40 year mortgage option

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40 year mortgage option

Michael A.
Member since 2021 · 24 posts · 4 votes

I’ve been researching alternative financing options for my second property. I have seen that New American Funding, Newfi, and Griffin Funding have a 40 year mortgage with the first 10 years being interest only while the remaining 30 years are a fixed rate. I’m located in Austin and a loan option such as this one sounds attractive in this highly appreciating market. I understand the opposition towards this type of loan product but I feel that this option is good for folks like myself who are limited on funds but would like to invest in RE for the long term. Having the extra money the first 10 years will help us stabilize until we’re ready to rent out the house and will give us the opportunity to perhaps save for another property instead of parking money in the house itself. If the interest rate is in fact fixed after the initial 10 years, does anyone know if the rate will be predetermined prior to closing on this 40 year loan? Or will the interest rate be determined later in the future? I’m wondering if I could perhaps secure today’s rates despite this being a hybrid type of loan. I have no plans of selling within the next ten years and will likely pass this on to my children . If anyone has any additional info about such loan products in the Austin area please kindly share any details you might have. Also, I’d love to hear what others have to say about such option whether they are in Texas or beyond. Thank you in advance.  

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y

Deals are made...not found.  Deals are deals because of two components:

1 - Minimal cost to the REI. This isn't the purchase price. It's the cash that comes out of you pocket. This should be restricted to only the DP. Negative CF adds to your cost. I would never buy a property with negative CF. What's the point?

If a market has negative CF, I won't invest in that market.  It's just that simple.  There are too many markets the do cash flow...big time CF too.

2 - The Terms for how someone/something else pays for the rest of the property cost.

Even areas where it looks like there is no chance to get positive CF at the start, there could be ways to make that happen.  All you need to do is learn real strategies, invest in the correct market, and have a plan based on a series of connected financial steps to achieve your specific financial goals.

Like I said in the first statement above.  Deals are made, not found.  Deals are made from opportunities found, where you use the correct strategy to make that deal happen.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y

    If they gave me a 100 year loan with those terms I would be the first one in line.  As long as the property cash flows positive, and I'm assuming the longer term (and I know the interest only years will do this) will give me even better positive CF, this is a great option.  Remember, your tenant is paying the mortgage for you.  Your ONLY cost is what comes out of your pocket in the form of cash...which should be restricted to the down payment ONLY.

    PRofits start once you've recovered your cost (cash) in the form of cash (cash flow).  The higher the CF, the faster you will recover your cost.  

    2Reply
  • Michael A.
    OP
    Member since 2021 · 24 posts · 4 votes
    4y
    Originally posted by @Joe Villeneuve:

    If they gave me a 100 year loan with those terms I would be the first one in line.  As long as the property cash flows positive, and I'm assuming the longer term (and I know the interest only years will do this) will give me even better positive CF, this is a great option.  Remember, your tenant is paying the mortgage for you.  Your ONLY cost is what comes out of your pocket in the form of cash...which should be restricted to the down payment ONLY.

    PRofits start once you've recovered your cost (cash) in the form of cash (cash flow).  The higher the CF, the faster you will recover your cost.  

    Due to the highly competitive market and high cost of entry into the Austin RE sector cash flowing from day 1 is unlikely. Just like in other high cost areas I must wait for the cost of rents to go up before I’d be able to cash flow. It could be years but at least it’ll be interest only for 10 years. Austin is more of an appreciation play as opposed to cash flow. And that as we all know is riskier. Is this approach still worth in your opinion?

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y

    Deals are made...not found.  Deals are deals because of two components:

    1 - Minimal cost to the REI. This isn't the purchase price. It's the cash that comes out of you pocket. This should be restricted to only the DP. Negative CF adds to your cost. I would never buy a property with negative CF. What's the point?

    If a market has negative CF, I won't invest in that market.  It's just that simple.  There are too many markets the do cash flow...big time CF too.

    2 - The Terms for how someone/something else pays for the rest of the property cost.

    Even areas where it looks like there is no chance to get positive CF at the start, there could be ways to make that happen.  All you need to do is learn real strategies, invest in the correct market, and have a plan based on a series of connected financial steps to achieve your specific financial goals.

