Neal McSpadden on 50-Year Mortgages, Net Present Value, and Mortgage Recasting

The emotional financial charlatans will get dogmatically fixed on one idea. >> For the majority of [music] Americans, the 50-year mortgage is bad. I think it just indebts them to the bank. They're beholden to the bank. You wouldn't pay me $1,500 today to get this mouse. In 30 years, I'll give you your $1,500 back. You would never do that, right? There's nothing in the world that could compel you to do that. When you control the entire function, everything's peaceful and easy. You don't have to worry about which [music] of these is better. What's the net present value? You literally own everything. You own the repayment schedule. You own the equity. You own the process. And that's the Hey, welcome back. Another episode of Remnant Finance. We got some big stuff in the news this past week. We were hoping to talk about a little earlier Trump's 40 or 50year mortgage. What's

up, man? >> What’s going on? Yeah, this is this is an interesting one. a lot of outrage and I’m going to make the case that it’s not justified outrage, but we’re going to talk through some a little bit of analysis of it and then how we would think through it in making these decisions. But yeah, what’s new? >> Oh, nothing. Just busy go, you know, life going on. But yeah, this this has been this has been interesting. Uh just to hop right in, we I I’ve been looking at Twitter and I look at even some of the chat groups we’re in. I’ve seen it on Facebook. There’s articles, YouTube videos. I mean it’s everywhere talking about it and almost everything and I agree with it to some extent which we’ll get into why is saying that it’s an absolutely awful idea you know that it’s and to a certain extent I agree but

it depends on a lot of factors and it depends on the person so yeah Dave Ramsey was having a conipion fit and for his people it may be bad I don’t know that’s also up for debate but yeah it’s not as straightforward as it seems just the the the only analysis you really see out there is, you know, and I can even give three examples here. I used a $400,000 house, put 20% down at 6% interest. A 15-year mortgage, this is the this is the deepest analysis you tend to see and why people say it’s terrible. On a 15-year mortgage at 6%, you would end up paying $486,62 or 1.52 times the original price of the house including so that so you’re you’re paying about what $164,000 in interest. If you get a 30-year mortgage, again, this is other everybody’s analysis. 6% 30 years same home same loan price of 320,000 you

would end up spending a total of 690,000 can’t see my scribbles there it looks like 882 the hundreds place won’t really matter that much comes out to about 2.16 times the original price of the house at 6% and if you got a 50-year mortgage on that of course you know with all these your payments drop by the way that same $320,000 house at 6%. Your total price out the door is $1,10,697, a little over three times the original cost or the original uh principal balance of the loan. So, that’s usually as deep as it goes. And it makes it look ominous because you could, you know, if you got a 15-year mortgage, you could spend 486 total. And then you look at a 50-year mortgage and it’s 1 million about and it stops there. But I think there’s a lot more nuance to it. There’s so much nuance. And this this book right

here, you’re just listening, it’s called Invest in Debt by Jimmy Napier. this if you don’t understand the net present value discount formula and the difference between a present value and a future value and how those two are related by three variables the you just can’t understand one you can’t understand mortgage mechanics this one’s specifically about investing in mortgage notes but when we talk about cash value in relation to death benefit that is a net present value versus a future value conversation the future value is the death benefit how is it calculated what it’s what’s that amount is worth today in the present That’s a net present value discount formula. It’s a simple formula and that’s why these these discussions it’s the the emotional financial charlatans will get dogmatically fixed on one idea. Like a 15-year mortgage is always better than a 30-year mortgage when that’s certainly

not true. I would make the case that a 30-year mortgage is almost always more efficient. Well, mathematically it always is more efficient than a 15. But really that is if that depends if you understand cash. Like there’s so much to this. It’s not it’s not that a 30 year is bad and a 15 is good. They’re really the same when you think about a net present value discount formula. The thing that matters here, and we’re going to introduce 50 as well to this conversation, even though no one has those yet, the thing that matters here is what do you value on the scale of equity to cash flow, you’re going to fall somewhere in caring only about one or the other or somewhere in between. And that’s going to determine what makes sense for you. But mathematically, these products are all the same. And so seeing

a large total interest paid, it’s like, yeah, 4% on a 30-year mortgage. You’re going to be paying, you know, close to double the price of the home in interest. But for the same reason that we all understand the power of compounding, it’s like there speak people speak out of two sides of their mouth. When you talk about think about what you can do with this money, if you don’t buy your latte at Starbucks and you invest that money and it grows at 8% a year for 30 years, look how much money you’ll have in 30 years. Okay, you get that. You’re making that case, right? You’re making that case for austerity today because you’re going to compound that money instead. The same thing is true. That future value of the cost of your Starbucks now has a net present value today that’s only like $5. And so, we have to think

about time frame here. And you have to understand this formula to have a relevant opinion on which of these makes sense for you because they’re about the same when we understand the net present value discount formula. And that’s what I’m gonna keep referring back to when we have this discussion. >> Well, I’m just looking at a calculator. What would what do you what do you what’s the current discount rate? Do you do you happen to know off hand? I can look it up. >> What do you mean? So, like the interest that you’re that you’re paying >> to use the net pres you know to to use a calculation of net present value for real estate there with the Fed funds rate. That’s what I’m trying to figure out is what’s the current discount rate that is used for that calculation. >> Looks like somewhere around 8%.

