Lender- 40 year loans
Real Estate Broker · NY · Member since 2020 · 70 posts · 27 votes
Lender- 40 year loans
Most Popular Reply
Member since 2024 · 5 posts · 2 votes
1yQuote from @LaTonya Clark:
Yeah. I’m very skeptical of getting a40 year loan. When is it a smart situation to get one? I thought my situation would be one.
Honestly, I’ve been around long enough to see 50-year loans, interest-only mortgages, and 40-year mortgages with balloon payments after 15 or 30 years. I’ve also dealt with loans where payments didn’t even cover all of the the interest owed each month—those deferred interest.
With a 40-year mortgage, however, most of your payments go toward the interest, and almost nothing goes toward the principal balance. AND... A lot of them contain Balloon Payment Provisions. That is essentially a waste of money. You're better off opting for an interest-only mortgage, saving on payments, and then refinancing it into something more conventional when interest rates drop—or, if possible, making a plan to pay down the principal.
Interest-only loans, which typically last for the first 5 to 10 years of the loan term, offer two key benefits. First, they allow you to make lower payments during lean times, such as during remodeling, vacancies, or when you need to qualify for a loan before completing a renovation. But there's something else that many people don't realize: these loans "constant recast" during the interest-only period.
For example, if I make an extra $400 payment one month, my interest-only payment will decrease the following month. You also have the ability to re-amortize the loan to suit your timeline.
Let’s say I have a $500,000 interest-only mortgage on a property. I make my regular interest-only payments for the first 7 or 8 months, and my interest-only period lasts 5 years. But if I decide to pay an extra $2,000 per month, in addition to my (dropping month after month) minimum interest-only payment, when the loan is recast to principal and interest, the new payment will be based on the remaining balance ($396,000) spread over 25 years. This results in a significantly lower payment after the reset.
I've used this strategy on multiple properties, and it's worked well for me. Over time, I've accumulated more cash reserves and don't need as much flexibility, but I'm actually in the middle of a refinance right now using an interest-only mortgage—because the pricing with the lender and the corresponding ARM is more favorable than a comparable principal-and-interest loan.
The key with these alternative or "exotic" mortgage types is that you need to be financially savvy and have a solid plan. If you don’t, you could find yourself in financial trouble.
31 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @LaTonya Clark:
Just got an accepted offer on a quad. Seller won’t budge on price and it will be tight for cash flow. Is it smart to take out a 40 year loan to get some cash flow?
Personally I would not. Reason why is if you go to sell it, people are not going to comp it based on 40 year loan. While great for cashflow, may limit your exit stratgy.
Also, How comfortable are you with the offer as well as the overall numbers on whether this will or will not cash flow?
7e investments53 Reviews - Real Estate Broker · NY · Member since 2020 · 70 posts · 27 votes1y
Yeah. I’m very skeptical of getting a40 year loan. When is it a smart situation to get one? I thought my situation would be one.
I wanted the bldg not only to hold for its equity but wanted to cash flow as well. I will cash flow only about $200 per unit a month. That’s not looking too good to me. And the rents have recently been raised.
any suggestions. I do want this bldg. - Lender · Member since 2021 · 495 posts · 130 votes1yIn my experience, 40-year terms have rarely made sense. The longer amortization is often offset by a higher interest rate and makes little difference compared to a 30-year.
Quote from @LaTonya Clark:
Just got an accepted offer on a quad. Seller won’t budge on price and it will be tight for cash flow. Is it smart to take out a 40 year loan to get some cash flow?
- 1yElias HalvorsonBusiness MemberHI · Member since 2024 · 225 posts · 130 votes
Hi LaTonya,
Just echoing what others have wrote - 40 year loans rarely make sense. I would highly recommend sticking to the 30 year option or not doing it at all.
Elias Halvorson C2 Hawaii NMLS#1697041HI Branch NMLS#1244222 585 Reviews - Member since 2024 · 5 posts · 2 votes1y
Quote from @LaTonya Clark:
Yeah. I’m very skeptical of getting a40 year loan. When is it a smart situation to get one? I thought my situation would be one.
Honestly, I’ve been around long enough to see 50-year loans, interest-only mortgages, and 40-year mortgages with balloon payments after 15 or 30 years. I’ve also dealt with loans where payments didn’t even cover all of the the interest owed each month—those deferred interest.
With a 40-year mortgage, however, most of your payments go toward the interest, and almost nothing goes toward the principal balance. AND... A lot of them contain Balloon Payment Provisions. That is essentially a waste of money. You're better off opting for an interest-only mortgage, saving on payments, and then refinancing it into something more conventional when interest rates drop—or, if possible, making a plan to pay down the principal.
