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- [00:00]
A
What's going on, everyone? Welcome to Real Talk Real Estate Mortgage Monday. I'm David Green, joined by Christian Bashelder, the Lone Ranger. And today we're going to be talking about everybody's favorite topic in lending, the 50 year mortgage. Christian, how are you today?
- [00:17]
B
I'm good. It's gonna be a, be a good one to challenge a little bit about, about what you guys think of lending. So I'm excited for this one.
- [00:23]
A
Yeah, that's exactly right. Now my guess is people have heard talk of it, they've probably heard more opinions on if the person who shared it likes it or doesn't like it, as opposed to just subjective facts. And that's what we're going to share today. What we know about it, what we don't know about it, who it could be good for, and most importantly, what it's not. Now if you guys like this topic, I highly recommend you go check out the YouTube video that Christian and I have on my channel, the David Green Show. We get into this in depth for about an hour and 15 minutes, answering questions from people, sharing all the details of it we possibly can. Today's show will not be that deep. Cause I don't know if you guys all want to spend an hour and 15 minutes hearing about a 50 year mortgage, but we are going to cover some of the things you should know. So let's start off here. Christian, first things first. Is the 50 year mortgage an actual loan option today?
- [01:10]
B
No, it is not. This is a conversation about a conversation. It's just a, it's just a, you know, outside of President Trump's little tweet where he put him next to FDR with a 30 year mortgage. Right. I thought that was kind of funny. This is just a topic of conversation that the combination of the US Government and Fannie Mae are thinking about. This is not something I can quote you today. This is not something we know the rates on. This is not something that you can get a quote on. This is a conversation about a potentially to come conversation.
- [01:42]
A
Okay, next thing, we have 30 year mortgages. But is a 30 year amortization period the only option you have if you want a fixed rate loan?
- [01:52]
B
No. Yeah, good question. And it's funny. It may not be as well known to a lot of people. Most people know about the 30, maybe the 15. What a lot of people don't know is you can actually have a lot of other options. There's 20, there's 25 years, there's actually 10 year amortizations. Obviously the shorter you go the higher your payment because you have less of a period of time in which you're paying off your loan. And usually the longer out you take it, the higher the rate goes. Which is why most people who elect for a 15 year fixed are pretty much electing for it because of the reduction in interest rate.
- [02:20]
A
Right.
- [02:21]
B
But on our non conventional side of things, we also have a 40 year option. It's not used very often, which we'll get into my, my opinions on this as we go through the video here. But right now there are pretty much anywhere from 10 to 40 year options that are fairly widely available throughout the industry.
- [02:38]
A
Okay, now if I elect for a 10 year mortgage, 15 year, 20 year, what are the pros and cons of if I go that direction?
- [02:45]
B
Yeah, pro is the shorter the time, usually the lower the rate. So 10 year out of everything we discuss will typically come with the lowest interest rate. Now sometimes the spreads are not what you think they would be. Right? I've had a couple days where like a 20 year and a 30 year fix have been priced exactly the same. That means there's not great long term sentiment in the market. Right. That means there's not a whole lot of buyers to, for, you know, for, for those weird fringe products to make them competitive. I, um, but typically the benefit is a cheaper rate, the lower term you go. But the trade off is a much higher payment. Even though your rate's lower, you're paying it over a much shorter period of time, which means you have to pay more per month to make sure that you have it paid off in 15 years. The longer terms have more flexibility ultimately because they have a lower required monthly payment, even though they come with a higher interest rate.
- [03:33]
A
All right, now you mentioned that you'll have a higher payment with a shorter period of time to pay it back. The fancy word for that is amortization. That just means the period of time it takes to pay your loan back. And I believe it also refers to the fact that the payment itself is made up of two parts, principal and interest. A lot of people don't really understand. They know they're paying interest on a loan, but they don't know how it's paid. Can you break down the way that an amortization schedule works and how the payments are divvied up?
