24 Responses to “The 40yr mortgage”

1. mtnrunner2
   March 7th, 2006 08:00
   1

   Why ever pay off your house? That’s the old way. People used to build equity by paying principal. Boy, those were the old days!

   Now, you build equity by appreciation. As a friend/loan officer told me,” I sold, and just made $100,000/year on my house.”

   With income like that, who needs to pay off principal?

   When you want to eliminate those pesky payments (retiring, job loss, etc.), sell your house and downsize, or take the equity and pay cash for digs in Wyoming.

   Any objections?

2. Bubble Butt
   March 7th, 2006 12:17
   2

   mtnrunner2:

   Stop trying to pretend you are one of those people in the “it’s different this time” crowd. I have seen you post here and on Ben’s Blog. You dont fool any of us.

   We all know that the building equity by appreciation only works if prices go up. If prices go down or stay flat for a while (and you’re unlucky enough to retire, need to move due to job etc..) you will wish you had paid down some principal.

   I object.
   Stop trying to pretend we are all stupid like those other guys posting on the flipper blogs.

   BB

3. hectore3
   March 7th, 2006 17:28
   3

   An update from Boston, Condos down the street from me in a “hot” area have dropped from 299,000 to 269,000. This was the first reduction and we are not even in the spring yet! I really don’t know how some people keep on thinking that the “old way” of paying off your properly priced mortgage is obsolete. Was it not the same type of thinking that got people burned during the tech boom?

4. invest3
   March 7th, 2006 17:30
   4

   I think mtnrunner2 was being sarcastic… I hope.

5. B. Durbin
   March 7th, 2006 22:38
   5

   Oh, yes, mtnrunner2 has posted much elsewhere and is being sarcastic.

   Remember your sarcasm tags, folks! Some people don’t catch it.

6. arizonadude
   March 8th, 2006 06:23
   6

   40 year loans only prolong your misery of interest on the loan. For an extra 100 or 200 a month I’d much rather have 10 less years on a loan. As someone stated I don’t people ever intend on paying these loans off. Most people will go to their graves oweing on their homes.

7. Mort
   March 8th, 2006 06:41
   7

   In forty years some of those houses I’ve seen will be nothing but a pile of junk. Banker: Uh, sir, you still have thirty years left on that Mortgage. Borrower: But it’s nothing but a pile of junk! Banker: that really doesn’t change anything sir…

8. Mort
   March 8th, 2006 06:46
   8

   The ones that really crack me up are the $400k trailer houses. Is land really that expensive in CA? $400k for a small lot with a trailer on it? Around here you can get a nice trailer, slightly used, delivered, for under $20k. What gives?

9. need 2 leave ca
   March 8th, 2006 07:14
   9

   in California, they provide a solid gold shitter that brings the value up. IT is a symbolic reminder of what has happened there, and you pay for it.

10. need 2 leave ca
    March 8th, 2006 07:15
    10

    and that goes for the low end trailers at $400K. Don’t get me started on the houses.

11. hectore3
    March 8th, 2006 07:35
    11

    These 40 year mortgages are no different than ghetto 7+ year auto loans. You are being sold the payment of the car not the complete cost. All this bull being spun up by these bankers is truly amazing. It’s obvious that they are trying to get the last remaining dregs of profit. I would hate to be the party in power now. No matter what the case the people in charge get the blame. When all this fantasy ends.

12. AZgolfer
    March 9th, 2006 06:32
    12

    http://realestate.msn.com/buying/Articlenewhome.aspx?cp-documentid=338165

    Check out this article!

13. John
    March 9th, 2006 06:58
    13

    THE 40 MORTGAGE—–

    Here we are to save the day……..wrong here we are to make your monthly payments a little lower and have you pay allot more in mortgage interest.

14. s.m.
    March 9th, 2006 07:21
    14

    AZgolfer- Thank you for that article. Most interesting.