Interest-only loans, which typically last for the first 5 to 10 years of the loan term, offer two key benefits. First, they allow you to make lower payments during lean times, such as during remodeling, vacancies, or when you need to qualify for a loan before completing a renovation. But there's something else that many people don't realize: these loans "constant recast" during the interest-only period.
For example, if I make an extra $400 payment one month, my interest-only payment will decrease the following month. You also have the ability to re-amortize the loan to suit your timeline.
Let’s say I have a $500,000 interest-only mortgage on a property. I make my regular interest-only payments for the first 7 or 8 months, and my interest-only period lasts 5 years. But if I decide to pay an extra $2,000 per month, in addition to my (dropping month after month) minimum interest-only payment, when the loan is recast to principal and interest, the new payment will be based on the remaining balance ($396,000) spread over 25 years. This results in a significantly lower payment after the reset.
I've used this strategy on multiple properties, and it's worked well for me. Over time, I've accumulated more cash reserves and don't need as much flexibility, but I'm actually in the middle of a refinance right now using an interest-only mortgage—because the pricing with the lender and the corresponding ARM is more favorable than a comparable principal-and-interest loan.
The key with these alternative or "exotic" mortgage types is that you need to be financially savvy and have a solid plan. If you don’t, you could find yourself in financial trouble.
- Member since 2024 · 5 posts · 2 votes1y
Quote from @Chris Seveney:
Quote from @LaTonya Clark:
Just got an accepted offer on a quad. Seller won’t budge on price and it will be tight for cash flow. Is it smart to take out a 40 year loan to get some cash flow?
Personally I would not. Reason why is if you go to sell it, people are not going to comp it based on 40 year loan. While great for cashflow, may limit your exit stratgy.
Also, How comfortable are you with the offer as well as the overall numbers on whether this will or will not cash flow?
I'll be honest with you, in my experience, I have never seen a Investor care typically about the existing financing, or what was owed on the property. I guess if you are trying to do a deal where the buyer/investor is taking over existing financing, but, almost every lender I've dealt with does not allow assumption.
- 1yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Not sure why people go for 40-year fully am instead of just traditional 30-year with 10-year IO option, I tend to think the 40 year term is more of a gimmick
Harpoon Capital514 Reviews - 1yKo KashiwagiPro MemberLender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
There are small number of cases where it makes sense, but sometimes it does. Best to get quotes for both 30 and 40 to see how it plans out. You could also just do 10 year IO.
- Real Estate Broker · NY · Member since 2020 · 70 posts · 27 votes1y
I would love for him to accept 265k but he stuck on 275k and there’s no comps to say otherwise.
- Real Estate Broker · NY · Member since 2020 · 70 posts · 27 votes1y
Yea, I guess I’m forcing this deal.
- Real Estate Broker · NY · Member since 2020 · 70 posts · 27 votes1y
Quote from @Mitch M.:
Quote from @LaTonya Clark:
Yeah. I’m very skeptical of getting a40 year loan. When is it a smart situation to get one? I thought my situation would be one.
Honestly, I’ve been around long enough to see 50-year loans, interest-only mortgages, and 40-year mortgages with balloon payments after 15 or 30 years. I’ve also dealt with loans where payments didn’t even cover all of the the interest owed each month—those deferred interest.
With a 40-year mortgage, however, most of your payments go toward the interest, and almost nothing goes toward the principal balance. AND... A lot of them contain Balloon Payment Provisions. That is essentially a waste of money. You're better off opting for an interest-only mortgage, saving on payments, and then refinancing it into something more conventional when interest rates drop—or, if possible, making a plan to pay down the principal.
Interest-only loans, which typically last for the first 5 to 10 years of the loan term, offer two key benefits. First, they allow you to make lower payments during lean times, such as during remodeling, vacancies, or when you need to qualify for a loan before completing a renovation. But there's something else that many people don't realize: these loans "constant recast" during the interest-only period.
For example, if I make an extra $400 payment one month, my interest-only payment will decrease the following month. You also have the ability to re-amortize the loan to suit your timeline.
Let’s say I have a $500,000 interest-only mortgage on a property. I make my regular interest-only payments for the first 7 or 8 months, and my interest-only period lasts 5 years. But if I decide to pay an extra $2,000 per month, in addition to my (dropping month after month) minimum interest-only payment, when the loan is recast to principal and interest, the new payment will be based on the remaining balance ($396,000) spread over 25 years. This results in a significantly lower payment after the reset.
I've used this strategy on multiple properties, and it's worked well for me. Over time, I've accumulated more cash reserves and don't need as much flexibility, but I'm actually in the middle of a refinance right now using an interest-only mortgage—because the pricing with the lender and the corresponding ARM is more favorable than a comparable principal-and-interest loan.
