What's the Difference Between a 30 & 40 Year Mortgage?

Foreign.

This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property For Panties on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now here's your host CEO of We Close Nodes, Scott Carson.

Hey Real estate investors, this is Scott Carson. I'm known across the country as the Note Guy and I've been an active note investor focused primarily on the niche of non performing notes, distressed mortgage notes on residential commercial properties for almost 20 years now. My company is we close notes.com and I know there's a lot of different things when it comes to the note world. Are you buying performing notes? Are you buying owner finance notes? Are you buying institutional debt? Like I would focus on Are you buying first seconds contract for each There's a lot of questions and it can be very confusing about what you can or cannot do. So one of the great things that we've hosted for the last couple of years that we do on just about a regular monthly basis is we host our one day class called Note Weekend. If you go to noteweekend.com you can register for our free three and a half hour class. We'll talk to you and share with you how you find fun and flip non performing notes. And yes, you can buy non performing notes from banks, hedge funds and a variety of different hard money lenders out there for your own portfolio. No, you don't have to have millions of dollars to dive into the non performing note game. We've got students that have bought plenty of deals with 2530 grand getting their ball rolling using their self directed IRA who are tired of dealing with toilets, tennis trash desks, tired of battling contractors and GCs to get properties rehabbed. We all know the market is changing and while it may not be like 2008, 9 and 10 again, it we do see a lot of distressed debt out there on both the residential and the commercial side. So if you're thinking about diving into the note game, becoming a note investor, a lean lord as you'd like to say, versus the landlord. Or you just want to figure out what it is about the sexy side of real estate in the note space. Well, check it out. Noteweekend.com doesn't cost you anything. We host it live usually the first or second Saturday of each month. You can go today. Register at the website noteweeking.com Register for the next live class we host. You'll get sent A replay to the previous class so you can start learning about the note business today. No questions asked, no credit card needed. This is a great way for you to dip your toes in the water and see if it's warm because I guarantee going through art three one day class. You want to dive into the deep end and become a note investor. So check it out noteweekend.com you can also go to our website. We close notes.com check out our podcast, check out our YouTube number one YouTube channel. We are here to help support you. Whether you're experienced investor or you're brand new investing Note weekend is a great place for you to get the ball rolling. People often say we cover more in our three hour class than most people cover in their three day class. So check it out. Love to have you be part of our note family but get signed up today@noteweekend.com thanks and have a great day. Good morning, good afternoon and good evening everybody. Hey, welcome to this episode of the Note Closure show. As always, Scott Carson. Excited to be here today. I had an interesting conversation with another note investor the other day and I thought I would share it with you. Coming from the background of mortgages like I have, you know, was a loan officer. Golly, when I get my first loan, well I did my first loan was actually for my parents back in the day was doing a cash out refinance form. So I fell in love with the mortgage business then. So that would have been back in 2000 and 2001. Yeah, 2001 I did my first mortgage and then of course we started a mortgage company, my buddy Boyd and we did, you know, mortgages for four plus years and of course kind of being a note investor and helping facilitate private mortgages and stuff like that or private lending kind of in this space still to this day. So the conversation somebody was talking with me about was when do I do I think that they're going to make the 40 year mortgage normal? Are they going to normalize this like they have like the 30 years normal now and somebody was talking about how it's not a good idea as a note investor. I don't like that it's bad for bad credit people. You know Fannie mae will offer 40 year but it's only on a, you know, a loan mod. And I thought I'd talk a little about this here to give you guys a little bit of insight just because it's important for you to understand what is really kind of going on out there. Now that his conversation, he goes should a 40 year loan become the new norm. Is this really a good idea? And they've been talking about a 40 year loan. Basically somebody from the previous Obama administration talking about how it makes things more affordable. It was an article I think in Fortune magazine. So certain individuals advocate the 40 year loan should become the new norm. Like the 30 year. Currently the 40 year mortgages. 40 year mortgages aren't a common option for borrowers in good financial standing or simply looking for a longer loan term on a new purchase. Instead, lenders typically use 40 year loans as a loan modification option. That's correct. We start to see some of those 40 and 50 year loan mods. Crazy. This is when a lender extends a struggling homeowner existing loan term and then recalculates called recasting the loan. The this can lower their monthly payments and help pull them back from the brink of mortgage default or foreclosure, which I think is a good thing. It makes it more affordable for them if they can finance it over 40 years versus 30 years. Right. If you're, if you're shopping 4040 year purchase loan rather than a loan modification, you'll have to search outside the large national lenders like Chase or Bank of America. 