15-Year Loan Or 30-Year Loan? There Can Be Only One Answer - And It's Simple
One of the questions I am asked most often – by clients and people who attend my seminars is this: should we opt for a 15-year loan or a 30-year loan? My answer is simple – the 30-year loan every single time! And what about if the rates are lower with a 15-year loan? The 30-year loan is still your best choice. If there is a 40- or 50-year loan, choose that! Here’s why.
Choose the longest possible loan repayment plan.
Make this a rule. A rule written in stone. Consider this – what does an avocado cost today? Say about $2.25, right? What will it cost in about 14 years? It will cost more in the region of $4, you reckon? So $2.25 today will be worth about the same as $4 in 14 years. People who argue that longer loans entail a higher amount of interest payments to the bank forget to consider the true value of money and how it changes over time due to inflation. What might be a substantial monthly outflow now will look like a joke in 15 years, perhaps just enough for a fancy meal for two!
The 30-year loan is also the most flexible kind of loan. You can, of course, repay earlier if you can and you want to. You can repay in 15 years or even 10 years. But you don’t have to! With a 15-year loan you don’t have the 30-year option. What if something goes wrong and you have some unforeseen expenses, or if, god forbid, there are retrenchments where you work? The 15-year option would be difficult but the 30-year option is much easier! You can even pay more for a while and then revert to the lower repayment option. And when you have a lower monthly payment, you can afford to buy more homes; invest in more real estate!
In other words, you cannot afford not to take the gift that is the 30-year fixed rate loan. Check out this video to know more reasons why this is the only savvy option. I will also explain why inflation is your best friend when you have taken the 30-year loan. Go ahead and spend a few minutes watching this video – those few minutes may end up saving/making you a lot of money!
Our ICG 1-Day REAL ESTATE Expo took place on Saturday, March 9th. It was a huge success; thank you to everyone who joined us. Throughout the day, we had 750+ attendees, with over 550 people in the main room at the same time. Great energy! Some of the attendees were KQED donors, who purchased the Remote Control Retirement Riches with Adiel Gorel Master Package. The donors received two tickets as part of their donation to KQED. It was an honor to have KQED members at the event, and what a thrill to explore our tried and true method with so many new folks. There was a good mix of investors: brand new investors, very experienced investors, and everything in between.
Market teams, property managers and expert guest speakers
The questions from the audience at the ICG Real Estate 1-Day Expo were excellent and I enjoyed answering all of them. I had the main market teams present, and some of the property managers within our national infrastructure there as well. Scott Webster from All Western Mortgage described regular FNMA (Fannie Mae) 30-year fixed-rate loans (some at just under 5%, which, for investors, is a low rate). He also described loans available to people who can’t get the FNMA loans, by virtue of owning more than the FNMA limit. He also outlined loans available to foreign investors. The attendees enjoyed the three expert guest speakers: CPA Joshua Cooper talked about the Opportunity Zone and other tax issues. Joyce Feldman talked about using insurance as the first and probably most important line of defense, and Lucian Ioja talked about optimizing real estate investing in the larger context of financial planning.
New offering on our website
Many new investors joined our QUICK LIST, to whom we send property sheets when we get them from the various markets. Those who joined the list will also receive event invitations and updates, throughout the year. (You can also join us, by texting QUICKLIST to 57838, or by emailing firstname.lastname@example.org and request to be added.)
I also introduced the NEW Members Area on our website. The Members Area will be an exciting treasure trove of information, offered in two tiers. It will be fully populated with podcasts, FAQ’s, and other useful information. It is a work in progress right now that we are truly excited about. There will also be webinars on specific subjects offered, as well as special one-on-one “Connect for Success” meetings with Adiel Gorel. We enabled people to join the membership area at a special discounted rate, as an “early member” which is good until April 10th only.
If you were not able to attend the ICG Real Estate 1-Day Expo you can still take advantage of our early member discount. Just use the code MARCHEXPO at checkout to receive 20% off, only available until April 10th. Also, for our early members (at either level), you will be able to attend two LIVE webinars that I will be recording before the “official” May 1st launch.
Everyone’s “membership clock” will only begin to tick on May 1st. Thus, by taking advantage of this discount you are getting a “backstage pass” as we get all our content loaded, and your payment will cover the time starting May 1, 2019. We are excited to have you join us, and will be working diligently to provide useful content to help you secure a strong financial future.