Uh four. Let’s go with 4%. I’m going to figure out some numbers. Go ahead and uh go ahead and chat about what that is a little bit. I’m going to get some real numbers to put on it. >> Yeah. So, if you want to get from present value to future value, you need three variables. You need to know the interest rate that you’re paying. You need to know the number of payments. And you need to know the monthly payment amount. Now, you can remove from those five things. present value, interest, number of payments, monthly payment amount, and future value, you can remove any one of those and calculate the the missing variable use if you have the other pieces of information. And so in this case, if you plug in, you know, they’ll say, all right, so if we’re going to increase the number of,

you know, payments, so we’re going to go from a 15 to a 30 year, we’re going to double the number of payments, the monthly payments you’re going to make. That’s going to change the interest rate. these these companies are going to make the same amount of money on you whether you you’re paying them upfront like you are with a 15-year, whether you pay them out over a long drawn out amount of time, not in not in dollars today. Like, you just got to understand $400,000 of interest paid over the course of 50 years is there’s a number paid over 15 years of volume of interest that’s exactly the same when we discount the time value of money, when you discount the devaluation of the dollar. And so it’s like would you rather pay $200,000 of interest by over by quote overpaying in 15 years or would you rather pay $400,000 of

interest underpaying over 50 years? Like if you you just have to understand we’re we hinge these numbers as if they’re today dollars. We really need to understand how your monthly mortgage payment today, that very last monthly mortgage payment you make in 30 years is worth so much less than the amount of that mortgage payment right now. A $1,500 mortgage payment today is worth way way way way less than that when we’re thinking 30 years down the road. $1,500 paid in 30 years is worth a fraction of it if we go the other direction. And so when we’re not understanding these components, we’re h we’re having an argument that doesn’t really matter because because it has it has to be like bolstered by an understanding of what’s happening here and the mechanics of a mortgage. And that’s totally absent when it’s just the emotional freakout of like 50 years, why

not 60 years? Well, why not 40 years? Why is it 30 years? Why not 20 years? Is there a 20-year mortgage product? No. And so if 50 is bad, then 15 must be the best of these three options, right? If 50 is bad, 50 is worse than 30. Well, 30 has to be worse than 15. Well, I don’t think I don’t agree with that cuz I think a 30 is better than a 15 for someone who values and understands cash flow in the net present value discount formula. It’s just it’s emotional reaction. It’s hysteria. I don’t think I mean it’s it’s not a good it’s kind of like it’s like the the tariff credit, you know, the $2,000 tariff credit they’re talking about giving out. Like it’s not good economics, but you just need to understand it and optimize. And so if you get that, you

should invest it and grow it doing doing what we do the COA stimulus checks. But it is bad economics. I I think in my opinion to have a 30-year mortgage. Now, as an investor, as someone who understands it, if I have the choice between the two, I’m going to take a 30 because I can take the cash flow difference and do something with that now. I can take the same net present value discount formula and it take advantage of it today. But what does that do in aggregate? It makes the the home prices more expensive, right? the the less the more house you can get for your money if you have the same amount of you can afford each month. You can afford more home on a 30-year mortgage than you can on a 15. So, yes, the net effect on the economy is that home

prices are going to go up. With a 50-year mortgage, if I can spend $2,000 a month and I look, hey, if I get a 50year mortgage, I can get a larger home. I can get a a higher home price. Well, yeah, home prices are going to go up. So, is this good economics? No. Is it bad for you? You can you can certainly profit from this if you understand these things. It’s just it it comes down to understanding and and that that formula is critical to making any coherent case in this. >> Yeah. And I think I think uh the the real question though just at a fundamental level staying even out of the mathematics of it is is compared to what that’s the problem is it’s it’s just comparing one mortgage to another mortgage to another mortgage like you said the net present value and all it

matters and then and then they’re just comparing one volume of interest to another volume of interest to another volume of interest like you said not not counting inflation not counting asset increase prices, not counting devalue. Well, inflation and devalue of the dollar is really the same thing, but what else are we going to do with the money? So, compared to what in that regard? So, if I have a 15-year mortgage and in that example I gave of $320,000 mortgage, it the first price at 6% was $2,700 a month. The second one was $1,919 a month at a 30-year mortgage. The 50-year mortgage would have been $1,685. So, if I look at all three of those, you know, that frees up about $1,000 in cash cash flow a month between a 15 and a 50-year. What are you going to do with that? And I think that’s some that’s

some of the psychological reasons of why. Like, for me, I would stick with a 30-year mortgage. Um because I because I think some of the things I would do with the money, it might not really make sense for me to go to a 50. But I understand the I understand the academics are going to the 50. But the question is what are you doing with that extra thousand? The majority of Americans are going to waste it. They’re going to succumb to Parkinson’s law. They’re going to inflate their income instead of using the difference of what house can I afford? Can I if I can afford it at 15 and I stretch it out to a 30 or 50, what do I do with the difference? That’s the most important part. And if you can beat Parkinson’s law, it will make sense 10 times out of 10 to do the 50-year mortgage, if you

know where to put that money, where to save it, where to grow it, where to invest it, and how to make that money work on your behalf. Most people are going to spend more and they’re going to have another car. You know, they’re going to free up $1,000. They’re going to go buy a truck, and so they’re just going to continue to be in debt. So the it I I really do I do think though for the majority of Americans, the 50-year mortgage is bad. I think it just indebts them to the bank. They’re beholden to the bank. They’re out of control for their entire lives. If you’re going to pay a 50-year mortgage for your entire life, you’re probably not going to pay it off because what happens in the first seven years of every amortized mortgage gets Yeah. I mean, that’s that’s essentially that’s where the average

