15 yr or a 30 yr mortgage???
Rental Property Investor · Panama City, FL · Member since 2019 · 6 posts · 12 votes
15 yr or a 30 yr mortgage???
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesOriginally posted by @William Thomas:
Hey guys,
So I’m buying my first single family rental in about 8 months and I’m debating between a 15 or a 30 yr mortgage. I love the idea of not paying as much money to the bank in interest, but I also love the flexibility of a 30 yr mortgage due to a lower payment (especially because I already have another house in mind as soon as I can get a down payment for that). My payment on a 30 year would be 650 and for a 15 year would be 850. My rent would be 1500, so I would get around 1350 back after paying property manager. Thank you guys in advance for your wisdom and advice!!
First, as long as you have positive cash flow, and it appears as though you do, you are NOT the one paying the mortgage...the tenant is. If it takes them 15 years longer to pay it...so what. It will bring you higher cash flow each month. It's not about the total interest that is paid on the mortgage. It's about who is paying it, and how that impacts your cash flow.
87 Replies
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Jacob Sampson:
Originally posted by @Joe Villeneuve:
Originally posted by @Jacob Sampson:
@Joe Villeneuve If I have a rental home that is fully leveraged and the market goes south I am far more likely to lose that asset than if the property is totally paid off. That is the risk of debt. Certainly, If I could ensure that I would always be able to maintain the revenue I needed to service the debt and maintain the asset then there is no need to pay down debt because there is no risk. But that isn't the world we live in.
Additionally, IMO, debt is risk whether it is on a personal home or an investment property. And debt is always leverage whether it is on a personal home or an investment property. In both cases I am using debt to leverage a small amount of my own money to control an asset worth more than my small amount. These principals are the same whether it is a personal property or and investment property.
I would be willing to bet that if we could gather all the investors that have gone bankrupt the VAST majority were heavily leveraged. Further, I bet there are very few investors that have gone bankrupt whose investments were debt free. If for no other reason than without debt you have a greater number of options when dealing with a downturn.
OK?.
You stated that the nature of debt changes depending on whether it is for a personal residence or an investment property. I was making the case that debt is always risk and always leverage, no matter what the debt is backing. Thus, by buying down debt more quickly you limit risk.
I know what you were saying.
- Lender · Granite Bay, CA · Member since 2014 · 456 posts · 454 votes7y
@William Thomas Never do a 15 year mortgage! I have been in lending and flipping for 30 years. I always tell my clients to never get a 15 year fixed. The rates arent that much lower and you can always make the 15 year payment, even if you have a 30.
Here is what happens... people go get a 15 and then financial hardship strikes and they need a lower payment again. Guess what? You can no longer qualify for the loan and your only option is to sell or foreclose. Get a 30 year, make the 15 year payment, and then go back to the 30 payment if you get in a financial bind... good luck!
- Investor · FL · Member since 2017 · 266 posts · 220 votes7y
@William Thomas
William,
Get an amortization calculator and print it out.
The first 5 years is mostly interest.
Month 1: 1200 payment is 1000 interest 200 principal
Month 2: same
Doing a 30 year note you send extra 200 writing principal only on check . This will eliminate month 2 interest .
My opinion is do 30 year notes only. If you’ll feel better paying it off early then so be it how I stated above. The tenant is paying anyways but I understand and thats ok too. Having paid off assets is great.
15 year notes are higher payments no matter what. Dont get too caught up on interest over the life of the loan.
Good luck and congrats.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @David Oldenburg:
@William Thomas Never do a 15 year mortgage! I have been in lending and flipping for 30 years. I always tell my clients to never get a 15 year fixed. The rates arent that much lower and you can always make the 15 year payment, even if you have a 30.
Here is what happens... people go get a 15 and then financial hardship strikes and they need a lower payment again. Guess what? You can no longer qualify for the loan and your only option is to sell or foreclose. Get a 30 year, make the 15 year payment, and then go back to the 30 payment if you get in a financial bind... good luck!
Just to clarify. If the REI is worried about getting foreclosed on if the economy goes south, which payments are the most likely to get foreclosed on...and for how long is this situation in play until it changes and favors the other one?
In other words, for those worried about losing their property because they can't make the payments, the payments are going to be higher for all 15 years of a 15 year mortgage than the 30 year option. So if both REI's were in the same position, which would be in a better place?
- 7yNed J.Pro MemberInvestor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
I don't even see this as a real debate...... get a 30 and if you want, pay it off like a 15 year....done.....flexibility....... and you cant do it the other way if you fall on hard times for whatever reason and those higher 15 year payment become an issue.
Its a separate debate over the "pay it off quickly or keep it leveraged"......
- Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes7y
Originally posted by @Jacob Sampson:
@Joe Villeneuve If I have a rental home that is fully leveraged and the market goes south I am far more likely to lose that asset than if the property is totally paid off. That is the risk of debt.
Real estate is a long term play. I don't know anyone who has owned property for 20, 30, 40+ years and hasn't made a ton of money. The trick is surviving the game long enough for the mathematical averages to actually average out.
When you already have a ton of money, surviving a downturn is easy, it's when you're first starting out in your investing career and don't have much that you are at a high risk. If you buy a $250k home at 4.25% @30yrs, you will be paying roughly 1,267 per month. That number skyrockets to $1762 per month if you do a 15yr at 4%.
In an economic downturn, the 30yr mortgage is going to be easily the most stable product for two reasons.
1. You will generate higher cash flow per month leading up to the recession, which will allow you to build better reserves, or reinvest the difference.
2. When SHTF and the market crashes, your mortgage will be 2/3 of what the 15yr option would have been, making it easier to survive the downturn because your monthly payments are $500/month less. Your income will stay the same regardless if it is a 15yr or 30yr, but the 15yr has a 500 higher monthly expense. Where are you going to get that extra 500 bucks during a recession time when everyone is already struggling?
Don't think that just because you have more equity in a property that it is a safer bet. In a downturn, your 30k in equity that you got by the faster equity buildup of the 15yr plan will vanish almost instantly. I would rather have 30k in the bank and my property be 30k underwater than 0 in the bank and net neutral on my home. The only thing that matters in a downturn is how long can you survive, because eventually the clouds will part and the sun will shine again and money will start rolling in again. The 30yr mortgage maximizes the number of months you can survive on your cash reserves by reducing your monthly expenses to its lowest value, in this case by reducing your mortgage by $500 per month which is a very non-trivial amount, especially if you have multiple properties. If you own 6 properties that is an extra 3k/month that you need to come up with in a downturn that I don't have to worry about.
Maybe you are able to survive and can come up with the extra 3k/month from your JOB wages. But even if that is the case, all things being equal I will still have 3k in monthly income rolling in. Income that I can use to buy even more properties at a fantastic discount due to the recession. A recession is an amazing event if you are well prepared and can take advantage of the situation. As the saying goes, the time to buy is when there is blood in the streets.
The 15yr mortgage is incredibly safe after the 15yrs have passed, but also very dangerous during those 15 years. The problem is it is during those 15 years when you are first starting out that you are at the highest risk to begin with. So you are essentially using the riskier loan product, at the time in your investing career when you are most prone to failing.
If you really want to have paid off properties, getting a 30yr mortgage and simply making an over payment of $500/month and treating it like a 15yr loan is a better option. If you overpay the difference your 30yr mortgage will be paid off in 15yrs and 4 months. Those 4 months are well worth the option of needing to only pay 1267 per month if times get rough, an option you don't have if you had simply gone with the 15yr plan. Or better yet switch to a bi-weekly plan and still pay the extra 500/month.
The next argument typically made is, "But it saves me a ton of interest". I'll concede the fact that you do pay significantly less interest with the 15yr plan, but my response would be, "So what?" Saving a couple of bucks on a historically low interest rate loan is only worthwhile if you are financially undisciplined and would otherwise waste those extra few bucks.
If you had $250,000 in cash that was earning a 4% yield would you be happy with your returns? Because that is what you are essentially doing by paying off your home. Instead of earning 4% of 250k, you simply aren't paying interest of 4% on 250k. Toe-mae-toe, Ta-mah-toe, either way the end result is the same and the return is abysmal. If I was content with 4% returns I would invest in bonds and other overly safe investments instead of real estate.
The last thing that people typically overlook when evaluating the 15yr vs 30yr mortgage is the time value of money. Money is guaranteed to lose purchasing power over time due to inflation. A dollar today is worth significantly more than a dollar 30 years from now. The 15yr plan pays off the loan rapidly by using mostly "today" dollars because the loan gets paid down rapidly, where as the 30yr loan uses more "tomorrow" dollars which have less relative value. If your mortgage today is 1200/month, you might think that is high, but you will look back and laugh at your puny 1200 mortgage during year 27 etc.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Ben Zimmerman:
Originally posted by @Jacob Sampson:
@Joe Villeneuve If I have a rental home that is fully leveraged and the market goes south I am far more likely to lose that asset than if the property is totally paid off. That is the risk of debt.
Real estate is a long term play. I don't know anyone who has owned property for 20, 30, 40+ years and hasn't made a ton of money. The trick is surviving the game long enough for the mathematical averages to actually average out.
When you already have a ton of money, surviving a downturn is easy, it's when you're first starting out in your investing career and don't have much that you are at a high risk. If you buy a $250k home at 4.25% @30yrs, you will be paying roughly 1,267 per month. That number skyrockets to $1762 per month if you do a 15yr at 4%.
