How 50 Year Mortgages will Change Real Estate.

Well, it looks like a 50 year mortgage may be coming to a neighborhood near you soon. President Trump recently just announced he is trying to get a 50 year mortgage in the United States. So here's everything you need to know about the truth about 50 year mortgages, whether you should use one or not, if it becomes available to you and what the true impact of 50 year mortgages will be on real estate and affordability overall, it's probably not what you think. So first, let's look at the math of the difference between a 30 year mortgage and a 50 year mortgage on your payment. So we're just using a simple mortgage calculator here that doesn't include things like home insurance or property taxes. We're just looking at the difference from 30 to 50 years. So this is all we need. I'm also looking at a $1 million loan, and I know that seems high, but as we'll be talking about in just a moment, million dollar loan amount is not going to seem that out of the ordinary soon. All right. So if you have a million dollar loan with a six and a half percent mortgage rate, which is typical as of the time of this recording, and it is a 30 year mortgage, the monthly payment for principal and interest is going to be $6,320.68. Now if we change this to a 50 year mortgage, we can see that the payment drops down to $5,637.17. That is a difference of a whopping $700 per month. Now you might think, okay, $700 per month is a significant chunk, but not when you're talking about a million dollar mortgage, when the payment is going from $6,300 down to $5,600, it's not going to move the needle, at least not in terms of major affordability of somebody being able to buy a house or not. Remember, this is a million dollar loan. If we look at the difference between a 30 year and a 50 year, we're just a $500,000 loan. The 30 year mortgage has a payment of $3,160 versus the 50 year mortgage has a payment of $2,818. So just a $300 difference again for very few people. Is this going to mean the difference between being able to buy a home and not being able to buy a home? This is not introducing new buyers into the market. This is just a couple hundred dollars extra available per month to people who are already going to be able to buy anyway. Now, the major advantage that everybody online is talking about right now is investing that difference. If you're able to afford a 30 year mortgage, get the 50 year and just invest the difference. So using our million dollar loan example, we have a $700 a month difference that we can now invest. So let's run the numbers on how much money you can make from investing the difference. And by the way, I understand that a 50 year mortgage will have a higher interest rate. And so the difference, the savings, the amount that you'll save each month going from 30 to 50 will actually be smaller than what we're calculating here. But I'm trying to give a best case scenario because we're looking at the advantages here first. So if you get a 30 year mortgage on a $1,000,000 loan, your monthly payments can be 6,300 bucks over the life of that 30 year loan. You'll pay a total of $1.2 million in interest. Again, this is assuming you keep the loan for the its entire duration. You don't refinance and you don't move. Otherwise start the whole process over again. If you change that instead to a 50 year mortgage, your payment goes down to $5,600 per month, but you pay a total of $2.3 million in interest. So if we're going to invest the difference of that $700 per month, we need to over the life of the loan, make at least $1.1 million to make up for how much more we're paying in interest on that loan along the way. So we're starting off with $0 in our compound interest calculator, and we're going to be investing that $700 a month, which comes out to $8,400 per year. We're going to let that grow for 50 years because again, this is over the life of the loan. And if we get just three and a half percent growth compounding every single year, then by the end of that 50 years, we have indeed turned that difference into $1.1 million. And three and a half percent is obviously a very low return, much lower than the mortgage rate. And it is much lower than what you could expect given average interest rates on even bonds over the last 50 years. So if we put in 8%, which is a more reasonable conservative return, you're looking at over $5 million by the end of the loan. Now this is starting to look pretty juicy to some people, which means by the time you turn 30, you've saved up enough to be able to afford a down payment on your first starter home. By this time in the future, prices have gone up a bit. And so you've got a million dollar loan. You're going to take that $700 per month. You're going to invest it. And by the time you're 80, you're going to have 5 million bucks. Let's just hope inflation doesn't erode too much of that by the time you get there. Now, obviously I'm being a bit facetious here, but the point is that few hundred dollars a month that you're going to save is not going to drastically move the needle over the course of a 30 to 50 year loan. Sure. That's a long time from now. You're probably going to move. You're probably going to get a new mortgage. And let's be honest, the way that Americans act with debt and prices is you just buy the most expensive thing you can, which means you're not buying a cheaper house and pocketing the difference. You're saying, I've got $500 more I can spend on a house every month. I'm going to get that house instead. And I know none of you who are watching this video would act that way because you have some financial literacy, but the vast majority of Americans do. Which is why the vast majority of Americans live paycheck to paycheck and have a ton of debt and a negative net worth. And that brings us to the first real problem with introducing 50 year mortgages to the United States. It increases demand artificially. What I don't mean is that it allows people who couldn't buy before to buy. That will almost not happen at all. But what it will do is it will allow people to afford just a little bit extra home, at least in the beginning, because what would happen here with 50 year mortgages is the same thing that 30 year mortgages did today. Very few people ever opt to try and buy a small enough home that they can afford a 15 year mortgage. They go with the 30 year mortgage and buy the most home they possibly can, which means eventually