person is going to refinance or sell the home. And so >> this conversation always ass you have to assume that you’re going to stay in the home and pay off the home till the end of the mortgage if you’re going to make these comparisons and in reality you know we this is a debate we were having in one of our groups and someone said well look I pulled up the you know the average person sells their home at 11 years or 12 years well that’s that’s when they move but when they actually refinance it when you add refinancing into the mix the average that the math that these companies use mortgage company is going to base it off of the fact that expectation that you’re going to sell or refinance in seven years, right? So, there’s a whole world of economics and financing happening under the surface of

what you see when you sign for a mortgage. That thing is going to get packaged and it’s going to be sold as an investment. It’s going to get transferred around. All this stuff is happening under the surface, but the math is how you know the math just works with these as far as this formula goes. So, you say you got a 15-year mortgage. Well, you’re going to have higher monthly payments, but you’re going to have lower number of payments, and you’re typically going to get a lower rate. You’re just pulling levers that affect the other numbers in here. The the the future value should be the same across all these theoretically. And so, I had a a conversation with a pending client recently, and we’re talking about how to use a policy loan. And so, the idea was, hey, what if I had a $50,000 policy loan and I applied that towards a

mortgage that I have on some raw land. So, this is a non-income producing asset right now. It’s kind of their retirement acreage down the road. They have a $118,000 mortgage. What if and and this isn’t something they’re actually like currently considering doing, but I was at making the case of two different ways to look at this. So, what the what the we’ll call it the Ramsay way and we’ll call it the IBC way. Ramsay way. If you have $50,000, and of course we’re we’re already in fantasy world here because we’re assuming that he’s using and understanding a policy loan, but if you were to do this, you could either take that $50,000 and put it on the back end or the front end. And what I mean by that is you could pay principal only $50,000 towards your $118,000 mortgage, paying up about 40% of the principal,

paying it down right there. Now, if you put it in the calculator that everyone gets really excited about, the calculator that everyone’s angry about. Now, look at this. A 50-year mortgage, you’re going to pay so much of a percentage in interest. This is crazy. You’re paying for the house twice and then some. Okay. Yeah. So, when you when you put the 50 grand principal only payment in the calculator, maybe you shave a decade off of this mortgage. And maybe you save yourself a ton of interest down the road. But that’s all happening on the back end of the mortgage. When you make a principal only payment, it chips away at the back end. It doesn’t impact your cash flow. Now, so in 12, 13, 14, 15 years, you might be done with that monthly payment. In this case, it’s $1,500 a month for this mortgage. You might free up $1,500 of

cash flow each month in 15 years because you make this principle only payment today and you shave time off the back end. Or what if you just put that in an interest bearing account and earmark that every month you move the $1,500 to the mortgage company and so that gets drawn down over time. that might buy you about 3 years worth of mortgage at that rate, right? It’s in that ballpark. So, what you’ve done now on the front end, you haven’t shaved anything off the back end. You haven’t saved yourself interest. You’ve just used that $50,000 to make your monthly payments. Well, now you’ve freed up that cash flow of $1,500 a month minus the interest you should be paying on your policy loan at least. But you freed up $1,500 of cash flow now. And what can you do with that? So, if you have the financial literacy and the

ability to take $1,500 today, not go spend it, not let it just get get washed away, but actually invest and grow it, you can more than make up for the lost interest dollars that are going to happen 28 29 years down the road. If you don’t, you should probably go the route of long-term thinking. It’s like, how much how much do you need to save yourself from your bad decisions? That’s the 401k. 401k is a great way to save yourself from bad decisions. Now you’re putting a putting that money in jail. You can’t touch it. If you could touch it, you would spend it. It needs to just be locked away. Same kind of thing. You know, depends on it depends on a lot of factors, but again, it’s it’s it’s kind of a it’s it’s it’s like a black and white math problem. And then there’s the

element the colorful element of the human behavior. And your human behavior will determine what the right choice is for you in these in these instances. And what do you value? Cash flow. Now, saving interest down the road. And do you value home equity? I don’t value home equity. I value cash flow. So, I’m going to take the longer mortgage that gives me a lower monthly payment so that I can actually take that difference and do something with it. >> Well, you’d value home equity if you had an all-in-one loan. >> That’s true. >> I value my home equity because I have access to that. So, it all depends on access home equity in a traditional mortgage. >> That’s not even fair, you know. >> Yeah. [laughter] >> So, I’m all I’m all f I’m fine with making extra payments on my house. I know I have access to it. I I will I

will add something a little this is a little tip for folks out there that I’ve probably talked to 20 people about this and they had no idea it even existed is the recast of a loan because your lender will never tell you about the ability to recast your mortgage. And so, it it’s a mix of what you’ve said. So, if you save that extra $1,000 somewhere and you have an emotional desire to pay your home off early, you can make a large lump sum payment against your house and you can ask them to recast a loan. Now, most lenders will charge some number. Some of them are free. Depends on where your who your bank is, but let’s say 1 to 500 bucks to do this. You can make a large lump sum. I think they normally require at least 10 grand. It it’s bankto bank,

so you’d have to call your bank and find out. But if you dropped $25,000 against your principal, basically the recast just sounds like it is an efficient analogy. You’re just going to reel the line back in and they’re going to recalculate the entire mortgage with a new basis but the same term. So if it was a 15, it stays a 15, but now has you’re starting with a new lower principal balance from where you are. So, if you if you had a 15-year mortgage or a 30-year mortgage and you’re at you you have 26 remaining, they’re just going to do a new 26-year table starting with the new principal balance. And so, the timeline doesn’t extend, but the principal payment or the total payment due comes down with that extra payment. But most people that pay extra on their mortgage, they do like the the every two