    Like I said in the first statement above.  Deals are made, not found.  Deals are made from opportunities found, where you use the correct strategy to make that deal happen.

    3Reply
  • Joshua JanusBusiness Member
    Realtor · Cleveland, OH · Member since 2021 · 1k+ posts · 1k+ votes
    4y

    As Joe said, getting to a positive cash flow position is the goal and the longer the loan term the better. Taking advantage of the 40 year long is definitely worth it. How long do you think you'd have to be cash flow negative or break even before the rents catch up to the home values in Austin? Your money might work better now in an out of state market if you have to wait a while for the return. 

    [email protected]614-502-5316Podcast Guest on Show From DoorDasher to $1.5 MILLION in Real Estate (All at 22 Years Old!)
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  • Trevor M.
    Rental Property Investor · Austin, TX · Member since 2020 · 10 posts · 9 votes
    4y

    If they do roll out a 40 year mortgage I think being early to the party would be the best bet. It will only be a matter of time until prices rise to offset the new loan length and we'll be back to barely finding 1% deals except now with a 40 year term. Same thing seems to be happening in the vehicle markets now that we have up to 96 month terms. People that couldn't afford a $40k car with a 5 year loan are buying $60k+ cars with 8 year loans.

    1Reply
  • Brandon Plombon
    Banker · Minneapolis, MN · Member since 2017 · 257 posts · 143 votes
    4y

    I'd like to see the loan terms - more than just the rate and amortization. I can't understand how a bank would want to keep this on their balance sheet for 40 years? Is the IO period adjustable? Pre-payment penalties? Ect.

    1Reply
  • Michael A.
    OP
    Member since 2021 · 24 posts · 4 votes
    4y
    Originally posted by @Joshua Janus:

    As Joe said, getting to a positive cash flow position is the goal and the longer the loan term the better. Taking advantage of the 40 year long is definitely worth it. How long do you think you'd have to be cash flow negative or break even before the rents catch up to the home values in Austin? Your money might work better now in an out of state market if you have to wait a while for the return. 

    I’m not 100% certain how long it’ll be by the time I cash flow. Austin is appreciating rather quickly so I would hope that it’ll take just a few years. But since I plan to live in the second home for a year or two, that can help with mitigating the negative cash flow. The good thing is that Texas does not have rent control so I can make adjustments to the future rent as the market grows without restrictions from what I understand. I’ve though about out of state but it’s tough moving my family around with a little one. Austin also has a job market that is appealing for my wife who in the future plans to return to the work force  

    0Reply
  • Michael A.
    OP
    Member since 2021 · 24 posts · 4 votes
    4y
    Originally posted by @Brandon Plombon:

    I'd like to see the loan terms - more than just the rate and amortization. I can't understand how a bank would want to keep this on their balance sheet for 40 years? Is the IO period adjustable? Pre-payment penalties? Ect.

    Unfortunately I just stumbled on this info yesterday and thought I should check in the other BP members for opinions before I move forward.  

    0Reply
  • Michael A.
    OP
    Member since 2021 · 24 posts · 4 votes
    4y
    Originally posted by @Trevor M.:

    If they do roll out a 40 year mortgage I think being early to the party would be the best bet. It will only be a matter of time until prices rise to offset the new loan length and we'll be back to barely finding 1% deals except now with a 40 year term. Same thing seems to be happening in the vehicle markets now that we have up to 96 month terms. People that couldn't afford a $40k car with a 5 year loan are buying $60k+ cars with 8 year loans.

    That’s what I was thinking. The 40 year plan buys me time which is important as you know. I noticed that you’re in Austin, do you know of any lenders that offer such a product locally?

    0Reply
  • Michael A.
    OP
    Member since 2021 · 24 posts · 4 votes
    4y
    Originally posted by @Brandon Plombon:

    I'd like to see the loan terms - more than just the rate and amortization. I can't understand how a bank would want to keep this on their balance sheet for 40 years? Is the IO period adjustable? Pre-payment penalties? Ect.