Next Expo May 18th
Many of the attendees from the March 9th Expo registered for the next 1-Day Expo, on Saturday, May 18th. We will have a new market available, three expert guest speakers, and of course loads of Q & A. You can register now for the May Expo here.
In a recent article on CNBC by Diane Olick, it is reported that weekly mortgage applications have risen by 5.3%. It is quite likely driven by the low rates, which may now last longer than previously expected. In general, purchase demand is weakening in the more expensive markets due to affordability issues.
Homeowners’ interest rates on mortgages are now about 4.65%. Investors always have higher rates, but can still get rates in the relatively low 5’s, which historically (for investors) is one of the lowest rates in the past few decades (only higher than the mid 4’s from about a year and a half ago, but much lower than most historical rates over the past few decades).
For us, as investors in new single-family rental homes in the Sun Belt states, demand for mortgages is up, and so is the demand for housing. Yet price increases over the past year have not been sharp. This makes some large metro areas in the Sun Belt affordable and sensible to the investor.
I have said countless time how special it is to get a 30-year fixed-rate mortgage which never keeps up with the cost of living (neither the PI monthly payment nor the remaining mortgage balance). Thus, inflation constantly erodes the real value of our loan, while the tenant’s rent is paying it off. To be able to get such 30-year fixed-rate loans at today’s rate is an extra special gift (for reference, when I started buying homes in the 1980’s, rates on investor mortgages were about 14%).
Investors should buy in the Sun Belt
Investors will be well served to buy new, good homes in good metro areas in the Sun Belt, getting a 30-year fixed-rate loan if they can (FNMA only allows 10 per person or 20 for a couple where both spouses can independently qualify). Many of our investors have exceeded that threshold. However, those of you that still can get these great loans, would be wise to use them.
Reach out to our office to schedule a time with me if you would like to discuss this further at (415) 927-7504 or email email@example.com
FNMA, (for those of you new to this blog, Investopedia.com sites FNMA is the acronym and the stock market symbol for the Federal National Mortgage Association, commonly called “Fannie Mae.” This government-sponsored enterprise provides liquidity for the U.S. mortgage market by guaranteeing and purchasing mortgages, indirectly enabling families to buy or rent homes through access to credit) perhaps in a bid to compete with the 3.5% FHA loans, has reinstituted its 3%-down (97% Loan to Value) loans.
The loans are primarily for new home buyers, with some limited provisions for the refinancing of existing FNMA loans. The combination of these new super-low-down loans, coupled with the very low-interest rates in the marketplace, AND the new government lowering of Private Mortgage Insurance (PMI) on low-down loans, combine to make buying homes much easier for new buyers.
What does this mean for investors? A lot! Not only is this loan likely to create extra demand and contribute to home price appreciation, but when an investor thinks of selling an investment home, the pool of ready willing and able buyers will have been greatly expanded. Great news for new homeowners and real estate investors!
At our next 1-Day ICG Real Estate Expo on March 7th, we will have experts on the newest wrinkles in asset protection, how to use your IRA to buy real estate, and getting loans for IRA-bought real estate. In addition, there will be experts speaking on the newest loans available (this keeps changing for the better!), as well as an array of experts, market teams, updates, learning, and networking. Can’t wait. Call our office at 415-927-7504 or email us at firstname.lastname@example.org and mention this blog entry to attend free.
An article in the Wall Street Journal dated May 14, 2014 – right on the front page, is an article by Nick Timiraos and Deborah Solomon. The article is about how, after a few years of tight mortgage lending, the U.S. government is set to ease the criteria to get home loans. Needless to say, this is music to our ears. As more buyers can enter the marketplace, demand is likely to increase and so are prices.
The housing sector will get a much-needed shot in the arm and for investors, there will be many more potential buyers upon liquidation. Will easing bring us closer to another mortgage meltdown? Possibly, but I think lessons have been learned during the recession which will prevent a wholesale catastrophe as we have seen before. My opinion is that for us as real estate investors this is an excellent bit of news. And remember – get your own 30-year fixed rate mortgage as soon as you can at these rates, which likely will increase in the coming years. We will discuss this and much more at our quarterly 1-Day Real Estate Expo Saturday, June 14th near SFO. Please see more details and to register, click here. Looking forward to seeing you!