week thing. So they make, you know, one extra payment a year or whatever that works out to or they or they make one or two extra payments a year and they’re just locking that capital up in the equity where in that case you’re better saving that for five, six years, have whatever amount you have, dump it all in at once and do a recast because then you do increase cash flow because your total more your total principal interest is going to come down. So if you’re not familiar with the recast, it works and a great way to do it is save that difference. There’s an optimal place to save, by the way. it’s in a whole life insurance policy. Save that difference for a long period of time and then use like chunk it in. Use the cash flow that you now have because you just lowered

your total mortgage payment to pay that loan back off and just keep doing it. Now, you’re still saving the $1,000 difference or that you were originally saving, plus you’re now saving the difference in the old loan versus the new loan after it was recast. Save that back. Do it a second time. You could probably only have to do that twice and knock your mortgage out in extremely accelerated speed. Something else you said that I want to talk about is the you said that the 15, you know, the shorter the duration of the mortgage, so the way they’re even talking about this 50-year mortgage, the 15-year is going to have a lower interest rate. The 30-year would have a slightly higher as it always does, and the 50-year would probably be even a slightly higher interest rate from there. There’s a reason for that, and it’s because of

what the banks value. And this is something people don’t understand and it’s and it it ties right back into what you were saying. What is more valuable, your cash now or your cash later? >> Why would they charge you less interest to pay a shorter term? Doesn’t seem like it would make a lot of sense for the bank because they’re going to collect a lot a much lower number on the interest side of that equation. Like I said, with this $320,000 loan, they’re going to collect 166,000. The reason they will charge you less on the interest side knowing they’re going to collect less interest is because that money is more valuable coming back to them today where they can relo it and reallocate it and do things today before the devaluation of the dollar happens. So they want cash flow now. >> The same principle applies. The cash in

your life now that you can deploy elsewhere is more valuable than it will be later. >> And let’s just let’s just go through a simple example here. This little mouse This is a promise to pay. Whoever holds this in 30 years, we’re going to go, we’re going to assume our $1,500 mortgage payment. Whoever holds this in 15 years, this little mouse here, we’ll be able to exchange it for $1,500. So, Brian, without looking at a calculator, without putting in any input variables, off the top of your head, would you pay me $1,000 for this >> to get $1,500 in 30 years? >> No. Yeah. Yeah. You’re not going to you’re not going to tie up a thousand now to make 500 in three decades. I mean, would you pay me a hundred bucks today to make 15 times that in 30 years? >> I still might not. No,

probably not. I mean, yeah. And we’d have to get a calculator out to get the right number, but I would imagine that’s a 30 years I can make more than $1,400 off of a hundred bucks today. I believe that, right? But let’s just say let’s just say it’s $50 is the amount. The present value of a $1,500 payment in three decades might be 50 bucks today. Maybe it’s a hundred. It’s probably in that ballpark somewhere. 100 like you. A 100 to me seems high. Like I I’d rather just keep my hundred and trade it and build it for three decades than get a guaranteed $1,500 in 30 years. Right. So, >> so 85 bucks at 10% per year for 30 years comes out to 1483. So, if you’re happy with a 10% per year gain on your money compounded, you wouldn’t pay more than $85 for that.

Okay. So, 85 bucks. >> That’s and that’s at 10%. If that’s what makes you happy and you’re like, “Hey, I’d take 10% a year on my money.” 85 bucks is what you would pay. >> Okay. So this this mouse this mouse which is is currently a bond or just a promise to pay 1,500 bucks. Now this is your your 360th your final mortgage payment $1,500 final mortgage payment. And so when the bank looks at this and says, “Hey, in 360 months at the end of this 30-year mortgage, we’re going to get 1,500 bucks.” So today is November 13th, 2025. So, in 2055, at the end of the year, at at the end of 2055, we’re going to get this check for $1,500. Well, what is that worth today? It’s worth 85 bucks, right? Using that number. Now, plug in any interest rate you want. It’s going to give you a

different number, but the point is it’s much much much less today. Even at like a 4% interest rate, assumed, it’s going to be much less than $1,500. So when you make that principalonly payment, what you’re doing is you’re taking this $255 or this 2055 payment and instead of discounting it to the present, instead of discounting it to the 80 bucks it’s worth today, you’re giving them a full 1,500. You’re giving them dollar for dollar. So they get the $1,500 now and they don’t have to wait three decades to get it. So what is $1,500 worth in 30 years using the exact same calculation? So what you’re doing is you’re giving up by and this is this is making your principal only payment. You get really excited because you plugged it into a calculator. You make one additional mortgage payment a year and you shave off however eight years or

whatever from your mortgage, right? So you’re very happy about that. But what did you just give the bank? You gave them 2055 dollars which are going to be greatly devalued due to due to macroeconomic like the the inflation and the time the devaluation of the dollar and simply opportunity cost and time value of money. So you gave them $ 2055 which should be worth a lot less. You gave them today in full and now they have $1,500. And if here’s here’s where I would be okay with the principal only payment is they’ve shaved it off the front. if they said this principal only, this principal is coming off the front end. So now I’m actually changing my cash flow now. But you’re not doing that. So when I pay the extra $1,500, not only do I not save myself a dime today, but I’m making the bank whole on $255

