HMW #127: Why the 30 year mortgage is superiorNov 08, 2023
Read Time: 9 minutes
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Unsure which mortgage to get? Leaning towards the 15-year fixed? Or interest only? Maybe an adjustable rate mortgage (ARM)?
There is super easy to answer to this, and it's something you'll never need to think about again. The answer is 30-year fixed mortgage (could you tell that from the subject line?). This is the best loan product for your long-term rental, short-term rental, primary, secondary, or any other real estate you purchase. Any deal, anywhere, any price point - the 30-year fixed mortgage is what you want.
Learning and understanding why the 30 year fixed is superior will set you up for success in real estate and even protect you from making mistakes.
Whooo boy... I suppose I am trying to save you from f*cking yourself over. So I'll accept it.
However, a big mistake many investors make is they try to pay off their mortgage as fast as possible.
This leads them to talk themselves into a variety of lesser loan products by getting:
- A 15-year fixed will allow them pay it off faster
- An ARM (Adjustable Rate Mortgage) as they expect rates to go down
- An IO (Interest Only) loan to maximize today's cash flow over everything
Don't worry! Every newbie has these thoughts. It also doesn't help that Dave Ramsey and Suze Orman promote this backwards way of real estate every chance they get too. They don't understand real estate either.
So let's get you some protection from yourself and get those bad thoughts out of your head with some education on why the 30-year mortgage is the best thing ever:
Reason 1: It's the best inflation hedge that exists
All things go up in price eventually. Money gets printed, so we have more dollar bills than we had before, and this makes each dollar bill worth less than it use it. A dollar bill is less rare with each printing and is worth a little less. This increase in prices to overcome the printing of more dollars is called inflation.
Let's look at this affect on a Coke (not a sponsor, but we're here for it). The price used to be a nickel, then a dime, then fifteen cents, then a dollar, then two dollars, and now it's three dollars. It's had more or less the same ingredients (minus the actual coke) and it's been the same size for the last 60 years.
If you had a magic wand that allowed you to lock in the price of Coke for 30 years at $3 would you do it? How about a gallon of milk? Or the price of new car? I would say yes to every single one of these because I know in 30 years the chances are each item I buy regularly will triple or quadruple in price over the next 30 years due to inflation.
So, why not lock in the most expensive thing you possibly can, like the price of paying for a house over a 30-year time span? This is a huge financial advantage every property owner with a mortgage has. Everything around you will be getting more expensive, except your mortgage. It will actually feel like you are paying less and less each month each year thanks to inflation to. Three dollars in the future will only buy a half a can of Coke, but you can still pay those same three $1 bills in the future towards your mortgage payment and it's worth exactly the same.
This is why your grandmother looks like a real estate genius. When she bought her property it was expensive and probably felt like a stretch to buy it. But today? She's paying the cheapest mortgage payment of anyone you know and just let time do it's thing.
Now, I (Alan) ask: why would you want to shorten this benefit with a 15-year mortgage? Or make extra payments each month to pay this off so you don't get this inflation hedge anymore? If you like math, and trust in math, then math says don't pay of your mortgage early if you want the best return on your finances.
It's okay! The good news is that now you do know. And you'll be better off for it moving forward. Let's talk about other benefits as well.
Reason 2: You control the timing on the sale of your property
ARMs and IO loans have a short-time lines where you are forced to refinance your property within the first 1-7 years.
But what happens in 3 years when you've lost your job and you can't get qualified for a new loan? Your only choice is to sell. What happens in 5 years when interest rates are at an all-time high and the only way to sell your property is by a massive price drop? Or you refinance at the higher rates, but now your mortgage payment is higher and you no longer cash flow.
You can avoid having your mortgage force your hand on timing with your assets if you use a 30-year mortgage. You can refinance the property whenever you want (to a new 30-year mortgage of course), you can sell when you want or not at all, or you can just enjoy the rent you charge going up each year thanks to inflation while your main expense will just stay the same. You have all the power with a 30-year fixed mortgage, which is obviously the best position and so easy to accomplish..
Reason 3: Best residential loan for your DTI
You want to buy real estate, right? And maybe you want to buy more real estate again in the future? Well, you can get as many loans (upto 10) as your debt-to-income (DTI) allows, and that ratio is usually 50%.
A 30-year mortgage spreads out your payments over 30 years, which makes you have much lower monthly debt commitments than a 15-year mortgage would have. So, it's easier to get approved for another loan, and another, and another. You are capping your own real estate growth by trying to get a mortgage with a lesser payback periods.
Plus, we covered that the inflation hedge is the best gig in town, so you are going to want as many as those as possible and the only way to do that is to rinse and repeat with as many 30-year fixed as you possibly can.
Good, you're thinking like a real estate investor now! I'm ready to watch you succeed.
- Thirty-year fixed mortgages freeze time
- You can get the best inflation hedge with a 30-year fixed
- You control the timing of selling and financing with a 30-year fixed
- You lower your DTI, which allows you to buy more real estate with a 30 yr fixed