    From what I was reading the rate can be adjustable or fixed. And regarding pre payment penalties, you can arrange a higher interest rate on the loan to avoid it 

    0Reply
  • Michael A.
    OP
    Member since 2021 · 24 posts · 4 votes
    4y
    Originally posted by @Joe Villeneuve:

    Deals are made...not found.  Deals are deals because of two components:

    1 - Minimal cost to the REI. This isn't the purchase price. It's the cash that comes out of you pocket. This should be restricted to only the DP. Negative CF adds to your cost. I would never buy a property with negative CF. What's the point?

    If a market has negative CF, I won't invest in that market.  It's just that simple.  There are too many markets the do cash flow...big time CF too.

    2 - The Terms for how someone/something else pays for the rest of the property cost.

    Even areas where it looks like there is no chance to get positive CF at the start, there could be ways to make that happen.  All you need to do is learn real strategies, invest in the correct market, and have a plan based on a series of connected financial steps to achieve your specific financial goals.

    Like I said in the first statement above.  Deals are made, not found.  Deals are made from opportunities found, where you use the correct strategy to make that deal happen.

    Yes it would be great to have have positive CF as you said. But time is not on my side unfortunately. While on the house hunt I will need to be paying for rent until I actually find a deal. This could be months in this competitive market. I was considering a new build in an area that my wife and I feel has room for growth  

    0Reply
  • Brandon Plombon
    Banker · Minneapolis, MN · Member since 2017 · 257 posts · 143 votes
    4y
    Originally posted by @Michael A.:
    Originally posted by @Brandon Plombon:

    I'd like to see the loan terms - more than just the rate and amortization. I can't understand how a bank would want to keep this on their balance sheet for 40 years? Is the IO period adjustable? Pre-payment penalties? Ect.

    From what I was reading the rate can be adjustable or fixed. And regarding pre payment penalties, you can arrange a higher interest rate on the loan to avoid it 


    So they are passing along the interest rate risk to the end consumer via variable rate and paying more upfront in fees to avoid having pre payments penalties that ensures the bank makes x. IO loans are fairly common on the commercial side of the bank 1 or 2 years for construction projects is the norm. 10 years IO on a SFH, followed by traditional 30 year term/am... I've never heard of that. One way or another you'll be paying more for it. Yes - appreciation can outpace the expenses but at that point you're gambling if the property doesn't cash flow.

    0Reply
  • Michael A.
    OP
    Member since 2021 · 24 posts · 4 votes
    4y
    Originally posted by @Brandon Plombon:
    Originally posted by @Michael A.:
    Originally posted by @Brandon Plombon:

    I'd like to see the loan terms - more than just the rate and amortization. I can't understand how a bank would want to keep this on their balance sheet for 40 years? Is the IO period adjustable? Pre-payment penalties? Ect.

    From what I was reading the rate can be adjustable or fixed. And regarding pre payment penalties, you can arrange a higher interest rate on the loan to avoid it 


    So they are passing along the interest rate risk to the end consumer via variable rate and paying more upfront in fees to avoid having pre payments penalties that ensures the bank makes x. IO loans are fairly common on the commercial side of the bank 1 or 2 years for construction projects is the norm. 10 years IO on a SFH, followed by traditional 30 year term/am... I've never heard of that. One way or another you'll be paying more for it. Yes - appreciation can outpace the expenses but at that point you're gambling if the property doesn't cash flow.

    I believe you can secure a fixed rate as opposed to an adjustable. Yes it’s a gamble but I see no other way to secure a second property. I’m trying to leverage as much as possible and I’m not interested in renting out this house right away 

    0Reply
  • Ulric Donawa
    Lender · MD · Member since 2016 · 31 posts · 15 votes
    4y

    Michael.

    This "40 year" mortgage is a great marketing tool.  The average homeowner in the US (as of 2021) keeps their home for 10.5 years before selling.  The odds that you will be in the same house 40 years from now are slim.  That being said, what you should care about with an interest only loan is if there are exit fees of any kind when you're ready to sell or refinance.  Other than that the main downside is that you're not reducing the principal balance.  The main upsides should be low monthly payment (improved personal cash flow) and more interest to write off of any taxable income you have.  Good luck! 