- [04:01]
B
Yeah, yeah, good question. So when you start off on a loan, the vast majority of your payment, let's say for example, you have a $3,000 monthly payment that includes principal and interest. We're going to leave taxes and insurance aside for now, but just principal and interest. Your first year, you may be paying like $2,700 in interest and 300 in principal. So a lot of people look at their loan after two or three years of having it, and you've only paid down like 10 or $15,000. And that shocks a lot of people. What do you mean I've been paying $3,000 a month? Correct. But the vast majority of that is interest upfront. The reason why that happens is that the interest is based on the current loan balance. And your loan is obviously the highest in the first years. Right. Once you get into your amortization period or your repayment period, you slowly start adding more and more to interest. So for instance, your first month you may pay $300 in principal. The next month it may be $310. Fast forward 20 years and those probably flip flop now you're probably paying $2,500 in principal and only $500 in interest. It's still your same $3,000 mortgage. It just every month changes how much goes to principal and how much goes to interest. And if you guys are interested in ever looking up maybe what your table looks like, there's always one printed on the end of your closing statement when you got your mortgage, or if you're looking to project one, there's a lot of free tools online. You can just Google amortization calculator, type in your loan amount, type in your interest rate, type in your loan term, and it will show you as you go month to month how much is going to principal and how much is going to interest.
- [05:36]
A
Now, if you don't mind, Christian, do you mind pulling up a mortgage calculator right now and we'll just maybe do a hypothetical one and we can show people that are on YouTube or Spotify what this looks like. So I'm going to buy him some time to pull that up while I'm talking right now. Just let me know, Christian, when you've got it.
- [05:50]
B
Yeah, let's do it.
- [05:51]
A
Oh, we had one last night actually on our YouTube live. So you might have it loaded up and ready to go. See if you can put that in front of the camera and just talk us through what it, what it means.
- [05:59]
B
Yeah. So for instance, do you want to see the actual calendar or just the monthly payment?
- [06:03]
A
No, if you could show the split up of each payment, principal and interest, and how every subsequent payment has a slight shift in how much goes towards principal versus interest.
- [06:15]
B
Absolutely, David. So what we're going to look at here is our example of a 30 year fixed mortgage. And once again, I just did what I told you guys to do. I just googled amortization calculator. Here's the first website that pops up right. I put in a $500,000 loan, I put in a 30 year term and I just put in a 6% interest rate to get the conversation started. And we can look as we go through the years, we can actually click a monthly schedule. So let's do that because it allows us to understand a little bit more. And what do you know? It's almost exactly what I said. $2500 in interest in your first month and just about $500 in principal. That's still your $3000 mortgage, but you can see as you go month to month. So in month two it goes to 500, month three, five zero two. So you can see these are very, very small adjustments. But to prove my point, let's scroll down to like year 20. Where's your 20? Right here. Year 20. By the time you're 20 years into your payment now more than half is going to your principal. You can see 13 interest column. And now it's almost 1700 in your interest column. That proves the point of an amortization table because after 20 years your balance is now down at 268, not 500,000. So that interest is calculated with that same 6%, but based on the lower loan amount that you have now, which is why in later months you get a bigger and bigger value for the principal that you make.
- [07:38]
A
So what he's describing here, if you guys aren't able to see it on the screen, is you have a payment of what's $2,997.75 of that 2,500 goes to the bank, you lose it, you get back $497.75 against your loan balance. So the money you owe the bank, even though you made a payment of almost 3k, only drops by a little under 500. But next month's payment, about $3 more of that 3,000 is going towards your principal, not the interest the bank gets. Next month it's another 250 or so. And every single month what you find is the same payment you're making, a slightly larger percentage of that payment is going against your principal balance so that you owe less and the bank is keeping a smaller percentage of it. And over time, when you pay a 30 year loan off for a long period of time, even though the payment hasn't changed the portion of it that you get back against your principal and does improve. Now he showed at year 20. Actually, was there a break even point we can show on this amortization schedule where 5050.
- [08:50]
B
Yeah. So let's just scroll down here and we can see it hits 50, 50 right around here. So this is in year 18, which is about 1490 per per payment type.
- [09:02]
A
There we go. So around year 18, it's half is going to principal, half you're getting back as interest. Now if you took out an 18 year loan with a 6% interest rate and the same loan balance here, you would theoretically start it at this point in the amortization schedule. So you're giving less interest to the bank and you're getting more back, which is why you'd have a smaller number. When someone says over the course of time you have the loan, you're paying this much money back to the bank, it's all front loaded. It all comes off in the beginning. Now if you don't mind, Christian, can you share if you change this loan from 30 years to 50, how this changes the amortization schedule? And I'll let you. Super easy to do, guys.
