Why would I NOT get a 35 year amort.?

[SpecialEd]

I recently had to take out a mortgage for a property I was buying (personal residence). I agree with the general consensus that a shorter amortization is better, far less interest over the life of the mortgage. Nevertheless, I got a 35 year amortization and here is why.

I can prepay 10% of the original mortgage amount once a year (i.e. $10,000 for every $100,000 borrowed. In my case about $30,000 per year). This prepayment goes directly to the principle.

I can increase my payments by 10% per year and the increase goes directly to principle (i.e. in year 1 I pay $1000 per month, in year 2 I pay $1100 per month, in year 3 I can pay $1210 per month).

I can also double my monthly payment (i.e. pay $2000 monthly in year one, $2200 monthly in year 2 etc.).

I understand these prepayment options to be quite typical and widely available at most insitutions (btw, I pay bi-weekly accelerated but am just using monthly numbers as examples).

Long story short, but doubling my payments, increasing them by 10% per year and making the 10% yearly prepayment, a 35 year mortgage gets reduced to about a 5 - 7 year mortgage. Even if you didn`t make the 10% yearly prepayment it is a considerable shaving off of the 35 years.

So, assuming that you have financial discipline, why not get a 35 year instead of a 25 year. You can simply set up the payments to make it a "25 year" mortgage, and you also have the benefit that if something unexpected happens you can drop back down to the monthly payment that is based on the 35 year term at any time.

 

[housingrental]

And its better for qualifying for other loans
I don`t have a good answer to your question beyond that for certain harder to finance property situations a 35 year amm might not be available, or might require a larger down payment from the lender, or might be at a higher interest rate, or available only through a different lender than one available for 25 year amm with less desirable issues as listed above (higher down payment, higher interest rate, etc..)

 

[invst4profit]

Because in the real world most people are not disciplined enough to actually excelerate there mortgage. Life gets in the way. Families, bills, emergencies, luxuries etc etc.

Forced payments on the other hand happen.

 

[Sherilynn]

I agree with Greg. Many people don`t want an LOC for the same reason. They would rather have set loan payments. These are likely the same people that require automatic savings transfers.

We have a 35-year am. on our primary residence so that we have flexibility. My husband is a med-evac pilot and for him to take a job with a major airline, he would have to take a major paycut. The flexibility of lower payments is important to us. But while he is making good money where he is, we prepay an average of $12k a year.

We are also currently looking at refinancing into an all-in-one product with an automatically-increasing HELOC. The ultimate in flexibility.

Sherilynn

 

[Rickson9]

Speaking for myself, I consider it a personal preference. Some individuals are comfortable with debt, others are less so.

Best regards.

 

[Nir]

QUOTE (SpecialEd @ Oct 24 2010, 02:41 PM) I agree with the general consensus that a shorter amortization is better.
Hi,
really you do? well for investment purposes shorter amortization is actually worse.

The reason longer amortization is better is: longer amortization means lower monthly mortgage payments ---> this means better cash flow ---> this means you need less properties to be financially independent! meaning you`ll be financially independent sooner!
Pls remember net income is calculated AFTER financing. so why in the world do people care so much about how much interest they pay the bank when those same loans from the bank are the ones allowing them to become financially independent one day.

Regards,
Neil

 

[luckyluciano]

QUOTE (investmart @ Oct 25 2010, 12:23 AM) Hi, really you do? well for investment purposes shorter amortization is actually worse. The reason longer amortization is better is: longer amortization means lower monthly mortgage payments ---> this means better cash flow ---> this means you need less properties to be financially independent! meaning you`ll be financially independent sooner! Pls remember net income is calculated AFTER financing. so why in the world do people care so much about how much interest they pay the bank when those same loans from the bank are the ones allowing them to become financially independent one day. Regards, Neil

Living off temporary positive cash flow of monies which typically would pay down debt before the introduction of the 35 and 40 year ammortization is mostly promoted on these financial/real estate websites. True net worth is equity and not how mant properties you hold. Cashflow based on these temporary low mortgage rates is just an delusion and exists for obvious reasons which can be heard all over the media, preventing a total collapse. Do you want to managing multiple properties squeeking out paltry cashflows for the rest of your life praying that real estate goes up forever an never comes down. The wealthy I know is large anf practically debt free. This comes from equity, not living off indebted cash flow.

 

[Rickson9]

This doesn`t seem like it will end well.

 

[bizaro86]

QUOTE (Rickson9 @ Oct 25 2010, 08:06 AM) This doesn`t seem like it will end well.


This discussion, or the idea of having a longer amortization?

Because the most interesting discussions in life (and on this forum) come when fundamental disagreements are debated with respect by intelligent, well-spoken people.

Personally, I keep my amortizations long, and invest the difference in paper assets, mostly individual stocks.