The U.S. Backs Off Tight Mortgage Rules
In Reversal, Administration and Fannie, Freddie Regulator Push to Make More Credit Available to Boost Housing Recovery
By Nick Timiraos and Deborah Solomon
The Obama administration and federal regulators are reversing course on some of the biggest post-crisis efforts to tighten mortgage-lending standards amid concern they could snuff out the fledgling housing rebound and dent the economic recovery. Nick Timiraos reports.
WASHINGTON—The Obama administration and federal regulators are reversing course on some of the biggest post crisis efforts to tighten mortgage-lending standards amid concern they could snuff out the fledgling housing rebound and dent the economic recovery.
In yesterday’s Wall Street Journal there was an article (below) by Nick Timiraos regarding the effects of home price appreciation on affordability. As the article states, rising interest rates, a dearth of housing stock in many markets, still-tight lending criteria and a slow builder’s resurgence, create a real difficulty for many people to buy their first home. Needless to say, investors reap a certain benefit from this situation by enjoying an expanding demand for rentals. Since many investors have the means and sophistication to buy homes, the expanding rental pool actually improves the investment situation.
Here is the article as it appeared yesterday:
Surging Home Prices Are a Double-Edged Sword
Affordability Troubles Grow, Especially for First-Time Buyers
The U.S. housing market faces a challenge at the start of the spring sales season: higher prices.
It is hard to overstate the benefits of rising prices to the economy broadly and to homeowners, banks and home builders specifically after years of declines. Price gains have pulled more Americans from the brink of foreclosure and given home buyers more confidence that they won’t get stuck with an asset whose value will decline.
But those gains have a painful edge, too, especially because prices have bounced back so strongly. The increases have rekindled concerns about affordability, particularly for first-time buyers, and could damp the gains of a housing rebound still in its early stages. The U.S. housing market faces an unexpected challenge at the start of the spring sales season: home prices are on a tear. Price gains have pulled more Americans from the brink of foreclosure and boosted demand from consumers no longer afraid to buy.
“Prices ran up so fast in 2013, it hurt first-timers’ ability to become homeowners,” said John Burns, chief executive of a home-building consulting firm in Irvine, Calif. “It’s going to be a slower recovery than people had hoped because a number of people have been priced out of the market.” Home values nationwide are up 11% over the past two years, according to real-estate information service Zillow Inc. and 14% below their 2007 peak. Mortgage rates, which jumped a full percentage point to about 4.5% in the past year, have sharpened worries over housing affordability.
Even as prices have increased, housing still appears affordable by one traditional gauge. Since 1990, American homeowners have spent about 24% of monthly income on their mortgage payments, according to data from Morgan Stanley. Today, that payment-to-income ratio stands at around 20%, below the long-run average. The problem with that view of affordability: It assumes borrowers have great credit and large down payments. The ratio isn’t favorable for first-time buyers and others with lower incomes and smaller down payments, which increases their monthly financing costs. The payment ratio for first-time buyers was around 24% at the end of last year, in line with its long-run average, according to the Morgan Stanley analysis.
This pinch on first-timers is troubling because, so far, the housing recovery has depended to an unusual degree on cash buyers and investors. The relatively weak position of entry-level buyers could further suppress the homeownership rate—now off more than four percentage points from its 2004 peak—as more of them rent, said Vishwanath Tirupattur, a managing director at Morgan Stanley. Making matters worse, home prices are going up fastest in markets that are already expensive, such as San Francisco and Los Angeles. Just 32% of California households at the end of last year could afford the monthly payments on a median-priced home in the state of $431,510, assuming a 20% down payment, according to the California Association of Realtors. That was down from 56% of households that could afford the payments on a $276,040 median-priced home in early 2012.
Rising prices are only part of the problem for first-time buyers. Inventory shortages and tougher mortgage-qualification standards benefit buyers who can make large down payments and those who can forgo a mortgage altogether. Because many markets have low supplies of homes for sale, all-cash buyers have routinely beat out first-time buyers by guaranteeing a quick, worry-free closing for sellers.
