter offer.

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They'll say, "Okay, this is close,

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"but I'm going to issue a
new counter offer contract,

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"where instead of it being 300,000."

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Now it's the seller we're talking about,

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they'll say, "How about 305,000?

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"Or how about fewer contingencies?

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"Or how about a closing
date that is closer,

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"closer to the period we're talking about.

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"Or how about the buyer takes on more

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"of some type of closing cost

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"or some other type of thing
that's actually going on."

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So the seller is trying
to give a counter offer

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that's in some way more
favorable to the seller

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than the buyer might look at that

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and either turn it down or take it

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on and on and on and on.

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But let's just say for
the sake of this video,

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that this offer contract is accepted.

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So if the offer contract is accepted,

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then, then the buyer signs
it, the seller signs it,

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and they move forward,

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the transaction will move forward.

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And this essentially releases
a whole series of things

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that are going to go on.

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So let me see if I can diagram that out.

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So we are talking about
a world where the offer,

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the offer is accepted.

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And so the first thing
that is going to happen

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is that we're going to
have, you're going to,

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you have an opening of escrow.

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Opening of escrow.

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Opening of escrow and I
know what you're thinking.

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What is escrow?

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And I know you're thinking that because

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I remember the first that I was involved

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in a real estate transaction,

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and I thought that myself,

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this word escrow kept popping up

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over and over again,

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and I have never seen the word

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until I started to having to deal

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with this real estate transaction.

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And the whole idea of escrow,

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let me scroll this up a little bit,

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is, if you have, so if you
have a buyer and a seller,

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and escrow actually applies

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beyond to just real estate,

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but the idea becomes useful
anytime you're making

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a major transaction for something

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that's quite valuable,
maybe the transaction

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is a little bit involved.

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So the buyer, if you
have a buyer and a seller

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you might just say, you
know the buyer might say,

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"Hey, give me keys to the house.

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"Give me the keys, give me the keys,

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"and then I will give you the money.

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"Then I will give you the money."

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But the seller might say,

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"Hey, hey, hey, I'm not
going to give you the keys."

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And when I really say
keys, I'm really meaning

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title to the house, that's
actually the important thing.

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Keys, locks can be changed.

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"But give me ownership of the house,

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"and then I'm going to give you money."

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And then the seller says, "Hey, hey, hey,

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"no, no, this is a major asset.

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"This is my largest asset I have.

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"I'm not just going to give you title

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"until I get the money first."

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And then the buyer says,

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"No, no, no, this is like
all the money I have,

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"I'm not going to give you the money

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"until I, until I get
the title to the house,

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"until I get ownership to the house first.

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"And by the way I don't
want to give you the money

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"until all of these other stuff happens,

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"until I can, until I
could inspect the house

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"and do all of these other things."

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And then the seller says,

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"Hey wait, I don't want to let you

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"get all these strangers
into my house and inspect it,

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"unless I know for sure that
you're going to buy it."

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So you can see that this
can be, this could be

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a little bit of a law jam.

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They want to transact,
but maybe they don't

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trust each other, or maybe
they trust each other,

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but they're just afraid
that maybe you know

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the one person might
take the title and run

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or one person might
take the money and run,

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or they might not be serious.

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And so what society has developed

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to solve this problem, and
it's not just for houses,

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it's for any major transaction,

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it could be for businesses,

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or anything that could be fairly complex

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is they turn to a third
party, a trusted third party.

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So let me write this down.

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A trusted, a trusted
third party, third party

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that is called the escrow agent.

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So this right over here
is the escrow agent.

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Escrow, escrow agent.

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And when we're talking about escrow,

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we're talking about
putting something into,

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I guess you could say
a third party bucket,

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an account, and everything is going to be

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placed there.

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The buyer is going to put all the things

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that they need to place there.

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The seller is going to be placed

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everything that they placed there.

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And then the trusted
third party can verify

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that both parties have
met their obligations

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and then it can give the
seller what the seller needs,

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and give the buyer what the buyer needs,

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and then essentially
close that escrow account.

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So, right when you start this,

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when we say opening of the escrow account,

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that means that, let's say this,

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so this is the escrow agent,

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and they're essentially going

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to manage the escrow account.

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Escrow, escrow account.

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So as soon as the offer is accepted,

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you open an escrow account,

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and that deposit that we talked about

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that goes into the escrow account.

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So let's put that in.

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So that deposit, that $9,000

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that was in the offer contract

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that goes into the escrow account.

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Why is it important to put
it in the escrow account?

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Well if you give that
deposit to the seller,

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well maybe the seller
just cashes the check,

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but then later refuses to proceed

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or doesn't allow the inspector
to come into the house

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or whatever else it might be.

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And so this is a way the
buyer can feel sure that,

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"Okay, I'm writing this
check, but you know,

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"it's just not going to disappear

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"without me knowing about it.

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"$9,000 is not a small amount of money."

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And this way the seller feels good,

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"Okay, I trust this third party,

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"the buyer has an earnest.

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"Put the deposit there, I
know the deposit is there.

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"So now I can let the transaction proceed.

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"I can let inspectors come into the house,

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"feel good about it,
et cetera, et cetera."

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And so as we go through this period,

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as we go through this period between

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the time that the offer was made,

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this two month period,
it's not always two months,

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and the closing date, the closing date.

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And the closing really is the closing

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of the escrow account.

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Once all of the parties
have met their obligation.

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But in that two month period,

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all the stuff is going to happen.

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And so you're going to have,

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you're going to have the inspection.

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So house passes inspection,

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passes inspection, the
house passes inspection.

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The financing comes through,

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and the rest of the money for the house

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gets placed here.

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So financing, financing,
and, so the financing,

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so let's say this person is putting 20%,

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so this was the 9K deposit.

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Actually, let me put some details here,

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so there's the 9k deposit.

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Now in order to actually
have the transaction,

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we have to have a whole 300,000 in there.

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And so let's say this buyer
is going to put 20% down

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on the $300,000 house.

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So that's going to be $60,000.

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They've already put 9K.

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This is often, this
deposit is usually towards

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the down payment,

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and so they will want to put another

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51K down payment. 51K, 51K down payment.

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And then the financing comes through,

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so this is going to be the remaining,

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this is going to be
the remaining $240,000.

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$240,000 from the bank.

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And there might be some
other cost on either side.

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So these are kind of closing,

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what we call the closing cost.

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And we'll do a whole videos on all

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the different types of closing cost.

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But these might be paying the agents,

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paying the mortgage brokers,

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paying for the escrow services,

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the title services,

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the title searches et cetera, et cetera.

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So both sides are going to
put in their closing cost.

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So from the buyer and the seller.

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And we could talk about
in different states,

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there might be a different conventions,

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or even different transactions might have

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different conventions for closing cost.

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And so on 12/15, let's
say you go all the way

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to 12/15, or we're
assuming this is happening

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in 2015, you have your closing date.

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And so the trusted third party,

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this escrow agent is going to say,

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"Okay look, the buyer
has put everything that,

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"that they need to put in,
in order to buy the house.

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"The seller has met all
of their obligations,

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"and the house has passed
all the inspection,

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"all of these contingencies,

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"all of these contingencies
have been met."

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So on the closing day, on the closing day,

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this trusted third party, the escrow agent

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will actually disperse the money.

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So we'll actually disperse
the $300,000 to the seller,

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and we'll actually issue the title

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which is the ownership to the buyer,

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and also pay everyone else
who has to be paid here.

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They might have to pay themselves

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because they're one of the,

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they're one of the
services as part of this,

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so that will be involved
in the closing cost,

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though it might pay the
mortgage broker, the agents,

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all of the other people who are party

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to this transaction.

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And as we see in the video on titles,

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the title is really about filing a deed,

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so filing a deed with the
county or with the city.

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So this right over here
would, would be a deed

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which essentially gives the new owner,

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the buyer proof that they
now own the property.

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So the big idea here, is this,

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the whole idea of escrow
is just a way for,

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a place to collect all of the obligations

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of the different parties,

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so that they can trust each other,

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and then on the closing date,

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and that's really the close of escrow,

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because you don't need this
escrow account anymore,

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it disperses the different things

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of the different parties,

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so that the transaction is complete.


Making an offer on a home

WEBVTT
Kind: captions
Language: en

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- So let's say that this house

00:00:01.615 --> 00:00:03.332
has been on the market
for a couple of weeks,

00:00:03.332 --> 00:00:07.403
and the asking price is $310,000.

00:00:07.403 --> 00:00:08.815
And you say, well, you
know this looks like

00:00:08.815 --> 00:00:10.070
the type of house, and
you're in the market

00:00:10.070 --> 00:00:11.282
to buy a house, you say, "Hey this is

00:00:11.282 --> 00:00:13.252
"a type of house that I could imagine

00:00:13.252 --> 00:00:14.648
"me and my family living in.

00:00:14.648 --> 00:00:16.116
"I would like to buy this house."

00:00:16.116 --> 00:00:17.416
But you think, you know this price

00:00:17.416 --> 00:00:19.115
has been on the market
for a couple of weeks.

00:00:19.115 --> 00:00:20.866
Maybe I think I could get
a better deal than this,

00:00:20.866 --> 00:00:23.665
so you decide to make an offer.

00:00:23.665 --> 00:00:26.866
You decide to make an offer for,

00:00:26.866 --> 00:00:31.332
let's say, a little
bit less, for $300,000.

00:00:31.332 --> 00:00:33.348
So the question is, how do you go,

00:00:33.348 --> 00:00:35.436
or how does your agent go about

00:00:35.436 --> 00:00:38.678
actually making an offer?

00:00:38.678 --> 00:00:40.031
Well, the way it goes is, you don't just

00:00:40.031 --> 00:00:42.998
walk up to the seller,
or the seller's agent,

00:00:42.998 --> 00:00:45.698
and say, "Okay, we're
gonna offer you $300,000,"

00:00:45.698 --> 00:00:48.303
because they don't know
whether you're serious.

00:00:48.303 --> 00:00:49.666
They don't know whether you actually

00:00:49.666 --> 00:00:52.081
have the money to do it, whether you are

00:00:52.081 --> 00:00:54.148
in a position to do it,
or whether you're just

00:00:54.148 --> 00:00:57.616
kind of playing around, or
just wasting their time.

00:00:57.616 --> 00:00:59.597
And so, to prove that you're
not wasting their time,

00:00:59.597 --> 00:01:03.005
you create, or you fill out,

00:01:03.005 --> 00:01:05.561
an offer contract.

00:01:06.500 --> 00:01:08.097
So let's think about what should go,

00:01:08.097 --> 00:01:11.555
or what might go in an offer contract.

00:01:16.279 --> 00:01:21.169
So, likely your agent,
if you're using an agent,

00:01:21.169 --> 00:01:22.919
or even a real estate attorney,

00:01:22.919 --> 00:01:25.567
or you could even find some
of these forms on the web,

00:01:25.567 --> 00:01:28.451
you would create a contract,

00:01:28.451 --> 00:01:31.233
and there's some basic
information that you would want.

00:01:31.233 --> 00:01:33.867
You would obviously want info,

00:01:33.867 --> 00:01:36.412
info on the property,

00:01:36.412 --> 00:01:39.419
what's its address, the property,

00:01:39.419 --> 00:01:42.523
who's buying, yourself,

00:01:42.523 --> 00:01:45.583
so the buyer and the seller,

00:01:45.583 --> 00:01:46.751
this is just to kind of know, hey,

00:01:46.751 --> 00:01:48.201
what is this contract about?