Michael

 

[housingrental]

Hi Lucky
You are correct
But it is still a good idea to choose a longer ammortization when selecting a mortgage in most situations.
This doesn`t prevent paying down debt - this just provides greater flexability to do things like paying off other debt, potentially at a higher rate than a mortgage, or using the funds to pay towards a capital improvement, etc..
It does require discipline to choose to pay off the debt when not obligated though.

QUOTE (luckyluciano @ Oct 25 2010, 08:09 AM) Living off temporary positive cash flow of monies which typically would pay down debt before the introduction of the 35 and 40 year ammortization is mostly promoted on these financial/real estate websites. True net worth is equity and not how mant properties you hold. Cashflow based on these temporary low mortgage rates is just an delusion and exists for obvious reasons which can be heard all over the media, preventing a total collapse. Do you want to managing multiple properties squeeking out paltry cashflows for the rest of your life praying that real estate goes up forever an never comes down. The wealthy I know is large anf practically debt free. This comes from equity, not living off indebted cash flow.

 

[Rickson9]

A real estate investor friend of mine suggested to me that a 20 or 25 yr am allows an individual to use the mortgage as a `emergency release valve` if things get tight - you can move the 20 or 25 yr am into a 30 or 35 yr am. He`s never had to do it since he makes sure he cashflows at 50% expenses at a 25 yr am, but likes the idea of a built-in safety net. Just a different perspective.

Best regards.

 

[SpecialEd]

QUOTE (Rickson9 @ Oct 25 2010, 11:57 AM) A real estate investor friend of mine suggested to me that a 20 or 25 yr am allows an individual to use the mortgage as a `emergency release valve` if things get tight - you can move the 20 or 25 yr am into a 30 or 35 yr am. He`s never had to do it since he makes sure he cashflows at 50% expenses at a 25 yr am, but likes the idea of a built-in safety net. Just a different perspective.

Best regards.

If I understand this correctly this is almost the exact mirror image of what I suggested. In my case, I get a 35 year am, but starting from day one I double the payments (or increase them as the case may be) to make it (for practical purposes) a 25 year am. If I need the "emergency release valve" I just reduce my payments back to what they originally would be under a 35 year am. No approval or paperwork necessary.

I recognize that longer ams = lower payments = greater cashflow. That being said, with this particular property I am doing the following:

a) 20% down, 35 year am, open Heloc right away.
b) every $ paid to principle generates an additional $ available in the Heloc.
c) double the payments and increase the bi-weekly payments by 10% each year.
d) once a year make the 10% annual prepayment using the money that is available in the Heloc (that has become available due to aggressive paydown)
e) repeat each year for 4.5 years.

The original mortgage was for just over $300,000. In about 4.5 years, the mortgage will be 0. The Heloc will be about $150,000 - $160,000 (don`t have the actual numbers with me right now).

So at that point I will only have to pay the interest each month. I will have moved out and rented out this property. The rent will easily cover the interest on the Heloc and leave me with a ton of leftover cashflow. I can use this cashflow to either reduce the Heloc or put into other properties / pay down other debt.

If I wanted to, I could let the $150,000 sit on the Heloc forever and have an interest only mortgage with a ton of cash flow.

 

[Nir]

QUOTE (luckyluciano @ Oct 25 2010, 05:09 AM) Living off temporary positive cash flow of monies which typically would pay down debt before the introduction of the 35 and 40 year ammortization is mostly promoted on these financial/real estate websites. True net worth is equity and not how mant properties you hold. Cashflow based on these temporary low mortgage rates is just an delusion and exists for obvious reasons which can be heard all over the media, preventing a total collapse. Do you want to managing multiple properties squeeking out paltry cashflows for the rest of your life praying that real estate goes up forever an never comes down. The wealthy I know is large anf practically debt free. This comes from equity, not living off indebted cash flow.Hi lucky Luciano. wrong, buying more properties is indeed expected to increase your net worth significantly. yes, there is risk buying RE but it does not contradict this. Regards, Neil

 

[gwasser]

QUOTE (investmart @ Oct 24 2010, 11:23 PM) Hi,
really you do? well for investment purposes shorter amortization is actually worse.

The reason longer amortization is better is: longer amortization means lower monthly mortgage payments ---> this means better cash flow ---> this means you need less properties to be financially independent! meaning you`ll be financially independent sooner!
Pls remember net income is calculated AFTER financing. so why in the world do people care so much about how much interest they pay the bank when those same loans from the bank are the ones allowing them to become financially independent one day.

Regards,
Neil

Neil,

Your mortgage paydown is part of your net rental income. Only the interest is tax deductable. Positive cash flow is not the only portion of your rental income that is taxable. If you did not include mortgage paydown in your rental income on your tax return, better talk to your accountant.

The real reason for having a 35 year mortgage on your principal residence is indeed flexibility. That way you are in control of your personal discretionary income not the bank. At year end you can review how much extra cash you have available for paying off your mortgage faster using your penalty free lumpsum payment. The latter is these days typically a maximum of 20% of the initial mortgage principal.