Meanwhile, federal officials have repeatedly increased insurance premiums on loans backed by the Federal Housing Administration, which serves many first-time buyers because it requires down payments of just 3.5%. While mortgage rates at the end of 2013 reached their highest levels in more than two years, the all-in cost of an FHA-backed loan—due to insurance-premium increases—was closer to a five-year high.
Rising prices are less of a problem for current homeowners seeking to trade up because they can tap growing home equity to make their next home purchase. An index tracking housing affordability from data firm CoreLogic Inc. shows that homes were 17% less affordable for first-time buyers at the end of last year compared with the year before, while the index was down just 6% for existing homeowners.
Ideally, higher prices would stimulate more home construction, which would ease inventory crunches that are partly responsible for price increases while boosting job growth. But builders have been slow to ramp up production, skittish after being caught with too much inventory when the 2008 downturn hit. Last year, many focused instead on higher-end houses, while entry-level construction was subdued. Sales of new homes last year rose by 14% from 2012, but the number of homes sold for less than $150,000 fell by 28%. Sales above $500,000 grew by 36%.
The worry is “a situation develops where construction remains low and prices continue to outpace incomes before first-time buyers can get in, and the next thing you know, you have to” bypass standard mortgage-qualification rules “to get people into homes,” said Thomas Lawler, an independent housing economist in Leesburg, Va.
Others fret that low interest rates have allowed prices to rise too fast relative to incomes, which have stagnated. While homes are still affordable on a monthly payment basis because of cheap financing, homes no longer look like a bargain when comparing prices to incomes. For the past few years, policy makers have focused on breaking a vicious downdraft in home prices. Now, it wouldn’t hurt housing to see price gains flatten out, especially if income growth remains tepid. If not, the housing market’s roller-coaster ride will continue.
In an article in the Wall Street Journal by Nick Timiraos on January 7, 2014 an attempt at predicting various scenarios for housing at large in the U.S. for the year is made. Of course, the 5 points are general. I personally believe (and am actually seeing) that markets that are still reflecting post-recession pricing (like Florida) and where houses can easily be bought under bare construction costs AND the future demographics are promising – should show a far more bullish trend this year versus other markets. Here is what Mr. Timiraos says:
“For housing, it was a tale of two halves in 2013. During the first half, unusually low supplies of homes and low rates spurred bidding wars, pushing prices up sharply. During the second half, the frenzy cooled amid a sudden spike in interest rates. While more markets are now reporting increases in inventory, the number of homes for sale remains quite low.”
The bull case for 2014 goes something like this: those low inventories will support rising prices. Below-average levels of household formation, the argument goes, must ultimately pick up, boosting construction. Mortgage rates, while higher, are still historically low. Credit standards will stop getting tighter and might loosen as home prices rise. Finally, mortgage delinquencies are dropping. While some states still have elevated foreclosure inventories, the worst of the distressed-housing problem is in the rear-view mirror.
The bear case, meanwhile, says that the recovery is a mirage built on the back of the Federal Reserve’s stimulus that has done little more than inflate asset values, including home prices. Record low-interest rates, the argument goes, unleashed demand from both borrowers and all-cash investors seeking returns on something—anything—with a decent return. These investors built large rental-home companies that remain untested at scale. How can first-time buyers take the baton from investors at a time when prices are up almost 20% in two years and when interest rates are rising?
Other problems loom: Mortgage rates could jump, choking off housing demand and curbing new construction that remains mired at 50-year lows. Investors could unload their homes if the rental-home thing doesn’t pan out. And don’t look for much help from mortgage lenders that face a cocktail of new regulations, which could keep credit standards stiff.
So which view will carry the year? Here are five wild cards to watch this year:
(WSJ: 7 Jan 2014 By Nick Timiraos)
1. WILL INVENTORY RISE?
Prices have risen largely because of shortages of homes for sale. While there is growing evidence that inventories hit bottom last year and that some markets are moving back in favor of buyers, the number of homes for sale remains relatively tight still. Foreclosure-related listings have plunged, and traditional buyers haven’t flocked to list homes—at least not yet. New construction, meanwhile, won’t be back to normal historical levels for years. The consensus view is that price growth continues at a somewhat slower pace, but that consensus view could be wrong—for the third year in a row—if there aren’t more homes for sale.