all of that artificial demand for the higher prices drives prices up to the point where you're still buying the same home you were before. Now it's just amortized over a longer period of time and you're stuck in debt for a longer period of time. This is what artificial demand does. When you add a bunch of money into a system like the government throws money at education, what did that do to education? It increased the cost. As the government has thrown a bunch of money into health care, what has that done to health care? It increases the cost. Because you're not doing anything about the fundamental problems, you're just treating the symptoms. You say people can't afford it, let's give them more money to be able to afford it. That just drives up prices by artificially improving demand. Which means 50 year mortgages will drive prices up to the point where nobody will be able to afford using a 30 year mortgage, especially a 15 year mortgage anymore. Now the second major problem with 50 year mortgages is you have a drastically increased risk of being underwater on your property. Most people are aware, but some are not, that mortgages are front loaded with interest. Which means for the first couple of years that you're paying payments on your mortgage, you are not really moving the needle on principal. With a standard $400,000 mortgage fixed over 30 years, you can see that for your first payments close to $2,000 is going to interest only, and only a couple hundred dollars per payment is going to principal. And in fact, halfway through the life of the mortgage at year 15, well over half of your payment is still going to interest and less than half is going to pay down principal. And a 50 year mortgage will make this problem worse by extending that time period. Which means especially for those who can only afford a small down payment, your risk of being underwater on that loan if the housing market in your city dips is up drastically compared to a 30 year or especially a 15 year. Because for years now, you are going to be paying very, very little towards principal, which means your equity will not increase over that time, at least not by any meaningful amount. You're going to be paying interest only, which means if the housing market dips, you're underwater. Which is fine if you can just keep on paying your payments, but if it dips and you have to sell, now you owe the bank money and you walk away with nothing. So a longer mortgage increases the risk that you will have to sell at a loss and lose your down payment and have no equity because that payback period is much longer. Now, if this does happen, it will be best for existing real estate investors who have tenants in their properties paying down their mortgages for them because their cash flow is just going to increase, which means they can pay off their debt faster and roll that into new properties and build their wealth even quicker. It's also going to be good for just existing homeowners because it could allow them to refinance and have a lower payment and invest the difference. But very quickly it's going to boost the prices from that artificial demand, which means everybody who hasn't bought will be back in the same boat that they're in right now, except it'll probably be even worse. And this is the reason why real estate in the United States is unaffordable for so many people and such a good asset for so many people. It's the government. 30 year mortgages don't exist anywhere in the world. That's a US thing because the government causes it to happen here. It's not a free market invention. What lender in their right mind would say, here, here's some money, pay me back over 30 years with a fixed interest rate. I don't know what the Fed's going to do with money. I don't know what they're going to do with interest rates. I don't know what they're going to do, what's going to, what the inflation rate or deflation is going to be. But I'll allow you to lock in a fixed interest rate for 30 years. That's preposterous. It's because of government intervention is because of subsidies, because of guarantees is because of federally backed mortgages, because of grants, it's because of all this money is mortgage backed securities that the federal reserve has bought all the money that all the intervention, the federal government has thrown into the US housing market is why the US real estate market is one of the best asset classes in the world, assuming you're using leverage. It's not a function of free markets. Again, 30 year mortgages don't exist anywhere else. It's usually five or seven year adjustable rate mortgages. So yeah, you're locked in for five years and then we'll reassess, which makes sense. That is a more logical thing that you would expect to see if there's free market influence. But in order to protect incumbents and protect real estate investors, the government keeps on forcing regulations, forcing subsidies, forcing grants in order to continue making real estate get more expensive here, which is good for existing owners and bad for people who still need to buy. In fact, without government intervention, real estate prices would actually go down over time, not up. Real estate is not an inherently appreciating asset. It is something that depreciates, which is why the tax code gives you depreciation deductions because they know houses fall apart. They need maintenance. They cost you money. You have to fix stuff. You have to improve stuff. They get less valuable over time and make you put more money into them over time. Without government intervention, house prices over time would go down, not up. And the main reason why they would go down, not up, is because you wouldn't have all the artificial demand for a payment driving the overall prices up. So that's first. But second, you wouldn't have restriction on supply, which is the biggest issue here. In every city and state that allows a lot more building, there's really no affordability crisis. There are still plenty of states where you can buy starter homes for under $150,000. Because it turns out, if you don't stop builders from building, they will build because they can sell it profitably, and people will buy because they can buy it and afford it. But plenty of cities and states around the country restrict building in order to artificially keep those prices up. This is done through zoning laws and building codes. Both of these are a violation of property rights, and the federal