    0Reply
  • Michael A.
    OP
    Member since 2021 · 24 posts · 4 votes
    4y
    Originally posted by @Ulric Donawa:

    Michael.

    This "40 year" mortgage is a great marketing tool.  The average homeowner in the US (as of 2021) keeps their home for 10.5 years before selling.  The odds that you will be in the same house 40 years from now are slim.  That being said, what you should care about with an interest only loan is if there are exit fees of any kind when you're ready to sell or refinance.  Other than that the main downside is that you're not reducing the principal balance.  The main upsides should be low monthly payment (improved personal cash flow) and more interest to write off of any taxable income you have.  Good luck! 

    thank you for the reply. This property will become a rental property so I will not plan on being there for 40 years. But yes the extra cash flow is a plus. If all goes well I will be contributing as much to the principal as possible to avoid the shock after the initial 10 years. I still have not cleared up the details regarding exit fees as you said

    0Reply
  • Jeff Harding
    Multi-family Investor · Seattle, WA · Member since 2012 · 4 posts · 4 votes
    4y
    Originally posted by @Michael A.:

    Just a heads up on this plan - verify with the lender that they'll recast the loan. The lenders I've spoken with on 40-year products don't allow a recast of the 30 year portion, so any principal you pay down shortens the loan term but does not reduce the payment.

    0Reply
  • Michael A.
    OP
    Member since 2021 · 24 posts · 4 votes
    4y
    Originally posted by @Jeff Harding:
    Originally posted by @Michael A.:

    Just a heads up on this plan - verify with the lender that they'll recast the loan. The lenders I've spoken with on 40-year products don't allow a recast of the 30 year portion, so any principal you pay down shortens the loan term but does not reduce the payment.

    Thanks for the heads up Jeff. Have you had any success obtaining this loan?

    0Reply
  • Jonathan SmallPro Member
    Investor · Suwanee, GA · Member since 2020 · 182 posts · 151 votes
    4y

    Hey @Michael A.  I have a little experience with 40 year mortgage.  https://newfi.com/home-loans/4...

    "For the first 10 years, you have the choice to decide the payment option. After the 10 years are up, the loan effectively becomes a standard 30-year fixed rate loan with the same interest rate, where each payment goes toward both your interest and reducing your loan principal."

    I am a long term buy and hold investor. My last 29 units were bought with DSCR loans. (DSCR) Debt Service Coverage Ratio

    The 40 year option gives you a lower payment.  As long as you manage your cash well then you can make this work for you.  Think about this.  You will be making payments in 2060 on a loan you made 40 years ago.  That means you get to lock in your mortgage expense today and reap the benefits for the next 40 years.  I like this option.  To drive home my point, think about the other extreme of a 5yr mortgage.  Payments are sky high.

    tip:  don't get a 40 year mortgage and use the extra money to buy depreciating doodads.  Use the low payments to free up money to buy cash producing assets.


    What would you save up for if you got a 40 year mortgage?



    2Reply
  • Ulric Donawa
    Lender · MD · Member since 2016 · 31 posts · 15 votes
    4y

    Michael,

    As Joe pointed out, cash flow is the name of the game.  However, to go a little deeper with this scenario if you have W2 income and you're paying taxes there, once you start renting the property your annual net will include the add back of the depreciation expense from the rental property, therefore reducing or eliminating your tax liability.  That factors into your annualized cash flow.  However, if this is a Variable rate product, unless there are some reasonable caps in place it would be more risk than it's worth unless you could exit without high exit fees.

    0Reply
  • Michael A.
    OP
    Member since 2021 · 24 posts · 4 votes
    4y
    Originally posted by @Jonathan Small:

    Hey @Michael A.  I have a little experience with 40 year mortgage.  https://newfi.com/home-loans/4...

    "For the first 10 years, you have the choice to decide the payment option. After the 10 years are up, the loan effectively becomes a standard 30-year fixed rate loan with the same interest rate, where each payment goes toward both your interest and reducing your loan principal."