The key with these alternative or "exotic" mortgage types is that you need to be financially savvy and have a solid plan. If you don’t, you could find yourself in financial trouble.
Thanx Mitch. You definitely shined on light this. I didn’t know there would be a balloon payment. Ugh! So much to think about. Thank goodness the seller went on vacation.🤔 - Member since 2024 · 5 posts · 2 votes1y
LaTonya, I would ask the lender making the loan what the provisions are. There might not be a balloon payment after-all. All I can say, is many of the 40yr Loans I have seen, contained a Balloon Due after 15 or 30 Years.
You should also ask and see if there is a Prepayment Penalty. This will likely result in you be asked to pay 6 Months of regular interest on the loan, should you decide to refinance or sale before a certain amount of time. I am okay with them, but I never accept any loan with more than ONE Year. Do not allow a Mortgage Broker to sell you a 3yr Prepayment Penalty. It is always better to pay slightly more in points or closing costs and have a one year, instead of a three.
As for the Balloon, there is nothing wrong with that, if you are doing this wisely. The only money you are out is closing costs on a new refinance. You should expect to pay about 2.5% of the loan amount, when you do refinance.
In your particular case, I would try to move forward and make this work. A 4-Plex for $265,000 is absolutely insane. But if inspection looks good, I would take it.
What I would also do, is find ways to increase the rental cash flow of the building. When vacancies occur, obviously try to maximize value for yourself. In some parts of the sun belt, I have been told that you can collect far higher rents doing Section-8 than you can regular Tenants. The secret is tenant selection, and finding good tenants in the program. I have no idea if that is the case in the area where you building is, but it is something to research and look into.
After a year or two in this loan, I would find a way to increase your monthly mortgage payment by about $600-700 a month, to knock out this balance and give you more opportunities when you want to refinance. I would not stay on the forty year payment cycle.
Let us all know how this works out. I am rooting for you. - 1yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@LaTonya Clark If you are saying you are $10K apart in a $265k vs. $275K acquisition and you believe a 40 year amortized loan is necessary to make the numbers work, this transaction may have bigger problems. You already seemed to conclude you are forcing this deal, I would agree unless there's a reason why this property will appreciate significantly in the near future and the 40 year amortization schedule allows you to hold on for that to occur. If that's not the case here, can you terminate the agreement without penalty at this stage?
- Real Estate Broker · NY · Member since 2020 · 70 posts · 27 votes1y
I can cancel the deal with no problems.
yes, I feel like I am forcing this bc I want it so bad. I’m really rethinking this.There are no comps in the area to support his price but I’m sure it will appraise, usually it does.
$275000 with 25% down, taxes $4080, insurance is 3000 yr and rents is $3800 month, Water $400 mth.
A.I. says I’m cutting it close. Everyone’s advice here is weighing heavy on me too. I really don’t know how to move forward.
- Member since 2024 · 5 posts · 2 votes1y
Those taxes of $4,080 for a property worth $275,000 are crazy. Am I understanding right that this is South Carolina (known for low taxes?) and not New York (known for high?).
Honestly, I would not be so close to walk away. You said yourself this can positively cash flow now, with the financing you were considering. I would see how the home inspection goes (get someone good) and make a assessment than on how you want to proceed. If you believe you can carry this place, without a negative carry, make any necessary repairs and can make changes to improve the rents... I would really consider moving forward.
I would also make tenants start paying water, as soon as their lease renewal comes up, with a flat monthly fee. In addition to looking for ways to increase rent, as I said before.
I'd shop around that insurance policy as well. I have landlord insurance on $1.5M houses, in wildfire zones that do not cost me that much. Maybe there is severe hurricane risk, but it is something I would look into.
A 4-Plex for $275,000 is unheard of, and fourplex and muti-family houses do not come on the market everyday. Do not shoot yourself in the foot and walk away from what could be a great property. Just make a plan like I said, and map it out. - Real Estate Broker · NY · Member since 2020 · 70 posts · 27 votes1y
Omg! I have awaken. I have started looking for another insurance quote, hard to find one that covers multi family. I will ask the seller who he uses. I was going to use the inspection as leverage, hopefully it’ll work in my favor but he was very stern. The seller just increased the rents to $950 starting in January 2025. The tenants have their own W/D so I can’t make money off that. Maybe I’ll buy outside sheds for each unit and rent to them. Idk. This seller has other property he’s putting on the market. I will post it b4 it hits the market.
- 1yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
So this is a Quadplex, very cool.
Ask him if he would carry back a second for part of the loan. Never hurts to ask. Could be 30 year amortization with a 5 year balloon. This would help you get going.