without giving them any kind of discount or without them giving me any discount on that. And so you’re shaving off of the back end. And yes, you’re you’re saving the total volume of interest, but you are if you if you plug it into this formula and the net present value of that payment, because this can you can do this down to the individual payment. So, you say what? Let’s plug in these values. Future value $1,500. How many months until it’s paid out? What’s the interest rate? All these assumptions, right? What is the present value? It’s going to be like 80 bucks. And so if you when you’re doing that, if you want to calculate the percentage return, if you swap out some variables and you remove the interest rate and we say 1,500 bucks, 1,500 bucks today, we’re not having any kind of time discount here. The the percentage return

that they’re making is off the charts. So banks salivate when you make principal only payments because you’re giving them $2,55 today in full at dollar for dollar. You wouldn’t do that. You wouldn’t pay me $1,500 today to get this mouse and I promise that in 30 years I’ll give you your $1,500 back. You would never do that, right? There’s nothing in the world that could compel you to do that. Pay $1,500 today for the promise to make $1,500 in 30 years. But that’s what you’re doing with the principal only payment. And again, yes, you are saving interest, but you have to understand how valuable those $1,500 are today in $ 2055. And so you’re you’re wiping away the power of those dollars by giving them principal only now. And that’s why that concept is why I prefer cash value and cash flow now over shaving them off the

back end of a mortgage. And that it doesn’t matter if it’s a 15, a 30, or a 50. That principle applies. It’s going to scale. These levers are going to change on the present value discount formula. But you’re not getting a deal here. like by paying a 15 you’re not getting a deal on the 50. There are other elements at play but just mathematically speaking the net present value discount formula applies across the board here equally. Yeah. And there’s there’s two places, you know, as we speak of a mortgage. And then let’s talk about the real problem is that is is that we’re talking about banks, but there’s only two places that you’re really secure in owning a house if things go ary. And that’s when a mortgage is brand new because you’re fully leveraged and the bank can’t make any money off of the house. So banks

will work with you if you’re fully leveraged to help you out if you’re in a time of need. The only other place you’re ever secure is if you owe absolutely nothing to the bank. So on a 15-year mortgage, when you’re paying principal down faster, you’re actually at greater risk of losing your house than on a 50-year mortgage in the same time span. If 3 years in you lose all income, on a 50-year, they’re likely to maybe work with you on something, a repayment plan, because they will lose their butt if they foreclose on you and they can’t sell the house because it’s so overleveraged already. on a 15-year, you’ve paid that much extra principal. It’s a really easy turn for them to take the house off of you and sell it and make a profit and just move on and have a new loan on it. So, you’re only secure

at the the front and the back end of a mortgage and not being foreclosed. And really, probably 3 years in, they would still foreclose on you. And the only time you’re 100% not at at risk of being foreclosed is with no mortgage. Which leads me to the solution. The problem we’re talking about here is who controls the banking function. There’s a the real answer to all this is to build a family system of capital to be building capital your entire life or from from the time you’ve heard this. So plant the tree now if you haven’t you know start now start building a capital base so that you can control this entire function. You can you can determine your repayment plan. You can determine your interest. You can determine what happens inside of that whole entire process. We’re giving this process up and even regardless what we talk about, if we’re

sending hundreds of thousands of dollars of interest out the door to the banks, they’re benefiting. We’re not. So, it’s all really the the whole thing is like who is the banker and who is in control of the entire play? Who are the characters in the play? And if you’re not every character of the play, then you haven’t even started the process become your own banker. And there’s a good chance, you know, Nelson Nash even says it’s going to take most people 20 to 25 years to to slay all the snakes and dragons and have no reliance on an outside bank. But do you want your children to have to be worried about getting a 70-year mortgage because the dollar continues to devalue and they can’t they can’t afford a home? So, by starting now, you can ensure that you are the lender for your children. Your

children are their own lenders. They’re your grandchildren never have to step inside a bank. And when you control the entire function, everything’s peaceful and easy. You don’t have to worry about which of these is better, what’s the net present value. You literally own everything. You own the repayment schedule. You own the equity. You own the process. And that’s the key. That’s what everybody that’s that’s what nobody’s talking about. And I think what is most important. >> Yeah. Yeah. The human behavior is huge here. And you talked about Parkinson’s law. I despite the fact that I think we can make a compelling case that your total opportunity cost your total price if you factor in everything is the same across all three options. The the problem people are going to are going to have is the same reason buy term and invest the difference doesn’t work. It’s it’s a it’s a phrase. It’s

not a strategy cuz what that what that implies is that you went out, shopped for the the appropriate whole life policy, priced it out, and then went and got term and then calculated the difference there that you actually saved. You know, invest the rest. You figure out what the rest is, and then you put all of those dollars into an investment. In reality, you just go right in. You’re convinced that whole life is more expensive. I’m going to do better here. I just get a term and then I invest some. I don’t know what the rest is but Phil like conceptually that just doesn’t work. Same thing if you’re does it. That’s the problem. >> And same same thing here. And this is why this is why you said you made a point that this is pro 50 years probably a bad call for a lot of people. And and

I agree because again I said the math is black and white but the human emotion the human action colors it. And so Parkinson’s law would would indicate that let’s say the house is $500,000. That’s a closing price on the house. If you did the same thing like the equivalent of buy, term, invest the rest. If you actually overcome all of these human inefficiencies in our behavior and you said, “Okay, the house is $500,000. At 15 years, my monthly payment is this. At 30 years, my monthly payment is less. And at 50 years, my monthly payment is the lowest.” Now, what’s the difference between those? I could spend up to $2,000 a month, and I will spend $2,000 a month on a 15 on a 15-year, and I can save money on my monthly payment as I extend the term out. So the the lowest monthly payment would be my 50-year.