The disadvantage is that many people do not have the self discipline to make the annual lumpsum payment. Hence, personal finance books like the Wealthy Barber suggest, `you pay yourself first`, i.e. put a fixed amount of money in a (investment) savings account and only use the remainder to cover your costs of living.

Personally, I see a clear title residence as a solid base of my financial position. This way if something goes wrong, e.g. a layoff I don`t have to worry that I can`t pay the rent. But others may look at a personal residence as a straight investment and they feel that money tied up in your residence is `dead money`. Not entirely true either (annual appreciation and `free rent`).

The compromise is to put a HELOC on your residence after it is paid off and use that to finance other investments. It really is all in the eye of the beholder and it is often, just like with the accellerated mortgage paydown strategy, a matter of self discipline and personal preference. BTW interest paid on a HELOC used to finance investments is tax deductable; interest paid on a residential mortgage is not.

 

[JimWhitelaw]

QUOTE (gwasser @ Oct 27 2010, 08:07 AM) Your mortgage paydown is part of your net rental income. Only the interest is tax deductable. Positive cash flow is not the only portion of your rental income that is taxable. If you did not include mortgage paydown in your rental income on your tax return, better talk to your accountant.
With respect, I think this is wrong. You don`t include mortgage paydown as a specific line item in rental income. It`s already accounted for in the reporting of your gross rental income. It`s not an allowable expense, so it sort of "falls out" of the equation when you deduct your interest and other allowable expenses. I`ve never seen it reported separately on a property income statement. It goes to equity, not current income.

 

[gwasser]

QUOTE (JimWhitelaw @ Oct 27 2010, 10:23 AM) With respect, I think this is wrong. You don`t include mortgage paydown as a specific line item in rental income. It`s already accounted for in the reporting of your gross rental income. It`s not an allowable expense, so it sort of "falls out" of the equation when you deduct your interest and other allowable expenses. I`ve never seen it reported separately on a property income statement. It goes to equity, not current income.

Hi Jim,

I am not talking about the actual way the tax form regarding rental income is filled out. I have no idea about that, my accountant does. But I do know that only the interest is deductable from your taxes and that the mortgage paydown ends up in your taxable profits. So I don`t think we have a disagreement. Your comment is more supplemental as to how interest and mortgage paydown are dealt with on the tax return form.

 

[bizaro86]

QUOTE (gwasser @ Oct 27 2010, 08:07 AM) interest paid on a residential mortgage is not.

Interest deductibility comes from what you use the funds for. If you own a free and clear house, and take out a residential mortgage against it (or a heloc) and use the funds for investment, the interest paid is tax deductible.

It may be beneficial to use a heloc for this (as you can make interest only payments) on the other hand, it may be beneficial to use a mortgage, as the interest rate is likely to be lower.

Michael

 

[Sherilynn]

QUOTE (gwasser @ Oct 27 2010, 08:07 AM) Your mortgage paydown is part of your net rental income.

BTW interest paid on a HELOC used to finance investments is tax deductable; interest paid on a residential mortgage is not.

I would not consider mortgage paydown as part of income until I sold the property. (Of course, technically it is not income but higher paydown increases income by decreasing interest expenses).

Also, as far as HELOC`s go, your interest on an LOC secured against your principle residence is tax deductible if the LOC is 100% for business purposes, so you can have an all-in-one mortgage on your principle residence with an LOC component dedicated to business expenses and that interest would be tax-deductible. (Some people use one LOC and try to track the personal vs. business purchases, but that is just crazy talk.)

Regards,
Sherilynn

 

[gwasser]

QUOTE (Sherilynn @ Oct 28 2010, 09:26 PM) I would not consider mortgage paydown as part of income until I sold the property. (Of course, technically it is not income but higher paydown increases income by decreasing interest expenses).

Regards,
Sherilynn

It is kind of like compound interest GICs. People figured that if they didn`t collect interest payable for a GIC and re-investing it into the same GIC that they would not need to pay taxes on the interest until the GIC matured. The Federal Government caught on, and now you have to pay taxes on the interest annually, whether it compounds in the GIC or wether you receive it at regular time intervals (monthly,semi-annually. etc.).

The same with money that you receive from your tenant and that you reinvest to pay down your mortgage. Just because it is reinvested to pay down the mortgage does not make it tax free. It is part of your net income and you will have to pay tax on this every year.

Maybe a true accountant can clarify this. Because either I pay too much tax or some of you pay too little.

 

[Thomas Beyer]

QUOTE (invst4profit @ Oct 24 2010, 05:03 PM) Because in the real world most people are not disciplined enough to actually excelerate there mortgage. Life gets in the way. Families, bills, emergencies, luxuries etc etc.

Forced payments on the other hand happen.
indeed ! Well said !

Think of the mortgage paydown as a forced savings plan !

Try to get to a point very quickly were you have NO MORTGAGE .. just a line of credit.