00:01:48.201 --> 00:01:49.300
It's about this property,

00:01:49.300 --> 00:01:52.766
and who's getting into this contract,

00:01:52.766 --> 00:01:53.800
and then you'd want to put some

00:01:53.800 --> 00:01:56.468
information about the actual offer,

00:01:56.468 --> 00:01:59.284
so, you would put your offer in.

00:01:59.284 --> 00:02:03.668
You'd say, "Okay, I'm
going to offer $300,000."

00:02:08.084 --> 00:02:09.368
And then you also want
to prove that, look,

00:02:09.368 --> 00:02:11.869
you're not just playing around with them,

00:02:11.869 --> 00:02:13.251
that you're serious about this.

00:02:13.251 --> 00:02:17.229
This offer is made in
earnest, and so you will

00:02:17.229 --> 00:02:20.315
give a deposit when you
make this offer contract,

00:02:20.315 --> 00:02:23.171
or it's typical to give a deposit,

00:02:23.986 --> 00:02:24.865
and it will vary.

00:02:24.865 --> 00:02:26.283
The higher the deposit, the better,

00:02:26.283 --> 00:02:28.514
because it shows the more earnest you are,

00:02:28.514 --> 00:02:30.617
the more serious that
you are about actually

00:02:30.617 --> 00:02:32.664
going through with this offer contract.

00:02:32.664 --> 00:02:35.883
It's typical for these deposits
to be anywhere between,

00:02:35.883 --> 00:02:38.449
I've seen one percent, two
percent, three percent,

00:02:38.449 --> 00:02:41.483
four percent, five percent
of the actual home price.

00:02:41.483 --> 00:02:43.831
Three percent is what
I'm most familiar with,

00:02:43.831 --> 00:02:45.083
but it doesn't have to be three percent.

00:02:45.083 --> 00:02:47.865
It's really, this is just
an indicator to the seller

00:02:47.865 --> 00:02:49.304
that you're serious about this.

00:02:49.304 --> 00:02:51.232
So you're gonna write a check right now,

00:02:51.232 --> 00:02:53.005
along with the offer contract,

00:02:53.005 --> 00:02:55.565
for let's just say three
percent of the offer price.

00:02:55.565 --> 00:02:58.209
So three percent of $300,000

00:02:58.209 --> 00:03:03.182
is $9,000, that's a $9,000 check.

00:03:03.182 --> 00:03:04.714
Some places, it's not a percentage,

00:03:04.714 --> 00:03:06.649
some people say, "Okay,
you just give $1,000,

00:03:06.649 --> 00:03:09.049
"or give $2,000," whatever it is.

00:03:09.049 --> 00:03:11.649
But this money, once
again, this is a check

00:03:11.649 --> 00:03:13.664
that you're writing
with the offer contract.

00:03:13.664 --> 00:03:16.149
This shows that you
are serious about this,

00:03:16.149 --> 00:03:17.900
that if for whatever reason you don't meet

00:03:17.900 --> 00:03:21.098
your end of the contract, then the seller

00:03:21.098 --> 00:03:23.331
might be able to just keep this money,

00:03:23.331 --> 00:03:28.072
so this shows that you are serious.

00:03:28.533 --> 00:03:31.534
This shows that you
are serious right here,

00:03:31.534 --> 00:03:32.965
that they should take you seriously,

00:03:32.965 --> 00:03:35.116
and that they should
go through the process

00:03:35.116 --> 00:03:39.415
of trying to close on this property,

00:03:39.415 --> 00:03:42.670
and we'll talk in future videos
more about what closing is.

00:03:42.670 --> 00:03:43.865
Now, you're probably
thinking, "Okay, look,

00:03:43.865 --> 00:03:45.803
"I'm just not gonna buy this outright.

00:03:45.803 --> 00:03:47.566
"I've toured the home, I like it.

00:03:47.566 --> 00:03:49.065
"I like the neighborhood, it seems to be

00:03:49.065 --> 00:03:51.248
"in good condition, but
I don't know for a fact

00:03:51.248 --> 00:03:52.181
"that it's in good condition,

00:03:52.181 --> 00:03:54.381
"unless I have a chance to inspect it,

00:03:54.381 --> 00:03:56.900
"unless I have a chance to
get some experts in there

00:03:56.900 --> 00:03:59.613
"and make sure that the
house is in good condition."

00:03:59.613 --> 00:04:02.232
And to make sure of that, it's typical

00:04:02.232 --> 00:04:06.845
to throw some contingencies
in your offer contract.

00:04:10.570 --> 00:04:12.767
Now, the most typical contingencies

00:04:12.767 --> 00:04:16.546
are things like inspections,
so you might want to

00:04:16.546 --> 00:04:20.537
inspect for termites, you want
to inspect the foundation,

00:04:20.537 --> 00:04:23.428
you want to inspect the
plumbing, the electrical,

00:04:23.428 --> 00:04:25.296
and make sure that it's
all on the up and up.

00:04:25.296 --> 00:04:27.579
If something comes up in the inspection

00:04:27.579 --> 00:04:30.326
that makes this house not
what you thought it was,

00:04:30.326 --> 00:04:33.124
it allows you to get out of this contract,

00:04:33.124 --> 00:04:35.834
and hopefully get your deposit back.

00:04:35.834 --> 00:04:36.955
Now, other things that you might want to

00:04:36.955 --> 00:04:39.325
put a contingency on, well you think that

00:04:39.325 --> 00:04:41.275
you're going to be able to get $300,000.

00:04:41.275 --> 00:04:43.859
Maybe you have saved enough for a deposit.

00:04:43.859 --> 00:04:45.424
You've saved, let's
say 20 percent of this,

00:04:45.424 --> 00:04:48.474
so you have saved say, $60,000,

00:04:48.474 --> 00:04:51.242
or maybe you've saved 70
or 80 thousand dollars,

00:04:51.242 --> 00:04:53.892
'cause you also need some
extra money for closing costs,

00:04:53.892 --> 00:04:55.441
and whatever else, and
we'll talk about that

00:04:55.441 --> 00:04:57.458
in future videos, and
maybe to buy furniture,

00:04:57.458 --> 00:05:00.491
whatever else, so you've saved
70 or 80 thousand dollars,

00:05:00.491 --> 00:05:03.058
but the remainder of it,
you're going to need to borrow.

00:05:03.058 --> 00:05:04.390
And you're going to need
to borrow it from a bank.

00:05:04.390 --> 00:05:05.808
The bank has written a
letter to you saying,

00:05:05.808 --> 00:05:08.259
"Hey, based on your income
and your credit score,

00:05:08.259 --> 00:05:11.858
"we feel we have pre-approved your loan,

00:05:11.858 --> 00:05:13.775
"we think you're going to get the loan."

00:05:13.775 --> 00:05:16.441
But that's not the same thing
as actually getting the loan.

00:05:16.441 --> 00:05:18.992
Something might happen,
the bank might realize

00:05:18.992 --> 00:05:20.540
that they didn't notice
something about you,

00:05:20.540 --> 00:05:22.691
or the financing conditions might change

00:05:22.691 --> 00:05:24.741
in between the time that
you got your pre-approval

00:05:24.741 --> 00:05:27.660
and the time that you
actually need your loan.

00:05:27.660 --> 00:05:29.540
So another typical contingency
that you might have

00:05:29.540 --> 00:05:31.776
is a financing contingency saying,

00:05:31.776 --> 00:05:34.224
"Look, I really do want to buy this house,

00:05:34.224 --> 00:05:36.358
"but I'm clearly not
going to be able to buy it

00:05:36.358 --> 00:05:38.841
"unless I get some financing."

00:05:38.841 --> 00:05:40.575
And then other things that might be there

00:05:40.575 --> 00:05:43.077
are things like insurance.

00:05:43.077 --> 00:05:45.540
Why would you need a
contingency on insurance?

00:05:45.540 --> 00:05:47.207
Now this one's less typical,

00:05:47.207 --> 00:05:48.742
so I'll put a little asterisk there.

00:05:48.742 --> 00:05:52.075
Well, there might be a place
that has a lot of floods,

00:05:52.075 --> 00:05:53.441
and the old owner had flood insurance

00:05:53.441 --> 00:05:54.608
just because they already owned it,

00:05:54.608 --> 00:05:57.041
but now the insurance
companies aren't issuing

00:05:57.041 --> 00:05:59.257
new insurance, because
it's so prone to flooding,

00:05:59.257 --> 00:06:00.325
or something like that,

00:06:00.325 --> 00:06:02.570
so flooding insurance might be there.

00:06:02.570 --> 00:06:05.992
There's a clear title,
is obviously something

00:06:05.992 --> 00:06:10.075
that you would need if you
wanted to buy this house,

00:06:10.075 --> 00:06:12.025
or that you probably should need,

00:06:12.025 --> 00:06:14.724
and once again there's
other videos on that.

00:06:14.724 --> 00:06:17.044
So these are all things that
if, for whatever reason,

00:06:17.044 --> 00:06:21.241
if these things fall through,
it allows you to unwind it.

00:06:21.241 --> 00:06:23.410
Now if you're in a really
hot real estate market,

00:06:23.410 --> 00:06:25.441
where there's many, many people bidding

00:06:25.441 --> 00:06:27.908
on the same property, and
some of them are coming

00:06:27.908 --> 00:06:30.841
with really juicy offers,

00:06:30.841 --> 00:06:32.576
where maybe they're
offering to pay it in cash,

00:06:32.576 --> 00:06:33.874
or they're offering other things,

00:06:33.874 --> 00:06:38.425
then it's not atypical to
have fewer contingencies,

00:06:38.425 --> 00:06:40.441
because, remember, from
the seller's point of view,

00:06:40.441 --> 00:06:44.108
they want the most serious buyer,

00:06:44.108 --> 00:06:46.908
and if someone is willing to
waive their contingencies,

00:06:46.908 --> 00:06:48.707
they're like, "Hey, look,
I know this is crazy,

00:06:48.707 --> 00:06:51.103
"but I'm just willing to get the house

00:06:51.103 --> 00:06:53.026
"in whatever condition it is,"

00:06:53.026 --> 00:06:55.359
that's a lot more
attractive to the seller,

00:06:55.359 --> 00:06:58.110
because the seller feels
good that the transaction

00:06:58.110 --> 00:07:00.741
won't fall through because
of one of these things.

00:07:00.741 --> 00:07:02.957
But that's in a very, very,
very hot real estate market.

00:07:02.957 --> 00:07:04.525
In a more typical real estate market,

00:07:04.525 --> 00:07:06.840
I suggest you talk to people, realtors,

00:07:06.840 --> 00:07:07.475
other people in the industry,

00:07:07.475 --> 00:07:09.641
to figure out what's
going on in your market.

00:07:09.641 --> 00:07:11.858
It's more typical to have stuff like this,

00:07:11.858 --> 00:07:16.401
especially the inspections,
the financing, and the title.

00:07:16.401 --> 00:07:17.576
Now, the last part of it,

00:07:17.576 --> 00:07:19.525
and I'm glazing over a lot of details,

00:07:19.525 --> 00:07:20.992
in future videos, we
might actually look at

00:07:20.992 --> 00:07:22.641
an actual offer contract,

00:07:22.641 --> 00:07:25.567
you would want to throw
out the closing date.