    I am a long term buy and hold investor. My last 29 units were bought with DSCR loans. (DSCR) Debt Service Coverage Ratio

    The 40 year option gives you a lower payment.  As long as you manage your cash well then you can make this work for you.  Think about this.  You will be making payments in 2060 on a loan you made 40 years ago.  That means you get to lock in your mortgage expense today and reap the benefits for the next 40 years.  I like this option.  To drive home my point, think about the other extreme of a 5yr mortgage.  Payments are sky high.

    tip:  don't get a 40 year mortgage and use the extra money to buy depreciating doodads.  Use the low payments to free up money to buy cash producing assets.


    What would you save up for if you got a 40 year mortgage?



    do you mind sharing the details surrounding interest rate, points, and down payment options? Newfi does not provide details on their site 

    0Reply
  • Dan Bass
    Kansas City, KS · Member since 2019 · 58 posts · 66 votes
    4y

    @Michael A. That’s incredible! They have so many products!

    0Reply
  • Michael A.
    OP
    Member since 2021 · 24 posts · 4 votes
    4y
    Originally posted by @Dan Bass:

    @Michael A. That’s incredible! They have so many products!

    Are you talking about Newfi?

    0Reply
  • Jared RineBusiness Member
    Lender · Sacramento, CA · Member since 2009 · 1k+ posts · 277 votes
    4y

    @Michael A....I deal with many investors and they like that loan structure because it maximizes cash flow. The rate that you lock is the rate that is fixed for the whole term, no matter who's issuing the paper. Newfi is just one of MANY lenders in the space, and honestly they're not even in the conversation when I do these types of loans - debt service, based off property cash flow only, 40 Year fixed I/O (10 Years I/O, 30 Years fixed).

    Jared Rine United Lending Partners53 Reviews
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  • Dan Bass
    Kansas City, KS · Member since 2019 · 58 posts · 66 votes
    4y

    @Michael A. I looked up a company called arcstoneinc.com.  I believe they are out of San Diego or LA area and watched some videos on them 

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    4y
    Originally posted by @Joe Villeneuve:

    Deals are made...not found.  Deals are deals because of two components:

    1 - Minimal cost to the REI. This isn't the purchase price. It's the cash that comes out of you pocket. This should be restricted to only the DP. Negative CF adds to your cost. I would never buy a property with negative CF. What's the point?

    If a market has negative CF, I won't invest in that market.  It's just that simple.  There are too many markets the do cash flow...big time CF too.

    2 - The Terms for how someone/something else pays for the rest of the property cost.

    Even areas where it looks like there is no chance to get positive CF at the start, there could be ways to make that happen.  All you need to do is learn real strategies, invest in the correct market, and have a plan based on a series of connected financial steps to achieve your specific financial goals.

    Like I said in the first statement above.  Deals are made, not found.  Deals are made from opportunities found, where you use the correct strategy to make that deal happen.

     >Negative CF adds to your cost

    True.  The negative cash flow should be treated as additional cost. 

    >I would never buy a property with negative CF. What's the point?

    I can understand avoiding negative cash flow in some/many markets.  However, markets vary and have different criteria.  I have never purchased a property that projected cash flow negative, but I would not be adverse to doing so for the right property.  I have purchased properties that projected about cash neutral with my pro forma that projects all expenses.

    In my market I have purchased with bad timing (properties that fell in value approaching 20%) and great timing.  My worse appreciating property has appreciated $2700/month over its long hold.  Best appreciating is tougher to identify.  I have a property that has appreciated over $20k/month over its 12 month hold (not including the almost $200k value add) and another property that has appreciated over $7k/month over a long term hold. 

    Needless to say this appreciation far surpasses even horrendous negative cash flow and have produced outstanding return.

    RE markets vary in what constitutes a good purchase.  My definition is that it has to produce outstanding return over the hold period.  I do not care if the return comes from cash flow, appreciation, or value add (I will say value adds usually involve more effort and I have come to appreciate more passive options). To judge a property just on cash flow could result in passing up some great RE investments.  

    The criteria of a good purchase varies by market.  If cash flow was the only criteria investors would not purchase in areas like Austin of San Diego.  Case Shiller lists the 3 markets with highest return for buy and hold for this century as San Francisco, Los Angeles, and San Diego.  Note if you were choosing a market for cash flow, you would not be choosing those markets.  

    Good luck

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