government should outlaw it. Now, you might think that is a crazy thing to say from somebody who's constantly preaching less government intervention. But when a government outlaws laws, in other words, restricts itself from violating personal property rights, that is the right kind of law. And the federal government imposing a nationwide ban on zoning laws and building codes means more freedom that people can do what they want with what belongs to them. In other words, build and sell what people want. Now, I know it sounds crazy, so just hear me out, because I know it's never going to happen, but it would solve the housing crisis nationwide. Zoning laws prevent individuals from being able to do what they want on their own property. The best cities in the world evolved and grew organically without these zoning laws. It allows people to design communities and grow communities the way that they want, creating walkable communities, livable cities. Many times they grow up, they grow out. Homes and shopping areas become mixed as people run small businesses out of their homes, build up on top, and things are able to organically grow based on what the free market dictates. In other words, if I want to build something that somebody else wants to buy, we can do that, and no third party can tell us no. But as it stands today, if you want to go in and you want to build homes on property that belongs to you and sell those homes, many times you can't do it. The government just tells you no. Oftentimes, if you want to build affordable multifamily housing or commercial real estate or vice versa, again, the government steps in and tells you what you can do with the land that you own. This is the driving cause behind the lack of supply. And I also mentioned building codes, and that is because building codes are not created in most places by the cities. They're created and owned by private organizations who make the building codes in private, paid off with companies that have patents on equipment and things like that, that they won't put into the building codes because they're going to get all that business. And the cities just enforce them with the force of law. So now if you want to go renovate an old building and turn it from office space into multifamily, that one building code for this type of sprinkler instead of this type of sprinkler makes a whole project unaffordable for you. And so you don't do it because you won't be able to do it profitably. In summary, if the government simply got out of the way, it would solve it by itself. Now, the loser in that situation would be everybody who currently owns homes and has their identity or their net worth wrapped up inside their home equity. But a personal residence is not a cash flowing asset. And so it doesn't actually really impact somebody if their home value drops a ton from changes like these. They're not living off of that income. Now, if you think, well, then all their net worth goes away, but it's in their home. It doesn't matter because the home across the street also has that same drop. It only matters to them if their house is the only house that drops in value. But if all houses drop in value, then it doesn't actually impact them. Now, if you think, okay, well, what about real estate investors that have a bunch of properties and tenants? Again, the appreciation or depreciation of the property doesn't actually matter in this case. It's the cash flow relative to the cost of the property. So 50 year mortgages are only going to do the same thing that 30 year mortgages did. Overall, drive up affordability of a monthly payment just enough to keep prices going up. It is not going to introduce new buyers. In fact, for somebody who hasn't bought yet and doesn't get on that bandwagon soon, they may be priced out of owning a home forever because prices will go up so much they won't be able to afford a down payment. Returning into a nation of landlords and renters. This is the road to serfdom. Great book, by the way. And last thought for anybody who thinks, oh, if we just kick out all of the illegal immigrants, that would solve our problem. That's just not the case. The first issue with that is largely illegal immigrants are living in a multifamily housing, which is not going to do anything for single family housing. Second, the rate of deportations, which is accelerating, is still nowhere near what would be needed to make a dent on demographics. And number three, it would arguably have an even bigger impact on the supply side because many of the people who are doing the building of the new places to live would be kicked out of the country. So if you really care about solving the housing affordability problem in the United States, it's not about immigration. It's not about cheaper monthly payments. It's about getting the government out of real estate from the federal level all the way down to the local level. But that's probably not going to happen. In fact, we're going the other direction, which means if you don't want to be caught on the wrong side of this, you probably need to get in the game. I'm not saying that you need to purchase your personal residence because many people don't want to live in the places that they can afford right now. But it's a lot cheaper to get in the real estate game by buying an out of state property with a property manager, with a house that costs under $150,000 and place a tenant in there as long as the property cash flows. And then at least you have your foot in the door. You accumulate a couple of those properties. You have tenants paying down your debt for you. Your equity is appreciating as time goes on. And if push comes to shove, you can always liquidate those properties in order to purchase a personal residence someday in the future if you need to. But getting your foot in the door at least allows you access to that market and makes it harder for you to be priced out forever because the direction we're going, that's going to happen to many, many people really trying to increase my content output game. I'm going live on YouTube a couple of times a week right around market close. And so stay tuned and watch out for that if you're interested. And I also have a free newsletter where I send out content that I do not talk about on YouTube. If you're interested in seeing me in your email inbox every week, I've got the link to subscribe in the description below. As always, thanks so much for watching. Have a great day.