00:07:28.675 --> 00:07:30.584
So it may be this offer contract,

00:07:30.584 --> 00:07:33.784
let's say it's made on

00:07:33.784 --> 00:07:38.664
October 15th of 2015,

00:07:38.664 --> 00:07:40.284
and let's say that you want to close,

00:07:40.284 --> 00:07:42.100
so that you want all of
this stuff to get done,

00:07:42.100 --> 00:07:44.418
and you actually want to get the seller

00:07:44.418 --> 00:07:46.618
the whole amount of the money,

00:07:46.618 --> 00:07:48.784
and you want to get
the title to the house,

00:07:48.784 --> 00:07:50.901
let's say you want to
have it in two months,

00:07:50.901 --> 00:07:55.803
so 12/15/2015.

00:07:55.803 --> 00:07:58.784
And once again, from a
seller's point of view,

00:07:58.784 --> 00:08:01.517
the closer in this closing
date, the more that they

00:08:01.517 --> 00:08:04.683
feel good that this transaction
is actually going to happen.

00:08:04.683 --> 00:08:07.571
So if you wanted to make a very
tempting offer to a seller,

00:08:07.571 --> 00:08:10.668
you would have as few
contingencies as possible,

00:08:10.668 --> 00:08:13.217
and you would make this closing
date as soon as possible,

00:08:13.217 --> 00:08:15.967
but if it's not a super-hot
real estate market,

00:08:15.967 --> 00:08:18.133
you don't need to go
through all of that trouble,

00:08:18.133 --> 00:08:20.668
and it's fairly prudent
to get inspections,

00:08:20.668 --> 00:08:22.551
and have contingencies on all of these,

00:08:22.551 --> 00:08:25.001
or things like this, not
necessarily all of them,

00:08:25.001 --> 00:08:27.054
but things like this.


Titles insurance

WEBVTT
Kind: captions
Language: en

00:00:00.300 --> 00:00:03.523
- [Voiceover] So let's say in
1950, let me write this down,

00:00:03.523 --> 00:00:06.973
in 1950, there was a plot
of land that the city owns

00:00:06.973 --> 00:00:09.233
and says, hey, you know what,
we could use some revenue,

00:00:09.233 --> 00:00:10.430
or we would want someone to build a house.

00:00:10.430 --> 00:00:12.566
There's a housing shortage in this city.

00:00:12.566 --> 00:00:14.233
Let's sell it to someone who maybe

00:00:14.233 --> 00:00:15.270
might build a house on it.

00:00:15.270 --> 00:00:17.900
So you have the city,
who is the original owner

00:00:17.900 --> 00:00:20.200
of this particular plot of land,

00:00:20.200 --> 00:00:25.200
and they transfer title of
that plot of land to, let's say

00:00:25.433 --> 00:00:27.766
it's a developer who's
going to be the first owner.

00:00:27.766 --> 00:00:31.066
So, they transfer title of
that land to a developer.

00:00:31.066 --> 00:00:35.269
So, I'll just call them the
developer right over here,

00:00:35.269 --> 00:00:38.533
and when they transfer
title, they record that

00:00:38.533 --> 00:00:43.533
by filing a deed, so filing
a deed with the county.

00:00:45.184 --> 00:00:46.772
And you sometimes file it with the city,

00:00:46.772 --> 00:00:48.117
sometimes with the county.

00:00:48.117 --> 00:00:50.628
So, this is at the county's
office right over here.

00:00:50.628 --> 00:00:52.566
So, this is the county.

00:00:52.566 --> 00:00:53.700
We're going to assume that we

00:00:53.700 --> 00:00:55.533
filed these things with the county.

00:00:55.533 --> 00:00:57.200
All right, fair enough.

00:00:57.200 --> 00:01:00.433
Let's say the developer lives
in that house for some time.

00:01:00.433 --> 00:01:01.466
Actually, maybe the developer

00:01:01.466 --> 00:01:02.833
lives in that house for a while,

00:01:02.833 --> 00:01:07.500
and he and his wife, they
unfortunately pass away.

00:01:07.500 --> 00:01:11.417
And so it gets, in 1970--

00:01:11.417 --> 00:01:16.333
So, let's say it's in
1970, they pass away.

00:01:16.333 --> 00:01:17.800
And so, in their--

00:01:17.800 --> 00:01:22.166
And maybe they didn't even have a will,

00:01:22.166 --> 00:01:25.800
and so it just gets transferred
to their closest relative.

00:01:25.800 --> 00:01:30.373
And let's say that the
developer had a brother-in-law

00:01:30.373 --> 00:01:32.800
is the closest relative,
and so the property

00:01:32.800 --> 00:01:36.166
gets transferred to the brother-in-law.

00:01:36.166 --> 00:01:40.000
So let me write this down, brother-in-law,

00:01:40.000 --> 00:01:42.533
brother-in-law of the developer.

00:01:42.533 --> 00:01:46.466
Brother-in-law of the
developer now has title,

00:01:46.466 --> 00:01:48.479
and that will be reflected.

00:01:48.479 --> 00:01:53.361
That will be reflected in another deed.

00:01:53.361 --> 00:01:54.800
So, let's call this deed one,

00:01:54.800 --> 00:01:58.000
and this will be recorded in
the county recording office.

00:01:58.000 --> 00:02:01.312
This is deed two.

00:02:01.312 --> 00:02:04.530
And then, let's fast forward now to 2000.

00:02:04.530 --> 00:02:06.033
The brother-in-law and his family

00:02:06.033 --> 00:02:08.048
has lived there for a while.

00:02:08.048 --> 00:02:13.048
And so, now it is the year 2000,

00:02:14.466 --> 00:02:16.473
and they are looking to sell the house,

00:02:16.473 --> 00:02:19.366
and there is a buyer who's
interested in that house.

00:02:19.366 --> 00:02:24.366
So this is, we'll call this owner three,

00:02:25.200 --> 00:02:26.666
but before she buys the house,

00:02:26.666 --> 00:02:28.242
she prudently wants to do--

00:02:28.242 --> 00:02:31.233
wants to make sure that
the title is clean,

00:02:31.233 --> 00:02:34.700
that this brother-in-law
really does have title,

00:02:34.700 --> 00:02:37.933
that has ownership, not just
possession of the house,

00:02:37.933 --> 00:02:40.100
that there aren't any liens on the house,

00:02:40.100 --> 00:02:43.173
some back taxes or some
contractor that did work

00:02:43.173 --> 00:02:46.318
that claims it was never
paid, whatever it might be.

00:02:46.318 --> 00:02:50.733
So she, owner three, hires
a title search company

00:02:50.733 --> 00:02:52.466
to do a title search, and they go to

00:02:52.466 --> 00:02:54.390
the county recording
office, and say, okay, look,

00:02:54.390 --> 00:02:57.300
it was sold from the city
to the developer in 1950,

00:02:57.300 --> 00:03:00.700
and then the developer and his
family passed away in 1970,

00:03:00.700 --> 00:03:03.033
and so then it was transferred legally

00:03:03.033 --> 00:03:03.984
to the brother-in-law.

00:03:03.984 --> 00:03:06.100
And so they say, hey, the title is clean.

00:03:06.100 --> 00:03:07.535
You can buy this house.

00:03:07.535 --> 00:03:10.266
So owner three, she
decides to buy this house.

00:03:10.266 --> 00:03:12.533
She pays for it, however much money,

00:03:12.533 --> 00:03:15.133
and then the title is transferred,

00:03:15.133 --> 00:03:20.133
and the evidence of that
is deed number three.

00:03:20.833 --> 00:03:23.367
So you might say, okay,
this is all good and well.

00:03:23.367 --> 00:03:27.166
This seems like a very
reasonable thing to do.

00:03:27.166 --> 00:03:31.266
She has nothing to worry
about, but what if,

00:03:31.266 --> 00:03:34.476
what if right after owner
three pays all of this money

00:03:34.476 --> 00:03:37.666
to the brother-in-law, let's say in 2001

00:03:37.666 --> 00:03:40.733
someone shows up and says, hey, look,

00:03:40.733 --> 00:03:44.767
I was the developer's long lost child.

00:03:44.767 --> 00:03:48.327
I had the rights to this,
not the brother-in-law.

00:03:48.327 --> 00:03:50.063
So, I lay claim.

00:03:50.063 --> 00:03:51.742
I lay claim to this house.

00:03:51.742 --> 00:03:53.200
So, this right over here.

00:03:53.200 --> 00:03:56.163
So, someone says this should have been me.

00:03:56.163 --> 00:04:01.163
This should have been me.

00:04:03.000 --> 00:04:05.527
And so, therefore, they claim that

00:04:05.527 --> 00:04:08.753
this was not a valid transaction.

00:04:08.753 --> 00:04:10.300
If this isn't a valid transaction,

00:04:10.300 --> 00:04:12.913
then this also is not a valid transaction,

00:04:12.913 --> 00:04:15.500
and then they could take
this whole thing into court,

00:04:15.500 --> 00:04:17.833
which is not going to be a pleasant thing.

00:04:17.833 --> 00:04:21.900
It's not going to be a
pleasant thing for owner three.

00:04:21.900 --> 00:04:22.800
So, I know what you're thinking.

00:04:22.800 --> 00:04:26.766
How does an owner three protect themselves

00:04:26.766 --> 00:04:29.486
from some random thing that
might happen like this,

00:04:29.486 --> 00:04:31.571
especially because a house is

00:04:31.571 --> 00:04:33.109
the most important transaction you make?

00:04:33.109 --> 00:04:35.392
If this happened, you get
bogged down in a big lawsuit,

00:04:35.392 --> 00:04:36.604
and who knows what might happen.

00:04:36.604 --> 00:04:39.704
This could be a nightmare for owner three,

00:04:39.704 --> 00:04:42.609
and that's why title insurance exists.

00:04:43.409 --> 00:04:47.353
Title insurance.

00:04:48.600 --> 00:04:50.366
The whole purpose of title insurance is,

00:04:50.366 --> 00:04:52.269
okay, you should do a title search.

00:04:52.269 --> 00:04:54.256
You should make sure
that the title is clean,

00:04:54.256 --> 00:04:56.176
that there aren't any
liens or encumbrances,

00:04:56.176 --> 00:04:58.133
any claims to the property,

00:04:58.133 --> 00:04:59.866
and that everything has been filed.

00:04:59.866 --> 00:05:01.300
You would also have a nonclean title

00:05:01.300 --> 00:05:04.000
if somehow these people
didn't file this properly,

00:05:04.000 --> 00:05:05.835
if deed two is shady or didn't have

00:05:05.835 --> 00:05:07.358
all of the proper language.

00:05:07.358 --> 00:05:08.833
But even if you do all of that,

00:05:08.833 --> 00:05:11.566
you're not 100 percent sure
that there might not be

00:05:11.566 --> 00:05:13.266
some other weird or bizarre claims

00:05:13.266 --> 00:05:15.033
or that something might
have been overlooked

00:05:15.033 --> 00:05:16.500
in the title search.

00:05:16.500 --> 00:05:19.707
And so, to protect yourself,
you get title insurance,

00:05:19.707 --> 00:05:23.866
and most lenders, because most of the time

00:05:23.866 --> 00:05:25.866
when houses are bought,
the lender is putting up

00:05:25.866 --> 00:05:27.346
the majority of the cash for it,

00:05:27.346 --> 00:05:30.566
and in the case that the
borrower isn't able to pay it,

00:05:30.566 --> 00:05:32.076
the lender takes possession of the house,

00:05:32.076 --> 00:05:34.758
most lenders make you get title insurance,

00:05:34.758 --> 00:05:37.627
so that they can be protected
for this exact scenario.