15. Deja Vu
    March 9th, 2006 10:59
    15

    AZgolfer - Interesting article. Frustrating, though. What date was it written? I guess you can back it out by the 14 interest rate hikes from the Fed…What exact dates were used for the regional foreclosure rates in the article? Where to find the raw data? Do you know? this is going to be something worth tracking - accurately.

16. AZgolfer
    March 9th, 2006 12:25
    16

    I saw the article on MSN home page and thought I would put up the link. I think the foreclosure thing in real interesting.

17. mtnrunner2
    March 9th, 2006 14:00
    17

    I guess my sarcasm wasn’t clear enough.

    What I posted were the words of my loan officer/neighbor. Her logic makes perfect sense, but only while prices keep rising. At some point, the gig is up!

18. need 2 leave ca
    March 10th, 2006 10:19
    18

    great article in the San Francisco Chronicle. it is self explanatory

    http://www.sfgate.com/cgi-bin/article.cgi?file=/gate/archive/2006/03/10/carollloyd.DTL

    Friday, March 10, 2006 (SF Gate)
    Home Sweet Cash Cow/How our houses are financing our lives
    By Carol Lloyd, Special to SF Gate

    The phone rings as I’m making dinner. Could be my contractor, who
    wants
    another fat check written from my equity-line checkbook. Could be the
    mortgage broker getting back to me about new refinancing.

    “Hello,” says a syrupy recorded voice. “Our records show you may be
    available for a new mortgage with monthly payments at only 1 percent
    and
    another $100,000 cash out with no documentation …”

    Lately, our lives seem to be inundated with mortgages of various
    kinds,
    and we’re taking advantage of them in droves. Last year, homeowners
    extracted some $600 billion in equity from their homes through
    refinancing
    and equity lines.

    But those are mere numbers. That I too have succumbed to this
    mortgage
    mania shows just how far it has seeped into the American psyche. I
    always
    considered myself a fiscal conservative. Credit cards get paid off to
    zero
    each month. Can’t afford it? Don’t buy it.

    How did I change?

    A decade ago, I remember my mother telling me that after nearly 20
    years
    of residing in their home, which my father had designed and built for
    about $75,000, my parents had a mortgage of over $500,000.

    “What happened?” I asked my mother disapprovingly.

    She waved my concerns aside. “This house is a bank,” she said.
    “We’ll
    never pay it off.”

    A bank? After that, I could never think about our lives in quite the
    same
    light. My parents were self-made. They were from poor, working-class
    families with five and eight siblings, and had put themselves through
    college, worked hard, and never got a dime from any parent or
    grandparent,
    dead or alive.

    But suddenly I realized that their college educations and hard work
    might
    not have been enough to cover certain … luxuries. Like trips to
    Europe
    or my tuition at a private high school or my mother’s painting habit
    that
    sometimes took time away from her more lucrative work.

    Now, I saw that our flexibility, creativity and cultural privileges
    were
    in part due to the reality of late 20th century coastal California real
    estate and my parents’ willingness to bet the farm on the future. Our
    house — a two-bedroom, redwood cathedral perched on a hillside at the
    mouth of Carmel Valley — was a creative feat, a family home and the
    very
    embodiment of my parent’s lifelong collaboration. But its rising value
    also made it something else: a financial instrument.

    Traditionally, money “taken out of one’s house” has been used to
    finance
    home-renovation projects. But according to an informal survey, more and
    more people are approaching their homes as their own private bank, with
    the equity line or refinancing serving myriad purposes. Some people use
    it
    to ride out difficult times during health crises and periods of
    unemployment. Others take advantage of its tax deductions (you can
    write
    off the interest), using it to consolidate credit card debts, pay for
    college tuition for their children and finance new cars.

    Maggie Vaughn of San Francisco used her equity line to get herself
    off the
    credit card merry-go-round by using the money to pay them off all at
    once.
    “I was throwing all my cash at [my credit cards] to pay them off, and
    therefore had very little cash to spend and would often end up using
    the
    cards again,” she explained. “Now, it’s great! I pay cash for
    everything
    and do not charge anything and can even save money now.”