40 year mortgages are rare since they are riskier for lenders than other loans because they can't be backed by the government or purchased by Fannie Mae and Freddie Mac as of right now anyway. Right. 40 year mortgages don't meet the qualified mortgage standards. That means qm. I mean they don't follow the set of rules graded by the Consumer Financial Protection vs. CFPB. 40 year mortgages also aren't conforming loans which means that they don't follow Fannie and Freddie's rules for conventional loans. That's why you can't get a 40 conventional loan unless you can demonstrate that you're in financial distress and need it as a loan modification option. Now is this good or bad? Well, the further you go out in time from a 30 to a 40 or to a 50 to a 60, you get less and less benefits due to the math. Do you really though? I'll share the numbers here in a second. So there's only so much you can do with pushing out the term. So Mikey has, Buddy has near 30 years. It's 25, 28, 40 year is 23, 42, it's 186 less. 50 year, 22, 54 is 88 less on top of the 186, 60 years is even $42 less at 2012. And he goes, in my opinion, 30 years is already too long. All this does is reduce the amount of equity build up for homeowners and more interest to the bank. Now for me, Randy says, as a note buy, this would not be a bet. This would be not be a bad thing. But for the average American, Homer, I don't see the benefit. Just buy a little less house or save a little more depth. Now that's, that's a different story. You have to, you know where he comes from. He self financed all of his note purchases in his real estate stuff. Not everybody's like that. And so I found it kind of humorous and I said, listen, well if Fannie and Freddie are already, what are they already doing? They're already modifying people to 30 and four year mortgages. Now I commented on it and I said, well, I said, well, it's just a matter of time until it does become acceptable on origination side more so. The 30 year mortgage wasn't always the norm. If you guys didn't know that. The 30 year mortgage was introduced in the 1950s, shortly after Fannie Mae or the FHA Federal Housing Administration was established in 1934. Before the 30 year mortgage, the most common mortgage term was much shorter. 15 years, 10 years and 5 years. Congress authorized the 30 year mortgage for new construction in 1948 and for existing homes in 1954. So we're literally 70 years since that took place. We've not had an update to that in 70 years. Okay. However, it wasn't widely adapted until the 1960s. Okay. We're at 64 years old. It's widely adapted and it's remained the longest mortgage term available ever since. With home values doubling every six to seven years in roughly 70% of the major markets. That's something you got to keep in mind because values keep going up. 68. We did a podcast episode or a YouTube short about this how if you look at took it 105 or 110 of the biggest markets, they doubled in seven years or less in 68 of them. Okay, here's the thing. With Fannie and Freddie already modifying the terms of the loans, it's not going to be a surprise that they come back and say, hey, let's make this commonplace. People want to buy houses. And you look at the uproar that like California has gotten for wanting to extend 20% down payments to illegal aliens in the United States and zero down, zero payments for up to 20% alone and how that has caught like brush fire, like a fart in a School, classroom, California. Oh, no, it's good for everybody now, not just illegals. Well, we know how you're going to play this thing. So anyway, what I thought I would do. Look, numbers don't lie. And I'm setting aside my fact of being a note investor. As a note investor, yes, I like shorter terms. I get higher principal and interest. People pay off the loans first. It's not as risky as being out 10 years long. But when you start looking at how much appreciation has taken place and if you look at what people need to make, you know, does it open the doors up to more people to buy in a house, to being affordable for a house? That's a good thing. Now, I'm not saying 100 financing. There are some things that I ran through here, assuming things. So what I did is, okay, so this up. So if you take a look in Google, what's the average home price in today's market? What the average interest rate is right now, about a six, you know, about a 30 year mortgage. And assume those things. Assuming that a borrower still comes in with at least 3% down through a, you know, FHA loan, what does it mean? How the numbers pan out. So let's go through that numbers because numbers don't lie, ladies and gentlemen. Right? So if we figure yet the average price of a home as of May of this year is up to 419,300, a 3% down payment on that loan would be a down payment of 12,579. So basically somebody would finance right at 407,000. Okay. If you look at the average interest rate as of today, it's about a 6.5%, 30, 30 year fixed rate, that's what the rate is, 6.5. And a 30 year mortgage, okay, might be a little higher, a little lower. Everybody's a little bit different. We're not going credit scores and I'm assuming that a, they're going to probably drop the interest rates down based on what Jerome Powell said this past week. Okay, so let's, let's, let's do apples to apples, not apples to oranges, not apples to a note. Deal. Let's talk about what it means to the consumer if you're a home buyer and will it have its advantages to you? Okay, so financing $407,000 down at 6.5% interest on a 30 year mortgage, your monthly payment is 26, 58 and 17 cents a month. On a 40 year mortgage, that is down by about 174 bucks, roughly down to 2484 and 40 cents a month. So there's about $174 difference in between the two. Now if you took that hunters, if you really could afford a 30 but you went with a 40 and you put that extra 173, 000 towards the balance of your loan, you would pay down your loan faster. Right? Gives you a little flexibility. I mean 130 isn't much, but that's almost, that's enough to cap out a, esa start a Roth ira. It's not a bad start. Now the annual salary needed between the two, okay. If you look at, if you need to buy finance on $407,000 and you need to stay below a 43% debt to income ratio, that's the cost of the house and everything goes along with it. Now debt to income, that means also what you're paying for credit cards in a car, student loan, stuff like that. So we just ran it normally because a assuming that taxes and insurance are going to be the same cost on that house, whether it's 30 or 40, your mortgage, here's what the salary needs. If you are going to do a 30 year mortgage, you need to be making just under $90,000. 