00:05:37.627 --> 00:05:39.135
Now you can imagine, let's say owner three

00:05:39.135 --> 00:05:40.771
took out a mortgage,
and then all of a sudden

00:05:40.771 --> 00:05:42.006
all this craziness happens.

00:05:42.006 --> 00:05:43.520
It might be easier for
them to just walk away

00:05:43.520 --> 00:05:44.966
from the mortgage, and then the bank

00:05:44.966 --> 00:05:46.594
is left with all of this messiness.

00:05:46.594 --> 00:05:49.280
So, the bank has a huge incentive
to have title insurance.

00:05:49.280 --> 00:05:50.900
And the whole point of title insurance

00:05:50.900 --> 00:05:54.266
is to protect this owner or the person

00:05:54.266 --> 00:05:56.600
who comes into ownership of the house,

00:05:56.600 --> 00:06:00.766
from any of this messiness
that might actually ensue.

00:06:00.766 --> 00:06:02.900
So although a bank, whoever
is giving you the loan

00:06:02.900 --> 00:06:06.100
for your house, might insist
that you have title insurance,

00:06:06.100 --> 00:06:07.933
it's probably a good
idea, even if you were

00:06:07.933 --> 00:06:10.166
buying the house in cash,
even if no one was forcing you

00:06:10.166 --> 00:06:11.900
to do it, just so that you make sure that

00:06:11.900 --> 00:06:14.167
you're protected against
these type of things.

00:06:14.167 --> 00:06:16.800
And just to be clear,
it's not a hugely costly

00:06:16.800 --> 00:06:20.933
type of insurance, because
these things are rare.

00:06:20.933 --> 00:06:23.966
So these are rare events,
but you still want to

00:06:23.966 --> 00:06:26.833
protect yourself against them happening.


Titles and deeds in real estate

WEBVTT
Kind: captions
Language: en

00:00:00.366 --> 00:00:02.471
- [Voiceover] Let's say that this is me

00:00:02.471 --> 00:00:04.076
in this column over here,

00:00:04.076 --> 00:00:06.892
and that this is you in
that column over there.

00:00:06.892 --> 00:00:09.834
And let's say that you are in possession

00:00:09.834 --> 00:00:14.834
of a nice juicy, of a nice
juicy apple right over here.

00:00:15.430 --> 00:00:17.884
Let me draw this apple properly,

00:00:17.884 --> 00:00:20.466
let me make the leaf in green.

00:00:20.466 --> 00:00:23.633
So you are in possession of this apple,

00:00:23.633 --> 00:00:27.240
and I'm hungry, I would
like to have an apple.

00:00:27.240 --> 00:00:30.620
And I just assume while
you posses this apple,

00:00:30.620 --> 00:00:32.200
I assume that you own it,

00:00:32.200 --> 00:00:33.080
so I go up to you and say,

00:00:33.080 --> 00:00:34.823
"Hey, can I buy this apple from you?"

00:00:34.823 --> 00:00:36.209
And you say, "Okay, yeah.
I don't really need it,

00:00:36.209 --> 00:00:37.742
"I'll sell it to you for a dollar."

00:00:37.742 --> 00:00:40.556
And so I give you a dollar,

00:00:41.002 --> 00:00:45.561
I give you one dollar, and
then you give me the apple.

00:00:45.561 --> 00:00:49.607
Then you give me the
apple, so now I have it,

00:00:49.607 --> 00:00:51.848
so now I have the apple.

00:00:51.848 --> 00:00:53.206
Somehow the apple got smooshed

00:00:53.206 --> 00:00:55.212
a little bit in the transaction.

00:00:55.212 --> 00:01:00.212
So now I have, I have,
now I have the apple.

00:01:00.648 --> 00:01:02.633
Now when I did that transaction,

00:01:02.633 --> 00:01:04.600
there were some
assumptions that were made,

00:01:04.600 --> 00:01:07.497
I assumed that possession of the apple

00:01:07.497 --> 00:01:09.733
was equivalent to ownership of the apple.

00:01:09.733 --> 00:01:14.733
I assumed, whoops, I assumed possession

00:01:14.863 --> 00:01:16.733
is equal to ownership.

00:01:16.733 --> 00:01:18.081
And you might be thinking, "Wait, wait,

00:01:18.081 --> 00:01:20.007
"under what cases would possession

00:01:20.007 --> 00:01:22.002
"not be equal to ownership?"

00:01:22.002 --> 00:01:24.461
Well what if you just picked this apple

00:01:24.461 --> 00:01:26.202
from your neighbors garden?

00:01:26.202 --> 00:01:28.500
The rightful owner of that
apple is your neighbor,

00:01:28.500 --> 00:01:29.376
but you just picked it,

00:01:29.376 --> 00:01:31.594
maybe you swiped this
from the corner store.

00:01:31.594 --> 00:01:33.433
Maybe you found this on a bench

00:01:33.433 --> 00:01:36.066
and you said, "Okay, well it doesn't seem

00:01:36.066 --> 00:01:36.966
"anyone else is claiming it.

00:01:36.966 --> 00:01:38.661
"So I'm just going to claim this apple."

00:01:38.661 --> 00:01:40.300
But maybe someone else
had left it on the bench,

00:01:40.300 --> 00:01:41.667
and then they come back an hour later,

00:01:41.667 --> 00:01:42.867
said, "What happened to my apple?

00:01:42.867 --> 00:01:44.376
"I'm the owner of that apple."

00:01:44.376 --> 00:01:47.071
So you see that even in
the case of an apple,

00:01:47.071 --> 00:01:50.366
possession might not
be equal to ownership.

00:01:50.366 --> 00:01:52.530
So these two things
might not be equivalent.

00:01:52.530 --> 00:01:55.050
But for something as small as an apple as,

00:01:55.050 --> 00:01:56.700
I guess you could say financially

00:01:56.700 --> 00:01:59.471
not as important,
something that's you know

00:01:59.471 --> 00:02:02.230
has a market value of a dollar.

00:02:02.230 --> 00:02:04.733
It might be too much trouble to kind of

00:02:04.733 --> 00:02:06.633
do a background check on the apple

00:02:06.633 --> 00:02:08.800
to see do a forensic analysis to see

00:02:08.800 --> 00:02:10.333
who is guarding the apple came from

00:02:10.333 --> 00:02:13.412
or to see is someone else had legal right,

00:02:13.412 --> 00:02:15.569
legal title to the apple.

00:02:15.569 --> 00:02:17.333
And so for things like apples,

00:02:17.333 --> 00:02:19.571
we tend to just transact just assuming

00:02:19.571 --> 00:02:22.276
that possession equals ownership.

00:02:22.276 --> 00:02:25.602
Now let's take, let's up
the stakes a little bit.

00:02:25.602 --> 00:02:26.884
Instead of an apple, let's say we're

00:02:26.884 --> 00:02:28.373
talking about a house.

00:02:28.373 --> 00:02:30.566
So let's say that you are in possession

00:02:30.566 --> 00:02:33.561
of this nice yellow house.

00:02:33.561 --> 00:02:36.533
So let me draw, we
definitely want to visualize

00:02:36.533 --> 00:02:38.517
what a nice yellow house would look like.

00:02:38.517 --> 00:02:40.709
It's got some windows here,

00:02:40.709 --> 00:02:44.068
so and there's some nice gardening.

00:02:44.068 --> 00:02:49.035
There's, so you, you are in possession

00:02:49.035 --> 00:02:50.266
of this nice house.

00:02:50.266 --> 00:02:51.600
So what does possession
of the house means?

00:02:51.600 --> 00:02:53.466
Well, it means you're living in it,

00:02:53.466 --> 00:02:54.933
you have the keys to the house,

00:02:54.933 --> 00:02:57.363
your station wagon is in the driveway.

00:02:57.363 --> 00:03:00.409
Your stuff is in the
closet, your furniture.

00:03:00.409 --> 00:03:03.600
You have pictures of you
and your family on the wall.

00:03:03.600 --> 00:03:06.118
So you seem to be in
possession of this house.

00:03:06.118 --> 00:03:09.112
And you stick a for sale sign out on.

00:03:09.112 --> 00:03:12.833
So, for sale.

00:03:12.833 --> 00:03:17.333
So you put a for sale sign
outside of this house,

00:03:17.333 --> 00:03:19.973
and I'm new to town, and I need a place

00:03:19.973 --> 00:03:22.148
for me and my family to live.

00:03:22.148 --> 00:03:23.533
And so I say, "Hey, you know,

00:03:23.533 --> 00:03:24.666
"I'd like to buy that house.

00:03:24.666 --> 00:03:25.500
"How much is it?"

00:03:25.500 --> 00:03:27.889
And you say, "It's $100,000."

00:03:27.889 --> 00:03:29.777
You say, "Okay, it seems like a reasonably

00:03:29.777 --> 00:03:31.368
"good deal compared to other houses

00:03:31.368 --> 00:03:32.399
"in this neighborhood.

00:03:32.399 --> 00:03:33.500
"I want to buy it."

00:03:33.500 --> 00:03:34.946
And you say, "Great."

00:03:34.946 --> 00:03:37.566
So I walk up to you, I write a check

00:03:37.566 --> 00:03:42.325
for maybe I even have cash for a $100,000.

00:03:42.325 --> 00:03:45.700
So a little bit more serious transaction

00:03:45.700 --> 00:03:47.417
than the apple transaction.

00:03:47.417 --> 00:03:50.211
And then in exchange you give me

00:03:50.211 --> 00:03:52.035
the keys to the house.

00:03:52.035 --> 00:03:54.384
So now I have the keys to the house.

00:03:54.384 --> 00:03:56.320
I'll draw some keys here.

00:03:56.320 --> 00:03:57.930
So keys to the house.

00:03:57.930 --> 00:04:00.133
And you say, "Give me an hour."

00:04:00.133 --> 00:04:01.500
And you pack up all of your stuff,

00:04:01.500 --> 00:04:02.500
take your pictures off the wall,

00:04:02.500 --> 00:04:04.840
put them in your station
wagon, and you leave.

00:04:04.840 --> 00:04:06.850
And you say, "Okay well, I guess I'm just

00:04:06.850 --> 00:04:08.638
"going to move in to the house."

00:04:08.638 --> 00:04:10.766
Now, you probably are thinking,

00:04:10.766 --> 00:04:12.484
"Something is suspicious here.

00:04:12.484 --> 00:04:15.542
"Something is, makes us feel
a little less comfortable

00:04:15.542 --> 00:04:16.925
"doing this transaction than this

00:04:16.925 --> 00:04:18.756
"transaction over here."

00:04:18.756 --> 00:04:21.925
Because this house,
just because the person

00:04:21.925 --> 00:04:23.933
happen to be in it and had the keys to it,

00:04:23.933 --> 00:04:26.200
didn't mean that they owned the house.

00:04:26.200 --> 00:04:29.148
So once again, possession
does not necessarily

00:04:29.148 --> 00:04:30.263
equal ownership.

00:04:30.263 --> 00:04:32.099
We can think of a lot
of scenarios for a house

00:04:32.099 --> 00:04:34.296
where possession does not equal ownership.

00:04:34.296 --> 00:04:37.073
They might have been renting the house,

00:04:37.073 --> 00:04:38.730
they might have been renting.

00:04:38.730 --> 00:04:41.176
They might have been guest in the house.