    And because equity loans are flexible — you only pay for what you
    spend
    – one loan can be used to attack several financial issues over a
    period
    of time. Marcus Pun of Oakland is considering getting a new equity line
    to
    pay off his credit card debt (used to foot the bill for his daughter’s
    private school tuition), to pay for living expenses during a slowdown
    in
    work, to pay for remodeling his house to rent or resell it, to attend
    technical classes and to take his first real vacation in 14 years.

    Although most people I heard from are using equity lines as a
    lesser-of-two-evils debt (better this than a credit card or a new car
    payment), some intrepid souls are tapping equity as a source of
    investment
    capital.

    Lynn Ruth Miller, who bought her Pacifica home for $97,000 in 1985,
    is
    living on the equity from her house and investing part of that money to
    get earned income. “I could not survive if I didn’t do that because my
    fixed income is $720-plus a month,” she wrote. “Because of the rise in
    property values I am living very comfortably and could not possibly pay
    my
    bills otherwise.”

    Some even factor the monthly payments of the equity line into the
    equation. My mortgage broker, Michael Simmons, once had a client who
    took
    out a $500,000 equity line to pay for her elderly mother’s home care
    and
    the monthly payments of the equity line itself. When I implied that
    this
    was nutty, he begged to differ. “It was a perfect use of the equity
    line,”
    he said. “It’s more flexible than a reverse mortgage and doesn’t
    involve
    the equity sharing.”

    Indeed, equity lines — although they can be abused — offer
    homeowners
    loans with tax-deductible interest that non-homeowners just don’t have.
    After decades of massive appreciation, most longtime homeowners have
    very
    different financial pictures than their non-property-owning
    counterparts.
    Equity lines of credit are also being used as a way for parents to
    ensure
    that their children enjoy similar privileges.

    Geoff Caldwell of San Francisco, used an equity line to avoid
    expensive
    dormitory fees, by buying a house for his daughter to live in during
    college.

    Edward Malouf of Novato funded a condo for his son. “We paid all
    cash for
    it, and our son made every payment, as agreed,” he explained. “Because
    of
    this, we allowed him to keep the appreciation when he sold the condo,
    so
    he could buy a larger, three-bedroom one.”

    Equity lines and second mortgages haven’t always played such an
    integral
    role in American life. In the old days, taking out a second mortgage or
    an
    equity line had a certain stigma attached.

    “It meant you were the sort of person who couldn’t pay your bills —
    that
    you were living above your means,” Simmons explained. But over the past
    20
    years, he’s seen things change. “Taking out an equity line has become
    common, prudent, easy.”

    Indeed, treating the home as a bank has grown naturally out of a sea
    change in our attitudes about debt. Once, credit cards also carried a
    stigma; now they are ubiquitous in all classes of society. As more and
    more people began to pay exorbitant credit card interest rates, equity
    lines — with their relatively low interest rates — suddenly looked
    downright practical.

    “When rates were down around 4 percent,” Simmons said, “if you were
    in a
    30 or 40 percent tax bracket and could deduct interest payments, it was
    almost like free money.”

    Now, we’ve become gamblers with our homes. With the rise of equity
    lines,
    40-year mortgages, second-home loans and constant refinancing, it’s
    obvious homeowners are counting on real estate prices continuing to
    rise.

    “For our parent’s generation the goal was to buy a home, pay it off
    and
    retire, owning your home free and clear,” Simmons said. “Now, most
    people’s goal is to buy a home that you can afford, live in it for a
    while
    until it appreciates, then buy something more expensive, live in it for
    a
    while and wait for it to appreciate, and so on. Then finally sell and
    buy
    something smaller free and clear for retirement. People look at their
    homes as a tool, a vehicle, an investment. ”

    This has in some ways changed our very notion of home. Home
    ownership
    isn’t a road to dominion but a temporary investment you can enjoy.