Well, whichever one I pick, let’s say I pick the 30. Now I take the difference and then I actually go and invest that. Then I think that is a is a equally optimal outcome, right? However, people aren’t going to do that. They’re going to say I can spend $2,000 a month. So they’re looking at the wrong input variable. The input variable is not here’s the home I want and here’s the fixed price that I’m willing to pay. It’s I can spend $2,000 a month. So, if I’m willing to spend $2,000 a month on a 15-year mortgage, but look, if I spend $2,000 a month on a 30, I can get more than a $500,000 house. And if I spend even less on a 50, I can go I can increase the monthly payment to 2,000. So, so most people are going to keep the 2,000 a month as their target, which

each the further out you go, the more house you can buy, and that’s going to contribute to home price inflation. And now everything I talked about about how these are essentially the same when they’re discounted, it goes out the window because now you’ve you’ve maxed out that payment. So there is nothing there’s no net there. There’s no savings in cash flow. And so a lot of the things if I’m talking about I value cash flow, you didn’t create any cash flow. All you did was just buy a bigger house because the same monthly payment can get you more. I think that most people are going to buy a larger house than they otherwise would have just like the 30-year did with the 15. And so that’s where this falls apart. >> You don’t even need to look at a house to prove that out. When when somebody

goes to a car dealership, >> the thing they will try to get you to say is, “How much can you afford in a monthly payment?” >> They they will the the whoever you’re working with will ask you that 69% of people are going to give up that data. They’re going to they’re going to say, “Oh, I can afford $800 a month.” And now they will fit the car into that. So what does everybody do? They don’t buy the $30,000 car on a three-year note or a four-year note. They buy they nowadays I think you can get as far out as seven at least seven years but I think even eight potentially you can do now. Yeah. >> So instead of getting the 30,000, >> five is still standard, but >> five is standard, but I I mean a sevenyear getting to be pretty nor I’ve seen seven out there 84 months. It’s

it’s insane. But so so instead of doing, you know, the not that long ago, 40 years ago, a three-year note was normal. A four-year note became the thing. The five-year note is has been standard for a long time, as long as I can remember now. So 30 years we’ll call it. But now you can get a seven-year car loan. So most people instead of getting a $30,000 car for four years, they’re going to jump up to the $50 $60,000 car for seven years and everybody does it. Especially if that salesman knows what you’re willing to spend a month. They’re going to get the maximum car that can spend per month. No, that’s just the way that the people’s brains are wired is what is this going to cost me per month. Nobody thinks about all the other factors. And that’s why this whole conversation is is

is almost moot because you’ve nailed it. like people were just going to figure out what they can cost per month and use the longest term mortgage they can to get the best biggest flashiest house, flashiest car, whatever it is they’re financing from that point forward. >> I think with perfect human behavior, I’ll caveat that perfect human behavior from the standard of increasing and optimizing today’s dollars with a long-term focus. perfect human behavior. Everyone could get a 50-y year house or 50-year mortgage, pocket that difference, and actually invest it and then do better in the long term. But again, I don’t think that’s that’s not people are already aren’t doing that with a 30. They’re already like 50 amplifies what’s already wrong with a 30. And a 15 amplifies what’s wrong with the way the system used to be before there were mortgages. When you had to go

and you had to put 50% down and you had to find a lender that trusted you to loan you the other 50%. Home prices didn’t skyrocket. Like home prices are a function of interest rates, how cheap the money is and also what people can get, you know, in this monthly payment. So the the homes aren’t going up in value, they’re going up in price. and price is a function of monetary and and these macroeconomic elements and human behavior is going to ensure I think with the 50-year mortgage. So, I would say in summary, I think it’s a bad idea. Not because of the outrage of like, oh, you’re becoming a slave to the bank. You already are. You already don’t understand that with a 30-year mortgage, you don’t understand these mechanics, and you don’t understand that human behavior has increased the price of homes by by going to exactly that. What

can I pay? I’ll get as much house as I can get for the amount, you know? So like we’re untethered from discipline already. And so this isn’t changing that. This isn’t making you more of a slave to the bank. We paying off a house in 30 years. It’s like uh we can I’m 35. I can think about 30 years from now. It seems that’s my dad’s age. So I can visualize that 50 years is like psychologically harder to wrap your mind around because like half a century you’re thinking no one’s going to pay off their house. >> Nobody already does pay off their house. The average turnover is seven years. You’re not paying off your house as it is. Even with a 15-year mortgage, people are people are refinancing and or moving and selling within seven years. Like, that’s a that’s a hard unmovable number in the psychology and the valuation of

mortgages, seven years. And so, this is all doesn’t matter. Like, you’re not owning your home. My, you know, I know a few people, my parents own the home outright. I have some I have some relatives, some aunts and uncles who own their home. They’ve been in it for 30 years. It’s not that it doesn’t happen, but on average, like this conversation is happening as if everyone is making an optimal decision and as as if everyone is staying in the home till the end of their duration anyways. It’s like who cares about these, you know, the dumbest thing you can do is make these principal only payments, shave some time off the back end of a mortgage that you’re never going to experience anyways, right? If you make principal only payments and you shave off six years from the back end of your mortgage, but then you sell it at

year seven, all you did was cost yourself cash flow today to save interest that you’re never going to end you wouldn’t have end up paying anyway. So, it’s like I think it’s a bad idea on whole, but not for the reasons that people are outraged about just because it further perpetuates bad decisions that are not optimal already. >> Yeah. So, let let me I want to read something real quick because what we when we talked about the monthly payments, it reminded me of something our friend the tax sherpa Neil Mcpadden wrote on his LinkedIn. It says, “Everyone’s calling Trump’s 50-year mortgage plan insane, but they’re missing the only part that actually matters. People don’t buy homes, they buy monthly payments.” All the talking heads are ranting about the true cost of a 50-year loan. They’re running spreadsheets showing how much extra interest you’d pay compared to a