You might be able to make these a little nicer and force appreciation and a little higher rent.
Either way rents will go up over time and the mortgage with remain constant.
Maybe even make one unit a STR which could see higher income.
I'd be ok with break even or a little bit negative on a Quad given you have 4 properties in one.
If you're only breaking even you still have depreciation and other tax write off to help you out.
I usually make people 3 offers. One with low cash, one with some owner financing and a little less price. One with full Owner financing at their asking price. I don't even mention interest.
I did this recently and the guy picked the higher price with him carrying the mortgage for 5 years with no interest.
Turns out a probate for one of his parents needed to be done so we are paying for this. We are renting from him for $100/month while we finish probate. We just fixed up the house and have it on zillow with several applications in 24 hours.
We explained to him we would pay for probate and pay to fix up the house to get it rented.
The lease is for 5 years but dissolves once we close. This just protects our investment until probate is finished.
Get creative with your offers you never know what will interest a seller.
Have a conversation and find out their needs if you can before making offers.
- Real Estate Broker · NY · Member since 2020 · 70 posts · 27 votes1y
Thanks John for bringing that to my attention- creative financing. I’m starting to feel a little confident about moving forward. I will ask him to carry the loan for 5 years, no interest🤔, with $40k down and a balloon payment The 6th year. At least that avoids the banks closing costs right now. Did I miss anything
- Real Estate Broker · NY · Member since 2020 · 70 posts · 27 votes1y
Thanks John for bringing that to my attention- creative financing. I’m starting to feel a little confident about moving forward. I will ask him to carry the loan for 5 years, no interest🤔, with $40k down and a balloon payment The 6th year. At least that avoids the banks closing costs right now. Did I miss anything
- Real Estate Broker · NY · Member since 2020 · 70 posts · 27 votes1y
Quote from @Stuart Udis:
@LaTonya Clark If you are saying you are $10K apart in a $265k vs. $275K acquisition and you believe a 40 year amortized loan is necessary to make the numbers work, this transaction may have bigger problems. You already seemed to conclude you are forcing this deal, I would agree unless there's a reason why this property will appreciate significantly in the near future and the 40 year amortization schedule allows you to hold on for that to occur. If that's not the case here, can you terminate the agreement without penalty at this stage?
Stuart, part of me feel this property would appreciate not sure if it will be significantly or not, one can’t tell but I do know part of me is willing to take the chance.
- 1yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
@LaTonya Clark “One can’t tell but I do know part of me is willing to take a chance”…You make it sound as if real estate investing is no different than gambling…. It’s not. If you can learn to understand the fundamentals of a given market you can make informed investment decisions.
- Lender · United States · Member since 2020 · 1k+ posts · 499 votes1y
While less than 10% of the mortgage industry offers 40-year mortgages, here's something to factor in: they often come in with a rate increase of 20-35 bps.
Assume 35 bps.
$300k mortgage at 7.25% (30-year): $2,046
$300k mortgage at 7.6% (40-year): $1,996
Technically, it lowers the monthly, but not by much once factoring in the rate adjustment.
- Real Estate Broker · CA · Member since 2024 · 60 posts · 42 votes1y
As long as the buyer prioritize lower monthly payments and is confident that they can manage the long-term cost of a 40-yr loan - If the buyer plans to stay in the property for a long time.
Also, be sure to weigh these two drawbacks to a 40-year loan (paying significantly more interest over the life of the loan and building equity slower as compared to a shorter loan term). What's the buyer's exit strategy?
- 1yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votesI do not see how this works
Quote from @LaTonya Clark:
I can cancel the deal with no problems.
yes, I feel like I am forcing this bc I want it so bad. I’m really rethinking this.There are no comps in the area to support his price but I’m sure it will appraise, usually it does.
$275000 with 25% down, taxes $4080, insurance is 3000 yr and rents is $3800 month, Water $400 mth.
A.I. says I’m cutting it close. Everyone’s advice here is weighing heavy on me too. I really don’t know how to move forward.
$3800 (rent) - ~$1600 (p&i) -$340 (taxes) - $250 (insurance) - ~$1200 (maintenace/cap ex) - $380 (PM) - $180 (vacancy) - $400 (water) ~$50 (misc) = -$600/month
in a market that appreciation and rent growth has not historically kept up with inflation. Where is the return?
if i am going to be ~$600/month negative, it would need to be a market that has rent growth far greater than inflation.
good luck - Real Estate Broker · NY · Member since 2020 · 70 posts · 27 votes1y
@John Underwood that is such great advice! As a real estate broker I would make the same suggestion but as a buyer I feel so lost.. It's the weirdest thing. I have to think about how to go about this.
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