00:04:41.300 --> 00:04:43.166
And maybe the owners, the real owners

00:04:43.166 --> 00:04:46.600
were off to work and their
faces were in the pictures

00:04:46.600 --> 00:04:48.233
just because they were
the owner's brother-in-law

00:04:48.233 --> 00:04:49.000
or something.

00:04:49.000 --> 00:04:51.040
So maybe they were guest in the house.

00:04:51.040 --> 00:04:52.833
Maybe they were,

00:04:52.833 --> 00:04:54.766
maybe they just saw a vacant house,

00:04:54.766 --> 00:04:56.466
maybe this is someone
else's vacation house,

00:04:56.466 --> 00:04:57.414
and said, "Hey you know what,

00:04:57.414 --> 00:04:58.633
"I know these people don't show up

00:04:58.633 --> 00:05:00.633
"during the summer, so
I'm just going to go there

00:05:00.633 --> 00:05:02.300
"change the locks, have the keys,

00:05:02.300 --> 00:05:04.233
"and I'm going to pretend
like I live there.

00:05:04.233 --> 00:05:05.492
"And then I'm going to
try and find somebody

00:05:05.492 --> 00:05:07.505
"new to town and I'm going
to sell them the house

00:05:07.505 --> 00:05:09.040
"for a $100,000."

00:05:09.040 --> 00:05:10.435
And if you think all of these things

00:05:10.435 --> 00:05:11.933
are kind of crazy scenarios,

00:05:11.933 --> 00:05:13.460
they've all happened.

00:05:13.460 --> 00:05:14.966
Because as you can imagine

00:05:14.966 --> 00:05:16.861
there's some people for whom who have

00:05:16.861 --> 00:05:19.366
who are I guess a little
bit less scrupulous,

00:05:19.366 --> 00:05:22.233
who's ethics are questionable,

00:05:22.233 --> 00:05:23.934
who could be very tempted by this.

00:05:23.934 --> 00:05:26.000
So you could imagine for,
when you're talking about

00:05:26.000 --> 00:05:28.000
big dollar figures, people have tried

00:05:28.000 --> 00:05:30.268
some fairly major scams.

00:05:30.468 --> 00:05:32.833
So how do you, and you
know, and once again,

00:05:32.833 --> 00:05:34.100
just in the case of the apple,

00:05:34.100 --> 00:05:35.476
maybe someone left it on the bench,

00:05:35.476 --> 00:05:37.033
and someone thought that it was their,

00:05:37.033 --> 00:05:38.163
you know you thought it was your apple

00:05:38.163 --> 00:05:39.100
now that you found it.

00:05:39.100 --> 00:05:41.067
There could be, it doesn't
have to be just scamming,

00:05:41.067 --> 00:05:43.923
it could be, I thought
I inherited this house,

00:05:43.923 --> 00:05:46.300
but then some other relatives shows up,

00:05:46.300 --> 00:05:49.400
who is closer to the
previous owner of the house,

00:05:49.400 --> 00:05:50.699
and said, "No, no, wait, wait, wait.

00:05:50.699 --> 00:05:53.589
"You can give that
house to the son-in-law.

00:05:53.619 --> 00:05:57.933
"I am his younger brother or
I am his long lost child."

00:05:57.933 --> 00:06:00.217
Or whatever else it might be.

00:06:00.217 --> 00:06:02.733
So you might have thought
that you own the house,

00:06:02.733 --> 00:06:04.800
but there might have been
some other claim on it.

00:06:04.800 --> 00:06:07.113
And maybe you bought the house out right

00:06:07.113 --> 00:06:07.953
or you thought you bought it,

00:06:07.953 --> 00:06:10.400
but maybe the previous owner had you know

00:06:10.400 --> 00:06:12.933
was in a dispute with their
brother or their sister

00:06:12.933 --> 00:06:13.953
over the house.

00:06:13.953 --> 00:06:16.313
So there could be other claims on it.

00:06:16.313 --> 00:06:19.833
And so the way that, the
way in modern society

00:06:19.833 --> 00:06:21.100
is that we deal with this,

00:06:21.100 --> 00:06:22.733
where we see who has ownership rights

00:06:22.733 --> 00:06:24.100
or another ways of thinking about it,

00:06:24.100 --> 00:06:25.925
who has title?

00:06:25.925 --> 00:06:27.494
So this is an important word.

00:06:27.494 --> 00:06:29.809
Who has title?

00:06:30.163 --> 00:06:32.167
Or I guess you could say proof of title.

00:06:32.167 --> 00:06:33.434
When I talk about title,

00:06:33.434 --> 00:06:34.800
this is ownership rights,

00:06:34.800 --> 00:06:36.966
we're talking about real,
right to live in the house,

00:06:36.966 --> 00:06:39.166
it's a right to do what you, you know,

00:06:39.166 --> 00:06:40.167
garden around the house,

00:06:40.167 --> 00:06:42.415
has the right to modify the house.

00:06:42.415 --> 00:06:45.942
So the question of who has
title or evidence of title,

00:06:46.342 --> 00:06:49.181
evidence of title, happens
through legal documents.

00:06:49.181 --> 00:06:51.897
Evidence of title.

00:06:51.897 --> 00:06:55.730
And these legal documents
are called deeds.

00:06:55.960 --> 00:06:57.451
So let me write them.

00:06:57.451 --> 00:06:58.809
So the legal type.

00:06:58.809 --> 00:07:03.073
These legal documents are called deeds.

00:07:03.073 --> 00:07:06.301
And deeds, so when I,
so if I wanted to buy

00:07:06.301 --> 00:07:07.892
this house from you,

00:07:07.892 --> 00:07:12.076
you would, we would get an attorney,

00:07:12.076 --> 00:07:14.961
and then we would draft
a deed that transfers,

00:07:14.961 --> 00:07:18.648
that transfers the
property from you to me.

00:07:18.648 --> 00:07:19.523
But you're saying, "Wait, wait, wait,

00:07:19.523 --> 00:07:22.481
"that still doesn't you know prove to me

00:07:22.481 --> 00:07:25.025
"that the house is all good."

00:07:25.025 --> 00:07:27.600
And then that's why I would
do a title search on it.

00:07:27.600 --> 00:07:29.733
So there's actually companies
that do title searches,

00:07:29.733 --> 00:07:32.200
and they're going to go
to the public records,

00:07:32.200 --> 00:07:33.928
to the city or county records,

00:07:33.928 --> 00:07:35.313
and they're going to
see, "Hey, what are all

00:07:35.313 --> 00:07:37.966
"the deeds that have been
filed with the city?"

00:07:37.966 --> 00:07:39.266
And whenever there's a deed,

00:07:39.266 --> 00:07:40.924
if things have done properly,

00:07:40.924 --> 00:07:42.667
it needs to be made of public record,

00:07:42.667 --> 00:07:45.450
it needs to be filed
with the city or county.

00:07:45.450 --> 00:07:47.618
And so when you do a title search.

00:07:47.925 --> 00:07:50.858
So when you do, let's
do in a different color.

00:07:50.858 --> 00:07:55.611
When you do a title search,

00:07:55.842 --> 00:07:57.400
whoever is doing the title search

00:07:57.400 --> 00:07:58.909
will look at the public records,

00:07:58.909 --> 00:08:00.876
and they'll look at
all the previous deeds.

00:08:00.876 --> 00:08:05.000
They'll look at the deed
that from the previous owner

00:08:05.000 --> 00:08:07.166
of the house to you,
they'll look at the deed

00:08:07.166 --> 00:08:09.948
from the previous owner even before that,

00:08:09.948 --> 00:08:11.766
and they'll make sure that all of the

00:08:11.766 --> 00:08:15.200
the titles, the title
transfer has been cleaned,

00:08:15.200 --> 00:08:17.536
that there hasn't been any
weird claims on the house,

00:08:17.536 --> 00:08:19.266
that there haven't been
liens on the house.

00:08:19.266 --> 00:08:21.900
We'll talk more about what a lien is.

00:08:21.900 --> 00:08:24.100
A lien is essentially
a claim on the house,

00:08:24.100 --> 00:08:26.500
maybe three owners ago someone didn't pay

00:08:26.500 --> 00:08:28.166
property taxes, and the
city is still saying,

00:08:28.166 --> 00:08:31.004
"Hey, whoever owns this
house, owns us a $1000."

00:08:31.004 --> 00:08:33.800
Maybe four owners ago there was someone

00:08:33.800 --> 00:08:35.067
who did an improvement to the house,

00:08:35.067 --> 00:08:36.500
and said, "Hey, that owner never paid me

00:08:36.500 --> 00:08:37.700
"for the new driveway.

00:08:37.700 --> 00:08:39.576
"I have a lien on this house.

00:08:39.576 --> 00:08:41.532
"Whoever is benefiting from this driveway,

00:08:41.532 --> 00:08:43.733
"who owns this house,
they still own me money

00:08:43.733 --> 00:08:47.009
"before I were to remove that lien."

00:08:47.009 --> 00:08:50.442
So the way that we do it
in a modern society is,

00:08:50.442 --> 00:08:52.700
Okay, you say you're selling this house,

00:08:52.700 --> 00:08:54.748
but before I actually give you the money,

00:08:54.748 --> 00:08:56.033
I'm going to do a title search,

00:08:56.033 --> 00:08:57.278
I'm going to make sure that there aren't

00:08:57.278 --> 00:08:58.484
any other claims, I want to make sure

00:08:58.484 --> 00:09:00.502
that you are the real
owner of the property.

00:09:00.502 --> 00:09:03.915
And only then will money be transferred.


Balloon payment mortgage

WEBVTT
Kind: captions
Language: en

00:00:00.050 --> 00:00:04.339
So we already have some experience
with traditional fixed-rate mortgages,

00:00:04.339 --> 00:00:08.221
but I'll give a little bit of a review
before we talk about a little variation,

00:00:08.221 --> 00:00:10.258
or maybe we could say
a big variation on it

00:00:10.258 --> 00:00:12.848
which is a balloon payment loan.

00:00:12.848 --> 00:00:14.862
So right over here, what I have depicted

00:00:14.862 --> 00:00:19.492
are the different payments you would make
on a 30-year fixed mortgage.

00:00:19.492 --> 00:00:25.124
So this is a 30-year fixed mortgage

00:00:25.125 --> 00:00:31.975
where you have a fixed payment
every month of $1432.00

00:00:31.975 --> 00:00:36.233
and the loan amount is $300,000.

00:00:36.233 --> 00:00:42.923
So before you make your first payment
you owe the bank $300,000

00:00:44.053 --> 00:00:46.475
and you keep making these payments.

00:00:46.475 --> 00:00:50.608
And we've seen in previous videos
that your very first payment,

00:00:50.608 --> 00:00:53.637
as you see in magenta here,
is mostly interest.

00:00:53.637 --> 00:00:57.544
$1000 of that $1432.00 is interest.

00:00:57.544 --> 00:01:00.983
Then the next payment, you've
paid down the principal a little bit,

00:01:01.013 --> 00:01:06.023
not a lot, about 400-something dollars.

00:01:06.023 --> 00:01:09.363
Now your next payment,
$999.00 of it is interest.

00:01:09.363 --> 00:01:12.598
And the next payment,
$997.00 is interest.

00:01:12.598 --> 00:01:15.872
And you keep doing that
for all 360 payments.

00:01:15.872 --> 00:01:17.977
Remember, 30 years
times 12 months per year,

00:01:17.977 --> 00:01:19.606
you would have 360 payments,

00:01:19.606 --> 00:01:22.412
and as you get to the end
of your 30-year mortgage,

00:01:22.412 --> 00:01:25.282
most of your payment is principal.