2. WHERE IS THE HOME-CONSTRUCTION RECOVERY?
While home prices have recovered strongly, new construction activity hasn’t. Part of this may have to do with the fact that home prices are still too low to justify construction, particularly given land, labor, and materials costs. For smaller builders, credit may also be harder to come by. Some economists say new-home demand could remain muted because many move-up buyers don’t have enough equity to “trade up” to that new home. Key issues to watch here: What happens to household formation, and do builders begin to throttle back price gains in favor of selling more homes in 2014?
3. WHAT HAPPENS TO MORTGAGE CREDIT?
Lenders could begin to ease certain “overlays”—or additional credit and documentation checks—that have been imposed over the past few years. Mortgage insurance companies are getting more comfortable insuring loans with down payments of just 5%. So don’t be surprised if, at the margins, it gets a little easier to get a mortgage—especially if you have lots of money in the bank.
Even if it gets easier to get a loan—by no means a given—borrowing costs and fees could rise. Banks also face new mortgage regulations that could keep most of them cautious. Borrowers with more volatile or harder-to-document incomes, including the self-employed or those who make a lot of money on commissions, bonuses, or tips, could continue to face tough sledding.
4. WHAT WILL INVESTORS DO WITH THEIR HOMES?
A handful of institutional investors have purchased tens of thousands of homes that are being rented out. These homes tend to be concentrated in a few of the regions that have been hardest-hit by foreclosures over the past five years. Investor purchases played key roles in stabilizing prices, especially because investors were wolfing up homes at a time when supplies were already dwindling. A key question now is what happens after the initial rush to invest subsides. More lenders and investors are extending debt financing to some of these property owners, which should help boost returns. Can owners perfect the expense management associated with maintaining and leasing tens of thousands of individual homes? Can owners perfect the expense management associated with maintaining and leasing tens of thousands of individual homes?
5. WHEN DOES HOUSING HIT A TIPPING POINT ON AFFORDABILITY?
Rising home prices are a double-edged sword, especially in pricier coastal markets such as San Francisco and Los Angeles. On the one hand, rising prices are giving many homeowners equity in their homes again—an extremely positive development to the extent it means these borrowers are less at risk of foreclosure.
But price inflation is making housing less affordable. This will be a bigger problem if cash buyers retreat from the market in 2014 and/or if interest rates rise in a meaningful way. Consider: In Los Angeles, prices have jumped by nearly 30% in the past two years, to a median of $448,900 in the third quarter. Assuming a 20% down payment, the monthly payment of principal and interest on the median-priced home has jumped from $1,255 in the third quarter of 2011 to $1,823 in 2013—a 45% increase.
I encounter many investors still tempted to get some flavor of an adjustable loan when using their available investment loans. There are extremely low-interest rates being offered on many shades of variable interest loans such as 1/1, 5/30 and so on.
Given that there is a virtual consensus among economists that we are headed to a high inflation period, it would not be the wisest move. When inflation is looming the need for fixed rate loans becomes even greater than it usually is. Fixed-rates are still very low, not far from the lowest rates in over 50 years. At this point, and before inflation rears its ugly head, it is definitely the time to lock in a rate forever.
Once you have locked in your 30-year fixed rate loan, inflation actually becomes your ally. It erodes the real monetary value of your loan, which never changes with inflation because it’s, well… FIXED! In a way, the very process of inflation will hasten the real-life pay down of your loan balance.
Many of you are eligible for a lot more investment loans than you might think. We will talk about this in detail, and also share strategies to increase the number of investment loans you can get at our incredible Real Estate 1 Day Expo on Saturday, December 7, 2013, near San Francisco Airport. More details can be found on our website www.icgre.com. We have been producing these events for over 20 years, and we always have the most useful experts to assist you.
This time there will also be a discussion of the new Affordable Care Act (Obamacare) and strategies on what to do, credit enhancement and repair (to be able to get all these loans), and an amazing lawyer battling the banks in court to share his insights and wisdom. In addition, market teams from the most relevant markets in the US will be there. Looking forward to seeing you!
ICG uses single-family home investments, bought in advantageous locations and the best U.S. markets. We enable you to enjoy the clout that comes from purchasing a multitude of houses, even if you only buy one.
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