- [09:42]
B
Here all I'm doing is scrolling to the top and I'm just changing the loan term to 50 years from 30. We're going to calculate and let's change the monthly schedule again. And here we go. Now your first payment, you can see it's less. Now our total monthly payment is what, 2600 instead of 3000. So you're saving 370 bucks roughly. But you can see the difference here. That same 2,500 is still going to principal. And now you only have 130 bucks going. I'm sorry, 2500 going to interest. And now you only have 130 bucks instead of our.
- [10:14]
A
It was like 450 or so, right? What was it? 350?
- [10:17]
B
Yeah, 490 I believe.
- [10:18]
A
Okay, almost 500.
- [10:20]
B
Correct. But now only 100 is going to principal. So this is the biggest argument against a 50 year or x term of a loan. As you get it higher and higher is that a smaller amount goes to your principal every month. Now guys, let's look at this in a realistic term. If I scroll down, let's just say we want to go snapshot the end of year five. How much have you paid down off your 500k loan in five years? You've only paid 10k off of your loan.
- [10:47]
A
Yeah, closer to nine.
- [10:48]
B
Yeah, closer to nine, you're right. And that's by paying $3,000 a month in interest. So this is a big thing to discuss. With a longer term mortgage and even our 40 years that we offer currently on our non conventional loans, you're sacrificing the pay down of your loan for theoretically better cash flow, a lower payment.
- [11:08]
A
Meaning more cash flow.
- [11:09]
B
Yeah. And you do have low lower payment. 2600 is less than $3,000. Absolutely. What people forget is that we use the same interest rate and that will most likely not be the case. For example, when you go from a 15 year to a 30 with the current loan products, this exists right now, they are not the same interest rate. So how we're doing this is not really accurate. We're just playing it on an even playing field. If you were to go from a 30 year at 6% up to a 50 year, that rate is going to be higher on the 50 year, maybe six and a half, maybe 7%. And if I just did this to prove my point, remember we had a $3,000 monthly payment on a 30 year loan. If I make this a 50 year loan with a 1% payment increase, what's our monthly payment? Exactly where we started on the 30 year loan. So a big question that David and I discussed at length on our YouTube video last night. If you guys. David already shouted that out, but if you guys haven't watched that, go see that. If you're interested in this in more detail, what's very interesting to me is if the interest rate is higher, there's going to be no benefit of a 50 year mortgage. You're going to pay the same monthly payment for 20 more years and not get the benefit of interest rate, not get the benefit of lower monthly payment because the rate will most likely be higher. Now we got into a lot of detail about this of maybe the government subsidizes this. Maybe there's some quantitative easing to have the government purchase these mortgages so that there is a demand for them and they can keep the interest rates lower. That's unknown. We don't know. But if we just extrapolate what we do know comparing a 15 year and a 30 year mortgage, those are not the same rates. So I'd have to assume that there's going to be some delta in the margin between a 30 year and a 50 year. And depending on how big that is, it may render the 50 year completely useless.
- [13:00]
A
Yep. Which Christian and I discussed yesterday. And we came to the conclusion if they do launch this 50 year. You know, before I make that point, let me roll back a little bit. If you Guys can understand what the amortization schedule looks like. Like we're sharing with you today. You can understand why a 50 year mortgage would make homes more affordable, which makes some people happy because we dropped our payment from, I believe the original one was 3400 down to 3000 or so. And other people angry because the amortization is less favorable for you. There's, there's, both of them are true at the same time. You don't have to pick a side here. You can look at the merits of both sides. However, if they want this to work to where the payment doesn't go up, they have to keep the rate the same. Which means if, as far as we can tell, they would be forced to subsidize this note to sell it as the standard note. Instead of they almost have to force a bank to give you the 30 year rate on a 50 year term, which they typically don't like doing. And if Trump is talking about getting rid of Fannie Mae and Freddie Mac, I don't see how the federal government subsidizes them to do this if they've separated themselves from it. And as far as I'm sure, as I know, Christian, you're flummoxed by this as well. Like how would this work?