30-year. And mathematically, they’re right. But personal finance isn’t math. That’s something we say all the time. Money isn’t math. Math isn’t money. It’s psychology. No one’s calculating a 50-year amortization table before making an offer. They’re just asking one question. Can I swing this payment or not? If the monthly nut drops by a few hundred bucks, that means they can afford that much more house. And behaviorally, that’s how the entire housing market operates. Look at the data. The US personal savings rate is hovering around 4.6%. That’s about as low as it gets. People don’t bank the difference when payments fall. They spend it. We just got done talking about Parkinson’s law. That’s human nature, not a spreadsheet error. So, no, a 50-year mortgage doesn’t fix affordability. It just changes the optics. That and that might be the whole point because if home prices start dropping, homeowners feel poorer, they stop

spending, they stop selling, the sentiment shift can sink an economy and an election cycle. Trump’s move isn’t about affordability. It’s about liquidity and sentiment. Stretching mortgages of 50 years keeps equity inflated, cash flowing, and the illusion of prosperity intact. It’s not a reform, it’s a pressure valve. He says, “Maybe that’s cynical.” Or maybe it’s just the political version of behavioral finance and action. >> That’s Yeah, spot on. This is bad economics. >> Yeah, it is. >> Like all of this is is hinged in bad economics. But but the but again, we’re already there. >> We’re already there. Like if if you’re not outraged about, you know, the fact that those reality like that human behavior is what’s driving up housing prices. People don’t pick the house first, pick their but their their maximum house price first and then work backwards from there. They they pick their monthly payment first and then

work forwards from there. That that’s already in effect. It’s like this is just this is it’s an extension of and I think people are going to slide into it. I think it’s going to be kind of a path of least resistance and it’s going to make things worse in net inherently. Is the is the product worse than a 30? No. Cuz I’d have to say I think a 30 is better than a 15 cuz I would rather sign up for a 30-year mortgage, have the capital and ability to pay it in 15 years if I choose to. So, the same thing. I’d rather pay the monthly of a 50 and have the ability to pay it off in 30 if I choose to. Like I always rather have more options. And I also feel like I understand and I actually I feel like I could price that

difference and actually invest the rest in something like low stress trading. And so you did you did kind of a an analysis of like what if these three people same person or person one two and three got a 15 a 30 and a and a 50-year. What is their monthly payment? You start with the 15-year and he got X amount of, you know, paid off his home, same price of the home but paid it off in 15 years and then he starts a whole life policy. Person two saves that difference and puts that difference in whole life policy on day one and then you know after the 30 years takes the net there and then pays you know new policy. So you kind of worked it forward and they all had about the same outcome if behavior is perfect. If exactly when you free up cash flow

I’ll actually read the numbers because I worked these out. It’s it’s not too far off. So, >> person one, I I made some assumptions. I made him 25 years because the, you know, mortality is right around the age 76, 77, something like that for a man. So, I I made this a guy who’s 25 years old. He can afford any of the three options. So, it was a $400,000 house, 20% down, $320,000 mortgage. I excluded taxes and insurance just so we could look at principal, interest only. The first guy, he would be spending $2,700 a month in principal and interest. After 15 years, assuming he went the entire length, he’s now 40 years old and he starts a policy with all of that money. So, a $32,000 a year policy. I used a split of 30 to 70 base to PUA. At age 75, he would have

about $2.6 6 million in cash value and 3 just under $3.3 million in death benefit. So remember that 2.6 and 3.3. The second guy, the 30-year guy, all the same metrics, 6% interest. I don’t remember if I said that. His payment was $1,919. So he takes the difference of that, and I didn’t jot down what that was, but you can do the quick math if you want. It’s 12,000 something. He puts that into a policy in day one. Now at 30 years, he can start another policy. One, the PUA rider drops off and two, he’s going to now do that entire 19, you know, $1,919. And he’s going to start a second policy of $28,000. When he gets to be 75, his total cash value, same exact policies, just starting at different ages is 2.1 million with a death or no, I’m sorry, $2.3 million in cash value, 3.1 million

death benefit, slightly less. The 50-year guy, he uh he can’t do quite as much because so because he’s just he’s fixed in his payment. So, when he hits the 30-year mark, all he can do is do a new PUA policy. He ends up with still almost $2.1 million. Like, it’s it’s like 100,000 150,000 less in cash value and a $2.6 million death benefit. But the point of that, the the thing that the thing that we can’t talk about, there’s the seen and the unseen. Those are the math. Yeah. the number one 15-year guy, he can end up with a larger cash value and a larger death benefit because he’s going to start at $32,000 and he’s going to run that out the whole time or for 30 years. So, it looks good on paper. It’s just like Neil’s thing said, it looks great on paper, but we what we can’t