00:01:25.282 --> 00:01:28.539
So on the 2 months before you pay it off,

00:01:28.539 --> 00:01:31.912
that 358th payment,
only $14.00 is interest.

00:01:31.912 --> 00:01:36.144
Then the next one,
9 or 10 dollars is interest.

00:01:36.144 --> 00:01:38.518
Then, roughly $5 is interest

00:01:38.518 --> 00:01:41.043
and then you have paid off
the entire loan.

00:01:41.043 --> 00:01:45.243
So you have a fixed payment,
you also have a fixed interest rate.

00:01:45.244 --> 00:01:49.615
I haven't said what the interest rate is
for this mortgage,

00:01:49.615 --> 00:01:56.565
but then you pay it off over 30 years,
there's a 30-year amortization.

00:02:02.136 --> 00:02:06.947
And the word <i>amortization</i> means
'spreading out' something.

00:02:06.947 --> 00:02:09.271
So in this case you're
spreading out the payments

00:02:09.271 --> 00:02:12.074
over 30 years.

00:02:12.074 --> 00:02:18.424
Why am I giving this as the preface
to a balloon loan,

00:02:19.976 --> 00:02:22.638
a balloon payment mortgage?

00:02:22.638 --> 00:02:23.723
In a balloon payment,

00:02:23.723 --> 00:02:27.183
this was a little confusing to me
the first time I learned about it,

00:02:27.184 --> 00:02:31.726
the term is different
than the amortization.

00:02:31.726 --> 00:02:39.036
So, for example, you could have
a 10-year-term balloon payment loan

00:02:41.546 --> 00:02:43.779
that still amortizes over 30 years.

00:02:43.796 --> 00:02:46.827
So what do I mean by that?

00:02:46.827 --> 00:02:51.208
Well, in this situation,
your payments could be exactly the same,

00:02:51.208 --> 00:02:53.709
but then after 10 years,
because it's a 10-year term,

00:02:53.709 --> 00:02:56.908
you have the loan for 10 years,
after 10 years the loan is done for.

00:02:56.908 --> 00:03:03.598
So 10 years is 120 months,
this is the 10 years here.

00:03:03.598 --> 00:03:06.294
After 10 years, you amortize it.

00:03:06.295 --> 00:03:08.521
Remember this payment schedule
that we set up

00:03:08.521 --> 00:03:10.670
is based on a 30-year amortization,

00:03:10.670 --> 00:03:14.490
just as if we were doing
a 30-year fixed rate mortgage.

00:03:14.490 --> 00:03:16.976
But in the balloon payment,
if you had a 10-year term

00:03:16.976 --> 00:03:19.600
with a 30-year amortization,
the payments are the same,

00:03:19.600 --> 00:03:23.499
but after the 10 years,
at the end of the loan

00:03:23.499 --> 00:03:25.407
you don't just make that 120th payment,

00:03:25.457 --> 00:03:28.058
you have to pay back
whatever the principal is,

00:03:28.058 --> 00:03:30.556
whatever is left on the loan.

00:03:30.556 --> 00:03:36.536
So we see that after 10 years,
what's left on the loan is $236,352.

00:03:40.797 --> 00:03:44.966
In a balloon payment,
the loan lasts for 10 years

00:03:44.966 --> 00:03:47.858
even though the amortization,

00:03:47.858 --> 00:03:50.732
the rate at which
you're paying down the principal,

00:03:50.732 --> 00:03:54.102
is the same as for
whatever the amortization schedule is,

00:03:54.104 --> 00:03:55.856
the 30-year amortization.

00:03:55.856 --> 00:04:01.486
So the question is;
why does this thing exist?

00:04:01.486 --> 00:04:05.113
In some ways, this is like
what we talked about

00:04:05.113 --> 00:04:06.760
in the adjustable rate mortgages.

00:04:06.760 --> 00:04:10.860
It's spreading the interest rate risk
between the bank and the lender.

00:04:10.881 --> 00:04:14.331
In a 30-year fixed loan,
all of the interest rate risk

00:04:14.331 --> 00:04:16.081
goes to the bank,

00:04:16.081 --> 00:04:19.416
while in an adjustable-rate mortgage,
all of the interest rate risk

00:04:19.416 --> 00:04:22.896
goes to the borrower.

00:04:22.906 --> 00:04:26.673
Here the bank is guaranteed
only to take on interest rate risk

00:04:26.673 --> 00:04:32.403
for 10 years, then after that
they get the balance of the loan.

00:04:32.413 --> 00:04:36.784
What does the borrower do,
or why would a borrower want to do this?

00:04:36.784 --> 00:04:38.148
They might want to do this

00:04:38.148 --> 00:04:40.646
because maybe they get
a slightly lower interest rate

00:04:40.646 --> 00:04:45.356
than with a 30-year mortgage,
while they get the exact same payments.

00:04:45.367 --> 00:04:46.878
They get a lower interest rate

00:04:46.878 --> 00:04:49.491
because the bank is taking on
less interest rate risk,

00:04:49.491 --> 00:04:54.561
they have less risk if interest rates
were to spike up 20 years from now.

00:04:54.564 --> 00:04:56.052
And a lot of people might say,

00:04:56.052 --> 00:04:59.942
"Well, I don't think I'm going to
own this property for more than 10 years

00:04:59.952 --> 00:05:04.615
as long as I get a 10-year fixed payment,

00:05:04.615 --> 00:05:09.015
if I sell the property in the 9th year,
then I just pay off the loan."

00:05:09.025 --> 00:05:13.168
Another possibility is that the person
thinks they'll end up with a lot of cash,

00:05:13.168 --> 00:05:16.659
maybe they expect an inheritance,
expect to earn more money.

00:05:16.659 --> 00:05:18.832
Another possibility,
if none of that happens,

00:05:18.832 --> 00:05:20.378
if after the 10th year they say,

00:05:20.378 --> 00:05:22.955
"I still want to continue
paying this house down,

00:05:22.955 --> 00:05:24.284
I don't plan on selling it,

00:05:24.284 --> 00:05:29.174
haven't come up with some windfall of cash
to pay $236,000."

00:05:29.174 --> 00:05:35.550
Then they can just take out another loan
to borrow the $236,000.

00:05:35.550 --> 00:05:37.652
And there's some risk involved there,

00:05:37.652 --> 00:05:39.295
because you have to feel good that

00:05:39.295 --> 00:05:41.821
at that time you'll still have
a good credit history,

00:05:41.831 --> 00:05:47.021
you'll still have the level of income
necessary to get another mortgage.

00:05:47.026 --> 00:05:50.856
So hopefully this gives you a sense
of what a balloon payment mortgae is.

00:05:50.856 --> 00:05:56.776
It's not nearly as typical
as a fixed-rate 30 year

00:05:56.778 --> 00:05:59.478
or a 15-year fixed or 10-year fixed,

00:05:59.478 --> 00:06:03.918
or as common as an adjustable ARM
or a hybrid ARM, but they do exist

00:06:03.918 --> 00:06:07.232
so it's interesting to know about them.


Hybrid ARM

WEBVTT
Kind: captions
Language: en

00:00:00.098 --> 00:00:04.316
In the last video, we covered the basics
of what an Adjustable Rate Mortgage is and

00:00:04.442 --> 00:00:06.886
how it's different from a Fixed Rate
Mortgage.

00:00:07.020 --> 00:00:11.318
But you may have heard another term that
seems to be a mixture of the two!

00:00:11.578 --> 00:00:20.355
And that is a Hybrid "ARM" or
Hybrid Adjustable Rate Mortgage.

00:00:20.355 --> 00:00:24.797
And a 'Hybrid', when we use the word
generally, means a mix of things.

00:00:24.797 --> 00:00:27.291
And that's exactly what a 'Hybrid ARM' is:

00:00:27.291 --> 00:00:32.997
It's a 'mix' of Fixed
(it's a mix, it's a mix)

00:00:32.997 --> 00:00:41.335
of Fixed & Adjustable, and an Adjustable
Rate Mortgage.

00:00:41.335 --> 00:00:45.745
So what do we mean by "mix of a Fixed and
Adjustable Rate Mortgage"?

00:00:45.745 --> 00:00:48.149
Well, you might hear something like a,

00:00:50.359 --> 00:00:54.839
5-1, a 5-1 Hybrid ARM.

00:00:57.959 --> 00:00:59.319
What does that mean?

00:00:59.319 --> 00:01:03.800
Well that means that the first 5 years of
a Mortgage, it behaves like a

00:01:03.932 --> 00:01:08.067
Fixed Mortgage, and then after that it
becomes Adjustable.

00:01:08.083 --> 00:01:12.665
So in the case that we used in the video
on Adjustable Rate Mortgages, we saw

00:01:12.670 --> 00:01:17.050
that as your benchmark one year
treasury rate fluctuates, that every year

00:01:17.696 --> 00:01:22.183
your Adjustable Rate Mortgage resets.
And if interest rates go high enough, it

00:01:22.183 --> 00:01:24.898
might become unfavorable relative
to the Fixed Rate.

00:01:24.898 --> 00:01:27.665
And this was just for the scenario that
we were looking at.

00:01:27.734 --> 00:01:32.434
Well, in the 5-1 Hybrid ARM, what happened
is that the first 5 years,

00:01:32.540 --> 00:01:34.821
it's a Fixed Rate Mortgage,

00:01:38.774 --> 00:01:44.818
and then after that it adjusts, it adjusts
as 1, 2, 3, 4, 5...

00:01:44.818 --> 00:01:48.917
So the first 5 years, it's a Fixed Rate
Mortgage, and then after that it adjusts

00:01:48.917 --> 00:01:52.204
just like an Adjustable Rate.
And if it has the same properties as the

00:01:52.204 --> 00:01:55.842
Adjustable Rate that we saw in the video
on Adjustable Rate Mortgages,

00:01:55.842 --> 00:01:57.727
then we start adjusting.

00:01:57.727 --> 00:02:01.077
So that's for that year, and then the
year after that, maybe this year

00:02:01.077 --> 00:02:05.830
interest rates have gone down a little bit
so we pay a premium over the

00:02:05.830 --> 00:02:07.840
treasury...
So we start adjusting.

00:02:08.323 --> 00:02:11.813
So question is, why would someone want
to do this?

00:02:11.864 --> 00:02:16.167
One, why would a borrower want to do this?
And then, why does a bank do it?

00:02:16.295 --> 00:02:19.864
When we talked about Adjustable Rate
Mortgages, we talked about this idea of

00:02:19.864 --> 00:02:20.979
interest rate risk,

00:02:20.979 --> 00:02:24.744
that in an Adjustable Rate Mortgage, a
borrower takes on the interest rate risk.

00:02:24.744 --> 00:02:29.114
If interest rates go up, the borrower
will have to pay more interest

00:02:29.114 --> 00:02:31.157
but the lender is protected.

00:02:31.157 --> 00:02:34.079
On the other hand, for a Fixed Rate, if
interest rates go up,

00:02:34.079 --> 00:02:39.034
it's the lender who has to take on that
risk, while the borrower is protected.

00:02:39.034 --> 00:02:44.698
While with a Hybrid, it's in-between. The
first 5 years, the borrower is protected.

00:02:44.708 --> 00:02:48.731
They know that "Hey look! I know what my
payment is going to be for those 5 years,

00:02:48.731 --> 00:02:51.434
and then after that, it adjusts."