- [14:23]
B
It's a very good question and the answer is unknown right now. I don't know. I mean I, I don't think that Trump's walking into it blindly. Maybe there's already conversations that have been had with, with bankers and hedge funds and all the people who usually buy mortgage backed securities. But this is a very interesting discussion because where do you draw the line? Like if 100 year mortgage option was available, would you do it if it meant better cash flow? I don't know. Right. The same exact arguments that the 50 year mortgage is having in the industry right now is the same conversations we used to have about 30 year mortgages. Why on earth would you take a 30 year mortgage? Right. And the 30 year became the standard. I don't know if a 50 year will ever become the standard. I think this is my opinion. Unless there is some serious subsidies, which guys, to clarify what a subsidy is, it's basically just the government giving money. That's what a subsidy is. Right. It's the government making up the difference on something that should be more profitable by, by incentivizing it with government dollars. That's all it is. So like if you're a business owner and you're selling tomatoes at your grocery store and it costs you $5 to make it, you know, pull the tomato off the vine and, and get it. But you can't sell it for five bucks. The government may come in and say people need tomatoes. We're going to give you three bucks and charge the client two bucks. That's a government tomato subsidy. Same exact thing that we're discussing for mortgages. The government may have to incentivize these loan products to have them make sense because otherwise people won't use them. Right. Now if the 50 year becomes the standard, we can get into a whole lot of discussions of what that means. It would almost guaranteed need to have a government subsidy to make sense in comparison to the 30 year fixed.
- [16:06]
A
Yeah.
- [16:07]
B
Now if it just replaces the 30 year fix, that's a different story because now there's nothing to compare to. I don't know if it will ever replace it and I don't think that would be good for the industry. I think people should always be able to get a 30 year and for that matter a 10 or a 15 year mortgage if they qualify.
- [16:21]
A
Right.
- [16:24]
B
So there's ways that this could be a nothing burger. There's ways that this could be a little intimidating. Right. If it does become the standard, and I'm hoping it does not, that's my, my personal preference is that the 30 year stays the standard and the fifth year is available for those benefits, but it is not replacing the 30 year.
- [16:43]
A
All right, let's go to a dark place in a world far, far away where 50 year mortgages ever place the 30s interest looms like Godzilla threatening to smash people's savings and equity into pieces. The world is in terror and panic. What can be done if we have 50 year mortgages that replace the 30 and you're forced to get one because they don't offer 30, but hey, they're like, we're going to give you the 30 year rate on the 50. So you're at an advantage here. You're getting a lower payment, but everyone complains, but I have more interest. There is an answer that we can use to fight this Godzilla. Can you share what it looks like to take, make the same payment you would have made that was higher and just put that extra amount towards principal and get the same effect.
- [17:31]
B
I love it. Here's the sweet, here's the secret sauce, guys. Even if we're comparing, this conversation can be had. Even if the 50 year ends up being a nothing burger and it was just a conversation that dies, we can have the same conversation with products that we have right now, which is a 15 and a 30 year. So what I'm going to do is I'm going to calculate what our monthly payment would be on a 15 year mortgage. Okay. We'll have a monthly payment of $4200 on the same $500,000 loan. Let's say a person could do that, but that's a little uncomfortable for them. Maybe you're doing an Airbnb, maybe it's seasonal, it's not going to make the same amount of money every year. Maybe you get a bonus at your work, so you can't make that money every month, but you can make it some months. Whatever the scenario is, maybe you're a business owner that has a seasonal aspect to the income that you make from your small business. There's a bunch of different ways that this could associate with you. Right. If we use this as a standard $4200, that's what you would be paying on a 15 year. I'm going to take this up to a 30 and once again, we're making to make the assumption of the same 6% interest rate. And I'm going to calculate it goes back to our 3000amonth. So that saved you $1200, 4200 down to 3000 by going from a 15 to a 30 year. But we're going to click this button here that says optional, make extra payments. And let's say every month, if we can, from the date that we do it all the way through closing, let's say we make an extra monthly payment of $1,200. So we're going to say my goal, I'm going to take a 30 year fix, but I'm going to pay the balance that would be due on a 15 year fix. And I'm going to calculate this. I'm curious if anybody can guess this off the top of mind where you think the loan would be paid off within. So we're starting in 2025. You guys can see you would pay it off in what, just about 16 years. And at the end of year 15, you would only have a $6,000 balance. That's kind of interesting because you still pay it off in 15 years, even though you elected for a 30 year loan. So if the 50 year loan becomes a standard, this would be my advice. Pay extra to your principal every month and you can still pay your 50 year loan off in whatever timeline you want to structure. Just like we just showed here, you can pay a 30 year loan off in 15 years. Okay. The biggest benefit is the flexibility and the reason why 95% of people elect for a 30 year fixed versus a 15, even if they qualify, is for that flexibility. If there's one month where you can't cover that extra twelve hundred dollars, you, you don't have to do it. You can go back down to paying 3,000amonth. But if you're able to structure your finances in a way that allows you to expense that same $4200 payment, you can still have it paid off in 15 years.