89,605. If you're going to go with 40 year mortgages, you need to make five grand less, $84,480. So that's a $5,127 difference that you would need to make in a year to be able to afford the two. Okay, now yes, you could afford a little bit more home too, but we're not going to go that route right now. Same house, hey, I make 85, I need to do a 40 year. If I want to do a 30, I need to make right at 95 grand more. So there's a little bit. You're helping more people get in two for the same amount of homes. Okay. I don't see anything wrong with that. There's nothing wrong with it because remember we're talking about paying on time, it still's got some skin. The game with a 3% down which is better than nothing down. Don't want to give these away. Of course if they bring more to the table, that's even better. But let's just be honest, you buy a new home 3% down, you're going to have some expenses. So trying to make this more affordable because let's face most people look at their budget. What can I afford monthly? Okay, that's one thing. What can I afford monthly? What's my interest Rate. Well, we all know what you pay and how long you're being. The thing is, obviously if you're going to be in a house for 40 years, it's going to cost you more interest. But let's face it, the average individual is in a house about 10 years, seven to 10 years you're going to move. But we also let's take in consideration values increasing in 7 to 10 years. Okay, so let's talk about balances. The difference in the two of paying it down. If you just make the principal interest, not anything extra, your $407,000 mortgage will be at 341, 702 in seven years and at 316, 138 in 10 years. So basically you got about $67,000 of equity buy down in seven years. And what is that? 90? 97? No. 407. Yeah. Was it not? Yeah. $93,000 there. It's not bad. Okay. 10 years on your 40 year or seven years, you have a 40 year mortgage, you're going to be paying it down to 351, 73. So it's reduced down to $58,000 in equity. If you do 10 years, your balance is 332, 220. So it's really in seven years, about 10, 10 grand difference between the two. And then 10 years is a $16,000 difference between the two of the difference. So yeah, you pay down a little bit more in the 30 versus the 40 year at 7 or 10 years. Let's take it the next step. But what's the value your house? Because the average house doubles in value about every 10 years. Now what we did differently is that instead of saying it doubles in 10 years because we all know markets can change. I mean this is all dependent on market and we're not talking about taxes, cost, stuff like that, but let's just talk about, let's say an average appreciation. Okay? Average appreciation on a house is 3%. Tom. I know, don't tell me. Oh, it's more in my market. It's less than my market. Look, I get it. But on average things go up. Okay? It may have one down year, but the next year goes up and maybe higher than that. My Calliston's had higher appreciation, one of the faster markets. But let's just say average 3%. The numbers don't lie. So we take a look at those same numbers. If you take 3% appreciation after seven years, that house is now worth 501. Okay? After 10 years, that house is now worth 553,000. So basically at seven years, if you have a 30% mortgage and you pay that monthly on time, you're going to be at about a 68% loan to value 68% while the 40 year you're at a whopping 70% difference is only a 2% difference in equity. Your appreciation goes up and kind of offsets what you're paying down 10 years. On the 30 year mortgage you're now sitting at 57% LTV on the 40 year mortgage at 10 years you're at 60% LTV because it's gone up to 553 and you only owe 332 at that point. So you see, I don't think it makes that big a difference. I think it's, it adds value, it adds a more, a bigger pocket of home buyers. The big mistake I think that's going to happen is we, we saw this happen before is sometimes big bigger banks were like giving people the 3% down payment. Like bank of America used to have a lending program that would give you up to $15,000 down towards a down payment towards on your FHA because they knew they'd make it back in interest over time. I don't think that's a good program. You got to have some skin in the game. You can't be given everything to everybody. Oh, you haven't qualified for payment. But qualifying for payment on your DTI is still not a good thing. You still gotta have some scratch, show some insight because even if they get in for free, they have no skin in the game. If they can't afford you, what are they gonna do? They're just gonna leave. Just what we saw happening. People got up and left. Now here's the thing to look at. If you're a real estate investor, is that extra $200 or $177 a month gonna be better for you on your cash flow? Yes and no. Right. Got to think about that. Is it a better deal now? I don't think it's good. I mean we've had weird mortgage products before. We used to have the negative and mortgage, you know what I mean? The pick a pay which