discount is that the 30-year guy, the 15-year guy, provided his family with an additional death benefit that could that could pay off the home. They had cash value working for them and the unseen is what did they do with that cash value? Did they start taking over the banking function for the cars they buy? Did they start investing that? Did they buy more real estate? Did they do low stress trading? Did they buy mortgage notes? So now we have, you know, we’ve got that internal rate of return on there. You’ve got the external rate of return and their eternal rate of return is the death benefit. They’re providing three things for the same dollar for a longer period of time. And when I can take that capital, so if it were me, I would go with the 30-year. That’s just my preference. I I because I can see the

light at the end of the tunnel. Kind of like you mentioned, I can pay it off and I don’t see the difference, you know, to to save $230 or something like that a month in payment between 30 and 50 doesn’t make sense. Between 15 and 30, it’s $800. That I’ll take that. I just I don’t think I don’t think it’s worth it to go to the 50-year on a personal level. I’m not saying it’s not worth it for anyone. I wouldn’t do it. But yeah, so that guy on the 30-year mortgage, like what has he done? Because he’s already been capitalizing a policy for 15 years, what has he done with that money to get an external rate of return that person one couldn’t do and person three really couldn’t do it as well either because they didn’t have a very, you know, their policy wasn’t actually

their policy was decent. So they could do that as well. So those are the questions. That’s the unseen that matters. Are they controlling the banking function other parts of their life? Are they investing that money and doing more with it? So, I would rather be in the middle on that and have the 30-year mortgage come out just almost the same and end 75 year old cash value and death benefit, but have access to that money for a longer period of time to get growing and working on my family’s behalf. >> Yeah. And of course, we’re taking we’re taking we’re we’re again we’re assuming perfect behavior that you actually take that difference and diligently apply, you know, like we’re assuming a lot of things that I don’t think would actually happen between these three individuals. But, you know, we also have to work in a vacuum of these are the only things

you’re doing with this chunk of money. It can only go into mortgage or an insurance policy. If you what if what if one of the guys who had extra cash flow because he didn’t tie it all up in a 15-year mortgage took a chunk of that and traded low stress trading starting at year one instead of year 15 or year 31. You know, like there’s a lot of there’s a lot of ways you could do this. But the the point really is I think it comes down to again. You don’t be outraged about the math. The math is the math. But the human behavior is is where the the real trap is here. That’s my biggest takeaway. And I also wouldn’t do a 50 year >> because like you said, he saves 800, 900 bucks going from 15 to 30. I like that cash flow >> for a few hundred extra. Would you go to

a 50? I mean, you could again on paper, you could sit down and make the case like you could make the mathematical case and sit down on paper and justify a 50-year. I think you could, but I think that this is going to be a a bad long-term economic trend. It’s certainly not, like you said, it’s not or I guess as Neil said, it’s not to address the affordability. It’s actually going to make affordability worse. It’s going to make people’s, you know, it’s everything we just said, but it it’s bad economics. It’s bad macro policy, but we’re just it’s like it’s like adding, you know, we’re we’re like hammered and we’re taking another shot. And now people are freaking out like you’re taking a shot, but it’s like you’re stumbling around puking already. It your your outrage is a little bit one, it’s not understanding this. It’s a little bit

a little too late. Yeah. It’s like we’re already here. So, I mean, yeah, bad a bad bad idea, probably. Um, is it going to make things worse? I’d say definitely. But your where was your outrage over the last 10 years, you know, and of course people have been outraged about macroeconomics. That’s why a lot of us are here because we’ve realized in the last 5 10 years we’ve been greatly misled. But, but yeah, I mean, spare me the crocodile tears. You’re already you’re already like on life support here. So, but yeah, it’s >> Yeah. So, there’s a reason. >> Definitely interesting. There’s there’s a reason that uh about almost probably a third of Nelson’s book is based on human behavior. Uh it seems kind of funny when you talk about the infinite banking concept because everybody focuses on product. The product is the product. It’s whole life insurance from mutual

company. I don’t really care what split how you design it. That’s everybody’s missed the metric. There’s a reason that a large chunk of his book is based on human behavior because we have to overcome that. And it’s really the secondary thing. The first thing we have to understand is what is the banking function, who controls it, who profits from it. If you can understand that and why that matters, follow it up with number two, what the human behaviors are that are going to cause you to fail and what the human behaviors are that are going to cause you to succeed. Because everything you do, as Nelson points out, is always compared to what everybody else is doing. And number three, the product is is the product. I don’t even care about design. It’s literally the third most important element. Take over the banking function. And this whole

entire conversation and your family’s timeline becomes mute. Your bloodline will be different if you take over the banking function now. >> Yeah, absolutely. I’d rather be inefficient on my mortgage by some by whatever metric I choose and optimizing and my protection and savings and understanding that and and optimize human action. You can you can make the numbers work if your human actions in order. So, >> yep. >> With that, we might actually wrap this up in under an hour. So, >> yeah, there we go. That’s >> all right, man. Second. >> Good chat. >> All right. See you. >> See you next time. >> Cheers. >> Thanks for listening to Remnant [music] Finance. If you found any value at all in this episode, please subscribe, leave a review, and share it with a friend. Remember, true financial freedom comes from taking control of your personal economy and breaking free from the

status quo. [music] So, stop being a passenger in your family’s financial future. Boldly take back control of your wealth. Until next time, this is Brian and Hans signing off.