- [20:23]
A
I talk about it in Pillars of Wealth, the book I wrote, how to kind of make this fun, that you make it a game. Like if you're not looking at your loan balance every month, you're not tracking it, you get very little reward out of paying it off. The idea is you set this up to where you automatically pay extra every month against your highest interest rate debt. And then you check it every month and see how much you paid off. And you're always trying to beat last month. If I work another day of overtime, if I do another sale, if I have another good month, whatever, can I get more money and put it towards paying this loan off? Because not only did you pay it down with the money you put in, but you rushed yourself through the amortization schedule so that of the money that you naturally made on your X payment, a higher chunk of it went to your principal and it sort of becomes this snowball. And my advice to everybody listening, if you think real estate sucks eggs, if you hate it, if the only thing you have to look forward to in your real estate portfolio is Christian and I's podcast and mortgage Monday, you're awesome and we understand it, but we want to make it more fun for you. If you can't find the next deal, if you can't acquire more, if you're having a hard time doing this, at least figure out a way to get a win paying down your mortgage and don't get caught up in getting angry about this 50 year mortgage and how it's going to be forced on you when we don't even know it is, it's not even coming yet, it might not happen. And if it does, you've still got this as a backup plan to keep yourself at the 30 year terms that you were used to. So Christian, anything you think we should cover on this that we haven't?
- [21:59]
B
No, I mean, it's, it's the same market. I think people get really caught up with thinking of about a 50 year and thinking that you can get a house when you're 20 years old, that you don't pay off until you're 70. And that's true. What I will share with you is just the average numbers in America. The average homeowner keeps their mortgage for seven years and they keep the home for 12 years on average. That's just average across all Americans. Now you may absolutely respond with, oh, my grandma paid off her mortgage in 30 years. You're absolutely right, some people do. But if we're taking the average across all of Americans and people don't keep the homes for half of the 30 years.
- [22:37]
A
Yeah, yeah, right.
- [22:39]
B
I don't think that would change with a 50 year mortgage. Now there's a conversation we had of you won't have as much equity. Absolutely. You won't have as much principal pay down. Absolutely. You'll have a little bit better cash flow maybe depending on how they analyze this interest rate difference. And I honestly think it will just be yet another option for home buyers. It shouldn't be the standard. Just like the 30 year doesn't have to be the standard. You can get a 20 year, a 15 year, a 10 year, a 25 year. It's all based off your risk threshold. How quickly you want to pay down your debt, how much cash flow or savings on your primary mortgage that you want to have and how that kind of contributes to your overall financial strategy. Right. But remember, very, very, very few Americans actually get to the end of their 30 year term. Very rarely. The people who do pay off their mortgage typically contribute extra per month like we discussed here, and they pay off their 30 year in 10 years, something like that. Very few hold your loan to maturity. Very few.
- [23:39]
A
Which is why it doesn't make any sense to get worked up. There you have it, folks. All the information about the 50 year mortgage with none of the outrage and none of the glazing on the other side. Just the pure facts. Christian, if people want to get a hold of you, they want to talk about refinancing a property that they've got now or getting pre approved. Where can they go?
- [23:57]
B
Absolutely, yeah. You can always find out more about our company. It's the brokerage that David and I created together. It's called the One Brokerage. We have a website titled the One Brokerage.com. who would have guessed? Right? If you guys ever want to catch me directly, I am aptly named the 1 broker. The best social media to catch me on is Instagram. You can just shoot me a DM there. My hashtag is @the_1_ broker. You'll see a lot of clips from Mortgage Mondays. Shoot me a dm. We can talk about your scenario. Get a calendar booking on the on the schedule to to see if a refi or a purchase makes sense for your future.
- [24:30]
A
And you can find me@davidgreen24.com There's a chat feature. Get a hold of me directly. Also give me a follow on Instagram @DavidGreen24 and let me know what I can do to help you with your real estate goals. Whether it's getting a mortgage for a property refinancing something, getting put in touch with a real estate agent in a certain market, or having someone manage a short term rental, we can do it all and we're here for you. Thank you guys for listening. Thank you for getting information from us. We know you could get it everywhere and there's plenty of YouTube reels with thumbnails and fire everywhere and angry people. But here you get the information from the actual source. So we appreciate you guys. Leave me a comment, let me know what you thought about today's show. Make sure you subscribe before you go and we will see you next week on Mortgage Monday.