00:02:51.434 --> 00:02:55.238
And that's also from a lender's point of
view. They're like, "Okay. We'll take on

00:02:55.238 --> 00:02:58.852
the interest rate risk for the first
5 years but then after that, because it

00:02:58.862 --> 00:03:03.051
is really hard to predict what interest
rates are going to be doing in 5 or 6 or 7

00:03:03.051 --> 00:03:07.733
or 10 or 15 years, then it floats and the
borrower takes it on."

00:03:07.882 --> 00:03:12.600
It's not even the case that the borrower
initially even has to take on this risk.

00:03:12.600 --> 00:03:16.543
It could be the case that the borrower is
buying some type of a property, where they

00:03:16.543 --> 00:03:19.120
think that they will either sell the
property,

00:03:19.120 --> 00:03:20.954
or maybe they'll refinance the property.
But especially

00:03:20.954 --> 00:03:22.409
if they think they're going to
sell the property

00:03:22.409 --> 00:03:25.129
in the next 5 years,
this could make a lot of sense,

00:03:25.129 --> 00:03:28.955
especially if they get a lower rate than
they would've gotten with a Fixed Rate.

00:03:29.085 --> 00:03:32.325
For example, the rate that they might've
gotten might've have looked

00:03:32.325 --> 00:03:33.972
something more like,

00:03:36.182 --> 00:03:38.529
it might've been a lower rate than
the Fixed Rate,

00:03:38.529 --> 00:03:41.818
very likely for the same credit risk,
it might've been a lower rate.

00:03:43.143 --> 00:03:50.033
And then after 5 years that's a lower rate
because the bank is taking on less of the

00:03:50.033 --> 00:03:54.061
interest rate risk especially when you go
out or when you go out beyond your 5.

00:03:54.061 --> 00:03:55.905
And then it would adjust.

00:04:03.020 --> 00:04:07.814
So the incentive is okay!
If I think I'm going to sell this house

00:04:07.814 --> 00:04:09.602
or refinance this house which means

00:04:09.602 --> 00:04:13.216
take another loan to pay this loan off,
if I think I'm going to be able to do

00:04:13.216 --> 00:04:15.241
either of those things in the
next 5 years,

00:04:15.241 --> 00:04:18.328
maybe it makes a lot
of sense for me to do this.

00:04:18.723 --> 00:04:22.756
So in a Hybrid, both parties are kind of
mixing - they're both taking different

00:04:22.756 --> 00:04:26.865
pieces of the interest rate risk and
once again, depending on your scenario,

00:04:26.865 --> 00:04:30.274
it might make sense to think about
something like a Hybrid ARM, if you

00:04:30.274 --> 00:04:35.025
feel very confident that you can either
take on the variable risk - the interest

00:04:35.025 --> 00:04:39.112
rate risk - that will happen after your 5,
or you think that this property is going

00:04:39.112 --> 00:04:43.325
to be something that you might own or ...
that you'll only own for the next 5 years,

00:04:43.325 --> 00:04:47.031
or that you might refinance in some way,
or maybe you'll be able to pay it off,

00:04:47.031 --> 00:04:49.273
maybe you're expecting an inheritance
in your 4,

00:04:49.273 --> 00:04:51.235
and so you can just pay off the property

00:04:51.235 --> 00:04:53.427
or pay off the loan,
& you won't have to worry

00:04:53.437 --> 00:04:55.833
about all of this business right over
here.


Adjustable rate mortgages ARMs

WEBVTT
Kind: captions
Language: en

00:00:00.217 --> 00:00:02.427
- [Voiceover] What I want to
do in this video is explore

00:00:02.427 --> 00:00:06.799
the mechanics of a typical
adjustable rate mortgage,

00:00:06.799 --> 00:00:11.200
often known as an ARM, and
then think about and wonder

00:00:11.200 --> 00:00:13.599
what situations could this be advantageous

00:00:13.599 --> 00:00:15.167
and in which situations might not

00:00:15.167 --> 00:00:19.233
this be the best scenario
for the home buyer.

00:00:19.233 --> 00:00:23.366
So let's just first think
about the mechanics,

00:00:23.366 --> 00:00:27.333
and to do that I will draw
a little bit of a timeline.

00:00:28.233 --> 00:00:32.400
Let's say on the vertical axis

00:00:32.400 --> 00:00:35.841
this is going to be your interest rate,

00:00:35.841 --> 00:00:38.342
this is in percentage terms.

00:00:38.342 --> 00:00:42.723
That's one percent, two
percent, three percent,

00:00:42.723 --> 00:00:47.607
four, five, six and it
can higher than that even.

00:00:48.069 --> 00:00:51.522
Let's say this is the time axis.

00:00:51.522 --> 00:00:56.322
This right over here is
the time axis in years.

00:01:00.990 --> 00:01:04.921
That is one year, two years,

00:01:04.921 --> 00:01:08.105
three years, four years,

00:01:12.384 --> 00:01:16.466
five years and maybe
we'll go six years out.

00:01:16.466 --> 00:01:19.146
Before I even plot the
adjustable rate mortgage,

00:01:19.146 --> 00:01:21.450
let's think about a fixed rate mortgage.

00:01:21.450 --> 00:01:23.633
If I had a fixed rate mortgage,

00:01:23.633 --> 00:01:26.833
it is exactly what the word implies.

00:01:26.833 --> 00:01:29.400
The rate is going to be fixed.

00:01:29.400 --> 00:01:33.000
On a fixed rate mortgage,
where the fixed rate mortgages

00:01:33.000 --> 00:01:36.866
are at the time you get
the loan, based on the type

00:01:36.866 --> 00:01:40.267
of loan you're getting
and your credit score,

00:01:40.267 --> 00:01:42.733
let's say you get a
four percent fixed rate.

00:01:42.733 --> 00:01:45.033
So that means over the life of your loan,

00:01:45.033 --> 00:01:47.259
your loan is going to
be at a four percent.

00:01:47.259 --> 00:01:50.727
Whatever you have to
pay on your principle,

00:01:50.727 --> 00:01:53.200
whatever principle you
have left over every period

00:01:53.200 --> 00:01:57.666
you will pay an equivalent of
a four percent annual rate.

00:01:57.666 --> 00:02:00.200
And we've gone into some
depth on that in other videos,

00:02:00.200 --> 00:02:02.098
where we talk about 30 year and 15 year

00:02:02.098 --> 00:02:03.933
and 10 year fixed mortgages.

00:02:03.933 --> 00:02:05.200
And you might be saying "Wait, I thought

00:02:05.200 --> 00:02:08.967
"as time goes on I pay down
more and more principle,

00:02:08.967 --> 00:02:10.900
"which means that each of my payments,

00:02:10.900 --> 00:02:13.219
"less and less of it goes to interest.

00:02:13.219 --> 00:02:15.200
"So it doesn't feel like
my interest is changing."

00:02:15.200 --> 00:02:18.266
And there's truth to
that, the dollar amount

00:02:18.266 --> 00:02:20.169
that you're paying towards interest

00:02:20.169 --> 00:02:23.600
with a traditional fixed
rate mortgage does go down

00:02:23.600 --> 00:02:26.819
every month as you pay down
more and more principle.

00:02:26.819 --> 00:02:28.900
But the interest rate, the
rate that you're paying

00:02:28.900 --> 00:02:30.966
on the principle that you have remaining,

00:02:30.966 --> 00:02:32.833
is going to be constant.

00:02:32.833 --> 00:02:36.733
In this example, it would
be a constant four percent.

00:02:36.733 --> 00:02:39.033
Now what about an
adjustable rate mortgage?

00:02:39.033 --> 00:02:40.366
As you can imagine, that means

00:02:40.366 --> 00:02:42.346
that the mortgage is going to adjust.

00:02:42.346 --> 00:02:46.433
So an adjustable rate mortgage
might start at two percent,

00:02:46.433 --> 00:02:47.967
and that might look really good,

00:02:47.967 --> 00:02:50.300
but the way that the deal will work is,

00:02:50.300 --> 00:02:54.133
if short term interest
rates were to increase,

00:02:54.133 --> 00:02:58.227
the adjustable rate mortgage
will increase as well.

00:02:58.227 --> 00:02:59.666
So there could be a reality where

00:02:59.666 --> 00:03:01.833
if short term interest
rates increase enough,

00:03:01.833 --> 00:03:05.200
the adjustable rate mortgage
interest rate, or rate,

00:03:05.200 --> 00:03:08.109
might be even higher than
the fixed rate mortgage.

00:03:08.109 --> 00:03:09.900
And if interest rates were
to go dramatically higher,

00:03:09.900 --> 00:03:11.966
that depends on if there are caps in place

00:03:11.966 --> 00:03:15.233
and whatever else, this rate
could grow dramatically higher.

00:03:15.233 --> 00:03:17.500
What do I mean by all of that?

00:03:17.500 --> 00:03:18.700
And what do I mean by

00:03:18.700 --> 00:03:21.718
"What if short term interest
rates were to go up?"

00:03:21.718 --> 00:03:23.800
When you have an adjustable rate mortgage,

00:03:23.800 --> 00:03:27.566
it usually adjusts to some index rate.

00:03:27.566 --> 00:03:31.840
In the US the most typical
one is short term Treasuries.

00:03:31.840 --> 00:03:33.833
That's the rate that the
government has to pay

00:03:33.833 --> 00:03:36.833
when the government wants
to borrow money for a year.

00:03:36.833 --> 00:03:40.619
So one year Treasuries, although there

00:03:40.619 --> 00:03:43.657
could be other underlying indexes.

00:03:43.657 --> 00:03:46.800
Another very typical index for any type

00:03:46.800 --> 00:03:49.266
of adjustable rate loan,
not just mortgages,

00:03:49.266 --> 00:03:51.033
but any type of loan,
even corporate loans,

00:03:51.033 --> 00:03:56.033
could be the London Interbank
Offered Rate, LIBOR.

00:03:56.215 --> 00:03:58.238
London Interbank Offered Rate,

00:03:58.238 --> 00:04:00.400
and we have other videos on what LIBOR is.

00:04:00.400 --> 00:04:02.666
Let's just say that we're
dealing with one year Treasuries

00:04:02.666 --> 00:04:04.904
as the underlying index.

00:04:04.904 --> 00:04:07.366
One year Treasuries, there's
a market for Treasuries,

00:04:07.366 --> 00:04:09.566
so that just changes with the day.

00:04:09.566 --> 00:04:11.942
Let's say this is the plot of what happens

00:04:15.219 --> 00:04:19.766
for one year Treasuries over time.

00:04:19.966 --> 00:04:22.755
So this is the rate, so
this means that right

00:04:22.755 --> 00:04:26.266
at this period of time, if you were

00:04:26.266 --> 00:04:29.367
to lend the government money for a year,

00:04:29.367 --> 00:04:30.881
you're going to get two percent.

00:04:30.881 --> 00:04:33.133
The government's borrowing
rate is two percent.

00:04:33.133 --> 00:04:36.133
Now, it's very unlikely that any lender

00:04:36.133 --> 00:04:39.333
will give you the exact
same rate as the government.

00:04:39.333 --> 00:04:41.200
The government can print
money, you have the full faith

00:04:41.200 --> 00:04:43.800
and credit of the United States.

00:04:43.800 --> 00:04:46.366
So you don't have that when you're paying,

00:04:46.366 --> 00:04:49.333
you might get into financial
difficulty, you might not

00:04:49.333 --> 00:04:51.166
be able to pay your loan for some reason.