was written in about a six, six and a half percent interest rate. When we were doing them back in the day, you only had to pay one and a half percent interest rates. The other 5% interest went to the face amount in the loan. Now that works really good in a appreciating market like California was going through or Texas in some cases. But the minute your appreciation stops or you get 125% LTV, where you owe more than the value of the house. That's a negative thing that it refers back. And so you make in one and a half percent payment. It was, it was four payment options. Partial interest payments, full interest payment, interest only payments, 30 year P and I payment. Okay. Or a 15 year PNI payment. That's what they called it. Pick a pay. Well, what did everybody do? Everybody picked the partial interest payment because that was where the cash flow was. If I only get paid partial cash flow and I got all this equity or this appreciation is working on my side, I'm gonna go as much, get as much cash flow. And that works. Okay. Until that appreciation merrygo around stops and value stop going up. Or you've now got a full payment. Now when you hit that 125 threshold, that one and a half partial payment went away. So a lot of people that were in pickup bays were budgeting for that 1%. They weren't budgeting for 6 and a half percent payment. So their payments now quadrupled, triple to quadrupled in some places. And they were like, I can't afford it. So it's not good to budget on something like that. All right, I'm going to most house I can afford. I don't think that's a good thing. I think you still need to. I think people that are buying their house going to realize it's the starter house, starter home form a lot of times. Yes, don't we, we like nice houses. Okay. The first house I bought was a nice little starter home. Three bedroom, two bath, about 1500 square foot. You know, I've had bigger homes. 4, 400 square foot homes, 3,000 square foot homes. Ah, I kind of like this 2, 000 square foot house. It's not a bad thing. But that's, that's just me. Some people want the big monstrosity and sometimes that house ends up owning. Of course, depends what you're doing. If you're using Airbnb or couch surfing or other things like that, that's a different story. But think about this. The numbers. If you're in the real estate side, I think it kind of does make sense for you to go with a longer mortgage, especially if you got cheap interest. Okay. Six and a half percent by some standards is cheap compared to what we've seen in the past. A whole lot cheaper than a hard money loan, actually cheaper than what we saw back in 2008, 9 and 10 where interest rates were a lot higher. So that's what I want to leave you guys with is just that numbers, the numbers make sense. I think it's a little bit different. Yes, you do pay more interest, but guess what, if your appreciation is going up, it's going to offset that. So what, you pay more interest to get more in tax, Tax write offs, you know, it just varies on that stuff there for you. So hopefully you found this value. I'd love to know what your opinion is. What do you think of this? Where do you see this going? I honestly believe it's just a matter of time that Congress is going to get around and making homes more affordable. Let's make the 40 year mortgage the next evolution. I mean it's been 60, 70 years since we've seen some sort of major update to fha. It's just a matter of time. And you know what's going to happen is that Chase and Citi and bank of America and Wells Fargo, they're going to get greedy and they're going to jump on board and start offering those things. It happens every time, ladies and gentlemen. Oh, you're making more money because you're getting those loans. I want those loans. I'll adjust what we do and make it affordable. Now as a note investor, lower monthly payment. I'm just going to adjust my bid. It's going to be a bigger discount for me to want to get a 12% return if I'm buying a 6% loan. You know what I mean? Bigger discount. And that's what's going to happen. You're going to have 40 year, 50 year loans that sell at a much bigger discount than a 30 year mortgage because it's going to take us longer to get our investment back. And that's already happened. I mean I saw that today. I got a portfolio of 280 loans in. There's a bunch of them that are 30, 40, 40 and 50 year modifieds. I'm like, well, I'm going to make a low ball offer on these. That makes sense. Well below what I normally would if it was a 30 year. So pros and cons of both sides, depending on where you're at, if you're trying to get in a house, listen, I get it. When I bought my first house I was, I, you know, basically brought five grand to the table as my part of my down payment was. I got into it and I was like, holy crap, this is awesome. But you know, it was a little bit of a burden for me. Be smart these days. But I honestly think if they do the 40 year origination. It is going to open up the wave to homeownership for more folks and I think you'll see a bit of a trend. And we need that. Honestly, I think we do need that in order. If you want rents to go down, you need to buy more houses. And that's the point where you start looking at the comparison of rent in some cities. It doesn't make sense. It makes it's cheaper to rent versus own a home. This may just turn the tide in that argument. So anyway, like I said, love to hear from you. If you've got a topic or article that you'd love for me to discuss, I'd be glad to do it. Feel free to reach out to me at TalkwithScottCarson.com TalkwithScottCarson.com and as always guys, make sure to check out our one day class, our free note investing class@noteweekend.com we'll be doing one here in the next couple days. Can't make it live. You can always watch the replay and join in on that as well. Noteweeking.com all right everybody, have a great weekend. We'll see at the top. Bye Sam Sa.