    “I think most people see their homes as somewhat transitory, and
    they’re
    almost resigned about it,” said Simmons. “Say you have a house that’s
    worth $1.3 million. Is it a reasonable expectation that you’ll ever pay
    it
    off? Probably not. The most people hope for is that someday they’ll
    sell
    it for a profit or leave it to the kids, who might have to sell it but
    will maybe make a little money.”

    But now the days of free money are long gone. Last year, the Fed
    raised
    interest rates 13 times, and my own equity line has jumped almost two
    points in six months.

    As the short-term interest rates rise, people may begin to be less
    cavalier about home equity funny money. But the mortgage industry has
    sold
    the benign idea of refinancing and equity lines to the American
    homeowner,
    and it will take more than interest-rate hikes to change that cozy
    perception. It’s going to take falling home prices, rising rates and
    the
    next fiscal crisis.

    Ten years ago I was horrified by my parent’s use of our family home
    as a
    source of cash, but now I see things differently. Would it have been
    better to have paid off the house and lived mortgage free? Maybe. But
    going that route would surely have meant curtailing their choices
    earlier
    – never giving their kids college tuition, or working extremely long
    hours, or having to get corporate jobs instead of working for
    themselves.

    In hindsight, treating our house like a bank worked wonders. But
    that
    doesn’t mean the nation following in their footsteps will experience
    the
    same real estate magic. After all, my parents were lucky enough to be
    homeowners during the longest period of economic expansion with the
    most
    explosive real estate growth. I can’t say the next generation of
    homeowners should expect the same — though I too have bet the farm on
    it.

    Carol Lloyd is currently at work on a book about Bay Area real estate.
    She
    teaches a class on buying your first home in the Bay Area, and another
    class based on her best-selling career counseling book for creative
    people, “Creating a Life Worth Living.” For more information, email her
    at
    surreal@sfgate.com.

19. need 2 leave ca
    March 10th, 2006 11:01
    19

    Attention passengers, this is your captain speaking…

    Click here for inspiration.

    1/1/05, 248 downtown condos for sale — 9/21/05, 513

    [Note, the above link disappeared after showing condos for sale topping out at 528. Here is another site dedicated to tracking housing, though it doesn’t go as far back.]

    [Note on note: Thanks to Lew Breeze for pointing out that he does have his information still available here.]

    We’re running about 20 minutes late for our landing in San Diego. We apologize for the delay but there are currently massive headwinds for all flights incoming to the San Diego area due to the deflation of the housing bubble. There will also be some chop from high winds escaping the massive high-pressure sales zone. This turbulence is only made worse as the hot air spewed out of the mouths of realtors meets the cold, harsh wind of reality. That and the major draft differential on the freeways as 5 and 15 North are packed with cars, while the Southbound lanes — towards San Diego — are entirely unoccupied.

    If you look out of the left side of the plane as we approach the airport you can see the downtown area of San Diego. Despite appearances, that is NOT a fungus growing on the city. Those are merely “For Sale”, “For Rent”, and “Open House” signs. Once our aircraft gets low enough you will be able to make out the tattered remains of the giant sign advertising “Luxury Downtown Condos, from the mid $600,000s”. Yes, that’s right folks, even though the sign is now quite faded, you can still make out the price that is three times the current value of a downtown condo! It is a shame the building it was on was never completed either, a bit of an eyesore, what with the first five stories mostly complete and the upper portion mostly a skeleton… but investors won’t touch this area anymore, and construction companies, from owners to workmen, refer to San Diego as “San Die-gone”. Incidentally, with it’s easy street access from the abandoned scaffolding, the exposed tenth floor of this particular building is commonly known as “Speculator’s Leap”. Someone should probably board that up, but then again… naaaaah….