00:04:51.166 --> 00:04:53.200
So you're not going to get that
exact rate, you're gonna get

00:04:53.200 --> 00:04:55.400
that rate plus some premium.

00:04:55.400 --> 00:04:56.833
Let's say you have pretty good credit,

00:04:56.833 --> 00:04:58.833
so let's say the premium
is only one percent.

00:04:58.833 --> 00:05:00.866
A premium like one
percent, that's actually

00:05:00.866 --> 00:05:04.300
what even very, very well
established companies would get.

00:05:04.300 --> 00:05:06.263
This is just to make the math easy.

00:05:07.522 --> 00:05:09.009
You see that right over here, the time

00:05:09.009 --> 00:05:11.533
that the loan was issued,
the one year treasury

00:05:11.533 --> 00:05:15.000
was like one percent, and so
you're gonna get a two percent.

00:05:15.000 --> 00:05:16.833
The way that an ARM works is,

00:05:16.833 --> 00:05:19.766
at some period, sometimes
it'll be every six months,

00:05:19.766 --> 00:05:22.979
sometimes every year,
your rate will be reset.

00:05:22.979 --> 00:05:26.033
So let's say we're dealing with
an adjustable rate mortgage

00:05:26.033 --> 00:05:27.800
and it resets every year.

00:05:33.568 --> 00:05:37.500
So yearly adjustment in the
case that we're looking at.

00:05:37.500 --> 00:05:39.658
So that means you're
gonna pay your two percent

00:05:39.658 --> 00:05:43.533
for the first year, from time zero

00:05:43.533 --> 00:05:45.488
to one year going by.

00:05:45.488 --> 00:05:47.966
And then at that point,
they're going to look

00:05:47.966 --> 00:05:50.066
at what the underlying
index is, and it's like

00:05:50.066 --> 00:05:51.433
"Okay, the index now looks like it's

00:05:51.433 --> 00:05:54.000
"at about one point six percent."

00:05:54.000 --> 00:05:56.866
So you're gonna pay a one
percent premium over that,

00:05:56.866 --> 00:05:58.866
so you're gonna pay two point six percent.

00:05:58.866 --> 00:06:02.522
So you're gonna pay two point
six percent for the next year.

00:06:05.537 --> 00:06:08.863
Now short term interest
rates have gone up even more.

00:06:08.863 --> 00:06:10.500
Looks like they're pretty close to three,

00:06:10.500 --> 00:06:14.000
so now you're gonna pay
four percent interest.

00:06:14.000 --> 00:06:16.133
So in this scenario where interest rates

00:06:16.133 --> 00:06:20.333
have steadily gone up, your mortgage rate

00:06:20.333 --> 00:06:23.333
is adjusting every year up.

00:06:23.333 --> 00:06:28.233
You see by at least this
third year, you are paying

00:06:28.233 --> 00:06:32.450
roughly the same as if you had
gotten a fixed rate mortgage.

00:06:32.450 --> 00:06:33.411
Now you might be saying "Hey, but it's

00:06:33.411 --> 00:06:34.747
still been a good deal.

00:06:34.747 --> 00:06:36.900
"I've paid for the first two years lower

00:06:36.900 --> 00:06:38.666
"than I would have paid
on a fixed rate mortgage.

00:06:38.666 --> 00:06:41.500
"And then only in the third
year I'm paying the same."

00:06:41.500 --> 00:06:43.500
And that's true, for this scenario,

00:06:43.500 --> 00:06:46.133
that so far has worked
out pretty well for you.

00:06:46.133 --> 00:06:48.533
But then in year three,
interest rates are even higher,

00:06:48.533 --> 00:06:50.625
so it would adjust even higher.

00:06:53.624 --> 00:06:56.636
So your adjustable rate might be up here.

00:06:56.636 --> 00:06:58.766
In this year you're actually paying more,

00:06:58.766 --> 00:07:02.766
your interest rate, the rate
of interest on the principle

00:07:02.766 --> 00:07:06.127
that you owe on your house, is now more

00:07:06.127 --> 00:07:07.900
than your fixed rate mortgage.

00:07:07.900 --> 00:07:09.433
Then I draw a scenario
where all the sudden

00:07:09.433 --> 00:07:12.817
it becomes more favorable
again, so it might adjust down.

00:07:12.817 --> 00:07:15.266
So here you're still paying
more than you would pay

00:07:15.266 --> 00:07:18.365
in your fixed rate, but then by this year,

00:07:19.335 --> 00:07:22.307
you're now paying less again.

00:07:23.260 --> 00:07:24.724
This is just one of many scenarios.

00:07:24.724 --> 00:07:25.565
In this one you're like

00:07:25.565 --> 00:07:27.433
"Okay, you know adjustable rate mortgage,

00:07:27.433 --> 00:07:30.633
"maybe this might have worked
out more years than not.

00:07:30.633 --> 00:07:32.500
"I'm paying less than I would have paid

00:07:32.500 --> 00:07:35.166
"with the fixed rate mortgage."
Lower rate I should say,

00:07:35.166 --> 00:07:36.700
there's only a couple of years here.

00:07:36.700 --> 00:07:37.355
But you have to remember,

00:07:37.355 --> 00:07:41.066
this is just one of
many possible scenarios.

00:07:41.066 --> 00:07:44.267
Maybe inflation goes
crazy, or whatever else,

00:07:44.267 --> 00:07:47.733
and maybe this index
does something like this.

00:07:47.733 --> 00:07:52.400
Which isn't typical, it's
not likely to happen,

00:07:52.400 --> 00:07:54.666
but things like that
have happened in history,

00:07:54.666 --> 00:07:56.956
when you had large inflationary periods.

00:07:56.956 --> 00:07:58.767
In something like this, all of a sudden

00:07:58.767 --> 00:08:00.400
you can see your adjustable rate mortgage

00:08:00.400 --> 00:08:02.533
adjusting up by a good bit.

00:08:02.533 --> 00:08:04.400
There's often these things called caps

00:08:04.400 --> 00:08:06.766
in place that keep the
mortgage from adjusting

00:08:06.766 --> 00:08:09.866
more than a percent or
two percent per year.

00:08:09.866 --> 00:08:13.232
But if you saw something like that,

00:08:13.232 --> 00:08:15.891
or if you saw something

00:08:15.891 --> 00:08:18.167
that just went straight
like this, that means

00:08:18.167 --> 00:08:19.248
that over the life of your loan,

00:08:19.248 --> 00:08:22.533
especially if your loan goes
out 10 or 15 or 30 years,

00:08:22.533 --> 00:08:25.633
you could end up paying a
substantial amount more interest.

00:08:25.633 --> 00:08:27.567
On the other hand, it's
completely possible

00:08:27.567 --> 00:08:32.433
that interest rates do
this the entire time.

00:08:32.433 --> 00:08:34.400
In which case, the
adjustable rate mortgage

00:08:34.400 --> 00:08:36.166
might work out better.

00:08:36.166 --> 00:08:38.100
So you might be noticing a pattern here.

00:08:38.100 --> 00:08:41.514
With your fixed rate mortgage,
it's very predictable.

00:08:43.946 --> 00:08:47.333
You can predict this, so the
payment that you're making

00:08:47.333 --> 00:08:49.400
from one month to the next,
even if it's interest only,

00:08:49.400 --> 00:08:50.900
whatever payment you're making,

00:08:50.900 --> 00:08:53.933
whatever interest rate,
it is not going to change.

00:08:53.933 --> 00:08:57.540
While the adjustable rate
mortgage it is less predictable.

00:09:05.645 --> 00:09:08.033
This brings up a very interesting idea,

00:09:08.033 --> 00:09:10.000
called interest rate risk,

00:09:10.000 --> 00:09:12.633
which you might sometimes
hear people talk about

00:09:12.633 --> 00:09:16.067
on the cable finance
networks and whatever else.

00:09:16.067 --> 00:09:19.766
Or if you're reading the financial section

00:09:19.766 --> 00:09:24.485
of the newspaper, interest rate risk.

00:09:24.798 --> 00:09:27.166
This is just the risk that you take on

00:09:27.166 --> 00:09:30.700
if interest rates were
to change dramatically.

00:09:30.700 --> 00:09:35.266
If you have an adjustable rate
mortgage, what's your risk?

00:09:35.266 --> 00:09:36.925
The interest rate risk you're taking on is

00:09:36.925 --> 00:09:39.546
"What if interest goes up a lot?"

00:09:39.546 --> 00:09:41.300
Then your payment goes up.

00:09:41.300 --> 00:09:42.833
With a fixed rate mortgage,

00:09:42.833 --> 00:09:45.133
who takes on the interest rate risk?

00:09:45.133 --> 00:09:47.000
With a fixed rate mortgage,

00:09:47.000 --> 00:09:49.146
the bank takes on the interest rate risk.

00:09:51.991 --> 00:09:56.633
Let me write this down, this is an ARM,

00:09:56.633 --> 00:10:01.367
and this right over here is the fixed.

00:10:07.333 --> 00:10:11.884
Who takes on the interest
rate risk in the ARM scenario?

00:10:11.884 --> 00:10:14.366
The borrower does.

00:10:14.366 --> 00:10:16.066
They might get the benefit of lower rates,

00:10:16.066 --> 00:10:18.266
but if rates were to go up dramatically,

00:10:18.266 --> 00:10:21.666
the borrower takes on this risk.

00:10:25.116 --> 00:10:28.142
While in the fixed rate,
who takes on the risk?

00:10:28.142 --> 00:10:31.307
In this scenario it's
going to be the lender.

00:10:32.429 --> 00:10:34.000
Why is the lender taking on a risk?

00:10:34.000 --> 00:10:37.700
If they lend something to
you at a fixed interest rate,

00:10:37.700 --> 00:10:39.733
let's say this four
percent, and if interest

00:10:39.733 --> 00:10:43.666
were to go up dramatically,
remember many lenders,

00:10:43.666 --> 00:10:45.700
especially financial
institutions like banks,

00:10:45.700 --> 00:10:48.200
they are borrowing money as well.

00:10:48.200 --> 00:10:49.394
Who are they borrowing money from?

00:10:49.394 --> 00:10:52.166
They could be borrowing from
a whole bunch of sources.

00:10:52.166 --> 00:10:54.633
One of them is the people
who are keeping deposits.

00:10:54.633 --> 00:10:56.747
Remember what a bank does.

00:10:56.747 --> 00:11:00.907
If this is the bank right over
here, people give deposits,

00:11:00.907 --> 00:11:03.166
and we go into much more
detail in other videos,

00:11:03.166 --> 00:11:06.700
and then it is loaned out.

00:11:07.330 --> 00:11:11.086
When they take deposits,
they are often times

00:11:11.086 --> 00:11:13.672
promising people interest

00:11:13.672 --> 00:11:16.042
and when they issue loans

00:11:16.042 --> 00:11:18.200
they're getting interest as well.

00:11:18.200 --> 00:11:21.100
This is fixed, right over here,

00:11:21.100 --> 00:11:24.925
but if short term interest
rates were to go up,

00:11:26.140 --> 00:11:29.433
then they're going to be paying
more than they're getting.

00:11:29.433 --> 00:11:31.666
Or this is not changing,
while this is going up,

00:11:31.666 --> 00:11:34.867
so they're not going to
be making as much money.

00:11:34.867 --> 00:11:37.766
So the risk, adjustable rate
mortgage, borrower takes on,

00:11:37.766 --> 00:11:41.633
the fixed rate, the lender takes on.