A mortgage is a loan used to finance the purchase of a home. Most home buyers in the US borrow money from lenders for their home purchases, which they agree to repay according to set terms. Generally, a mortgage specifies the term (timeframe) over which repayment occurs and the interest rate. Until the loan is repaid in full, the lender or mortgage holder has recourse to the underlying asset: the home.

The US Federal Government & GSEs Shaft Co-buyers

The US has a well-established, highly regulated, and complex mortgage market. Homeownership is the primary driver of household wealth in the US, and the US government subsidizes homeownership in several ways, including mortgages and taxes. We’ll focus on mortgages here.

Government-sponsored Enterprises, or GSEs, play a central role in the mortgage markets. You may be familiar with the largest GSEs: Freddie Mac and Fannie Mae. These institutions were bailed out by the US Federal Government during the last financial crisis and remain under “government conservatorship.” So what do they do? Simply put, when a typical mortgage lender originates a mortgage to a homebuyer, that mortgage is sold to the GSEs. The GSEs buy roughly 70% of all primary residential mortgages in the US. They pool, or combine, these mortgages and sell them to global investors in the secondary market, including the US Federal Reserve.

Why do we care? The GSEs exert a lot of influence. Their position in the market means they effectively determine lending standards for residential mortgages. They’re also responsible for the Uniform Residential Loan Application (URLA), the standard form for mortgage applications. Nearly all primary mortgages in the US use this form.

The GSEs are not favorable to co-buyers in their operations:

• Terminology: the first name on a mortgage is referred to as a “borrower”; anyone else is a “co-borrower.”
• Software and APIs: Desktop Underwriter—used by nearly every lender in the US—accommodates a maximum of four (co-)borrowers. Five or more co-borrowers require manual underwriting. This results in more effort, scrutiny, and time. Consequently, it’s damn near impossible to get a mortgage as a group of five or more from most residential lenders.
• Pricing: Fannie Mae officially states that having multiple borrowers on a mortgage reduces risk. Lenders are in the business of pricing risk. Somehow, mortgage rates don’t reflect this by offering co-buyers lower rates.

These aren’t trivial issues.

The treatment, systems, and pricing for federally-regulated mortgages in the US systematically disadvantage co-buyers.

Consider:

• The US taxpayer funds the Federal Government.
• The Federal government backs the GSEs.
• The GSEs subsidize homeownership.

The government is subsidizing homeownership, but not for you. And this is just the tip of the iceberg.

Why should you care?

👉🏾 To win a game, first learn the rules.

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Mortgage Rates

The interest rate on a typical 30-year fixed-rate mortgage is correlated to US 10-year Treasury yields, which track US monetary policy.

Most residential mortgages are packaged and sold to investors in secondary markets as Mortgage-Backed Securities (MBS). Like any freely traded financial security, their price fluctuates (and so does the corresponding yield or rate).

Interest Rates: 30-year Fixed Rate Mortgage (last ten years)

‍Interest Rates: 30-year Fixed Rate Mortgage (all-time)

As a borrower who takes out a mortgage, a small rate change can impact monthly repayments. The effect on the total mortgage cost over the full term can be considerable.

➡️ Example:

Even a slight increase in the interest rate can have a significant impact on both your monthly budget and your long-term financial obligations. It's crucial to shop around for the best rates and understand the long-term implications of your mortgage rate.


Scenario: 30-Year Fixed Mortgage

• Purchase Price: $650,000
• Down Payment (20%): $130,000
• Loan Amount (80% LTV): $520,000
• Term: 30 years


Option 1: 7.49% Interest Rate

• Monthly Payment: $3,642.06
• Total Payments over 30 years: $1,311,141


Option 2: 7.99% Interest Rate (0.5% higher)

• Monthly Payment: $3,792.54
• Total Payments over 30 years: $1,365,366


👉 Key Takeaways:

1. Monthly Cost: A 0.5% higher interest rate results in a $150.48 higher monthly payment.
2. Long-term Cost: Over the 30-year term, you'd pay an additional $54,225 with the higher interest rate.

This example emphasizes the importance of securing the most favorable interest rate possible. Even a seemingly small rate difference can lead to substantial extra costs over the life of the loan.

Mortgage Components

Mortgages come in a variety of shapes and sizes.

A common format is the 30-year fixed-rate mortgage, and that’s the route chosen by most of our past CoBuyers.

Below, we break down the most important components.

🧾 Loan Type

Specifies the loan you're getting, such as Conventional, FHA, VA, or USDA.

🏦 Original Amount Borrowed

The initial sum of money lent to the borrower.

⏳ Term

The length of time you have to repay the loan, most commonly 30 years.

% Interest Rate

The percentage of the loan amount charged for borrowing money.

🔗 Interest Rate Type

Indicates whether the interest rate is Fixed (stays the same) or Adjustable (can change).

💵 Monthly Payment (PITI)

The total monthly payment, including Principal, Interest, Taxes, and Insurance.

💰Down Payment‍

The upfront payment made when you buy a home, usually a percentage of the home's value.

💡Fast Fact

The lending landscape is dynamic. The availability of mortgage products and programs varies by geography and according to your circumstances. There’s no one-size-fits-all mortgage.

Key Mortgage Terms & Concepts

Mortgage terminology is thick. We break down terms in the glossary, but let’s review a few of the most important terms and concepts anyone co-buying a home needs to understand.‍

Co-borrower is someone officially listed on a mortgage and shares responsibility for repayment. They’re usually also on Title, which would make them a co-owner.‍

Co-owner is someone who jointly holds Title to the property, meaning they have an ownership interest. They’re often on the mortgage, which would make them a co-borrower—but not always. In select circumstances, co-buyers may choose to leave one person off the mortgage because of a low credit score or no credit history, but still include them on Title.‍

Co-signer is someone who guarantees the mortgage but does not have ownership interest in the home. Co-signers are joint and severally liable for mortgage repayment, meaning that they’re on the hook for the debt despite not being a co-owner. Parents sometimes co-sign a mortgage for adult children on their first home purchase to improve their ability to borrow at favorable terms.‍

Earnest Money serves as a good-faith deposit made by the co-buyers to secure the property during the negotiations of a home purchase. This deposit is typically held in an escrow account and is applied toward the down payment or closing costs upon successful transaction completion.‍

Escrow is a neutral third-party account where funds like earnest money or down payments are securely held. These funds are released when specific conditions outlined in the Purchase and Sale Agreement (PSA) are met.‍

First-Time Home Buyer (FTHB) is a designation applied to folks who have either never owned a home, not recently owned a home (within the past three years), or have only ever owned a home with a former spouse. FTHBs are eligible for favorable mortgage financing terms.‍

Investment Property is a property that none of the co-owners occupy as their primary residence. It often comes with different mortgage rates and tax obligations.‍

Joint and Severally Liable describes the financial responsibility of each co-borrower and co-signer on a mortgage for the entire loan amount. If one party defaults, the lender can pursue any co-borrower or co-signer for the entire debt.‍

Primary Residence is a home where at least one of the co-owners resides for the majority of the year. This designation impacts mortgage terms and has tax implications.