    To the right of the aircraft you’ll be able to see Ditech Park, home of the San Diego Padres. Though it won’t be called Ditech Park for much longer, as the name will be auctioned off in the bankruptcy proceedings for the now defunct company. Real estate does happen to be the focus of one remaining growing San Diego industry however… prosecuting criminal real estate and mortgage fraud that is! Starving construction companies are vying desparately for state money to build the new prisons that are going to be needed for these people. Hmmm, I guess they really are going to be set for life…

    Finally, please do not be alarmed by the whining sound which will increase in volume as we descend. This is not, I repeat, NOT a mechanical problem. It is merely the wailing of thousands of condo owners in their own private purgatory. They wish to leave, but they owe far more than they can get for the space between their four concrete walls. Ironically, every time one of them does give up the ghost and just make a runner for it, leaving an empty foreclosed condo, it lowers the value of their property, but actually raises their homeowner’s association fees. If the association can even collect them, that is. The worn carpet and burned out bulbs in the lobbies of most of these buildings is a testament to that!

    Well ladies and gentlemen, thank for flying with us today, we know you have a choice when you travel (though not when you fly as Southwest is the only remaining carrier still serving the San Diego area…) Looking about the cabin you can see that, as usual, the incoming flight to San Diego is mostly empty. However our outbound flight, also as usual, will be full (and impatient), so please check to make sure you have all your belongings and we thank you for being ready to exit the plane quickly…

    … so I can get the hell out of this Godforsaken city. Man, nice weather, but everyone here is just so depressed you know. Used to be a fun place, but downtown is dead now, dead. No one feels like partying and I guess there isn’t any money left to party with now that the funny money dried up. But hey, did I tell you what my friend’s brother’s Uncle’s former roommate made a bundle of money investing in? I lost my entire IRA/401K in the dot-com thing and my wife and I had to declare bankruptcy last year after our two I/O ARMs expired and adjusted up… can you believe that bad luck?! Anyways this should be able to make everything back… and more! It seems he….

    Oh crap, this thing still on? It is? Godam~click

20. Michael
    March 10th, 2006 13:08
    20

    The payment on an interest only loan is still less than the payment on a [ficticious] 100 year mortgage (or 1,000,000 year mortgage, for that matter).

    Nothing can save the market now from the bursting of the credit bubble that was caused by people only focusing on the payment.

21. hectore3
    March 10th, 2006 17:48
    21

    People have to live below their means. That entails no more 200.00 dollar cable sports packages,matching SUV’s,and keeping with the Mr. Jones new boat and such. Then there would be no need to take out so many second mortgages. This country is so amazingly pig like. We have a negative savings rate. And many boomers over 50 have less than 25,000 dollars in their retirement accounts. God help them, because I won’t.

22. Renter in Arlington,VA
    March 11th, 2006 09:16
    22

    I realize that we are talking about 40 year loans in the context of lower payments, higher loans, propping up the bubble, etc. However I think from a pure financial standpoint a 40+ year can make a lot of sense for the financially disciplined (a group of debatable size).

    As loan terms lengthen from 40, 50, 100, 1000 years they essentially become “interest only” fixed-rate loans. Obviously fixed rate is crucial but I don’t think there is anything inherently wrong with interest only. A fixed percentage of my after-tax paycheck is invested every month. I could either use this money to pay off principle on a loan or I could put it in a mutual fund.

    If my mutual fund makes more than my mortgage rate (historically pretty common), OR if my marginal tax rate is higher than the Capital Gains tax rate (common for most homeowmners) OR simply because my taxes are deferred until I sell my shares yet my interest deduction is immediate (ie presuming some inflation, present value of the future taxes is less) I will be better to invest my money than pay off a mortgage.

    Using loans to discipline people into saving, by investing in mortgage principle, is certainly a valid argument but I think that may obscure the very real financial merits to 40+ year loans.

23. Anonymous
    March 11th, 2006 11:09
    23

    I use a home equity line of credit to finance my business. Yes, I’m “betting the farm,” but the interest rate is less than half of what I would pay for a business line of credit.

24. Eskimosik
    November 20th, 2007 10:10
    24

    Hail

    What do you think about this? When it happens?

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