In an economic downturn, the 30yr mortgage is going to be easily the most stable product for two reasons.
1. You will generate higher cash flow per month leading up to the recession, which will allow you to build better reserves, or reinvest the difference.
2. When SHTF and the market crashes, your mortgage will be 2/3 of what the 15yr option would have been, making it easier to survive the downturn because your monthly payments are $500/month less. Your income will stay the same regardless if it is a 15yr or 30yr, but the 15yr has a 500 higher monthly expense. Where are you going to get that extra 500 bucks during a recession time when everyone is already struggling?
Don't think that just because you have more equity in a property that it is a safer bet. In a downturn, your 30k in equity that you got by the faster equity buildup of the 15yr plan will vanish almost instantly. I would rather have 30k in the bank and my property be 30k underwater than 0 in the bank and net neutral on my home. The only thing that matters in a downturn is how long can you survive, because eventually the clouds will part and the sun will shine again and money will start rolling in again. The 30yr mortgage maximizes the number of months you can survive on your cash reserves by reducing your monthly expenses to its lowest value, in this case by reducing your mortgage by $500 per month which is a very non-trivial amount, especially if you have multiple properties. If you own 6 properties that is an extra 3k/month that you need to come up with in a downturn that I don't have to worry about.
Maybe you are able to survive and can come up with the extra 3k/month from your JOB wages. But even if that is the case, all things being equal I will still have 3k in monthly income rolling in. Income that I can use to buy even more properties at a fantastic discount due to the recession. A recession is an amazing event if you are well prepared and can take advantage of the situation. As the saying goes, the time to buy is when there is blood in the streets.
The 15yr mortgage is incredibly safe after the 15yrs have passed, but also very dangerous during those 15 years. The problem is it is during those 15 years when you are first starting out that you are at the highest risk to begin with. So you are essentially using the riskier loan product, at the time in your investing career when you are most prone to failing.
If you really want to have paid off properties, getting a 30yr mortgage and simply making an over payment of $500/month and treating it like a 15yr loan is a better option. If you overpay the difference your 30yr mortgage will be paid off in 15yrs and 4 months. Those 4 months are well worth the option of needing to only pay 1267 per month if times get rough, an option you don't have if you had simply gone with the 15yr plan. Or better yet switch to a bi-weekly plan and still pay the extra 500/month.
The next argument typically made is, "But it saves me a ton of interest". I'll concede the fact that you do pay significantly less interest with the 15yr plan, but my response would be, "So what?" Saving a couple of bucks on a historically low interest rate loan is only worthwhile if you are financially undisciplined and would otherwise waste those extra few bucks.
If you had $250,000 in cash that was earning a 4% yield would you be happy with your returns? Because that is what you are essentially doing by paying off your home. Instead of earning 4% of 250k, you simply aren't paying interest of 4% on 250k. Toe-mae-toe, Ta-mah-toe, either way the end result is the same and the return is abysmal. If I was content with 4% returns I would invest in bonds and other overly safe investments instead of real estate.
The last thing that people typically overlook when evaluating the 15yr vs 30yr mortgage is the time value of money. Money is guaranteed to lose purchasing power over time due to inflation. A dollar today is worth significantly more than a dollar 30 years from now. The 15yr plan pays off the loan rapidly by using mostly "today" dollars because the loan gets paid down rapidly, where as the 30yr loan uses more "tomorrow" dollars which have less relative value. If your mortgage today is 1200/month, you might think that is high, but you will look back and laugh at your puny 1200 mortgage during year 27 etc.
6 stars for Ben.
Let me add this, the savings you think you are getting, you are not. All you're doing is saving the tenant from using the money he's giving to you in cash flow from the rent. That extra interest isn't your money.
- 7yJoe A.Business MemberRealtor · Waco, TX · Member since 2018 · 76 posts · 80 votes
I prefer to use 15 year if you can afford it... ie keep positive cash flow. The faster your tenants pay the mortgage for you the better. Once you’re mortgage free, it’s all smooth sailing.
- Developer · Houston TX · Member since 2018 · 423 posts · 400 votes7y
@William Thomas
If rates are not very different between the two it might be beneficial to go with 30yrs given it’s your first deal. Take one months rent and divide by 22. If you pay that extra to each mortgage payment you will automatically reduce your mortgage by 7 yrs.
Just focus on finding deals and getting cashflow. Don’t worry how much bank is making in interest as it will sicken you and will slow you down in investing.
Once you have equity in the deals you can get more creative in how you want to pay off these properties faster.
Best of luck
- Member since 2018 · 50 posts · 56 votes7y
I am always a fan of paying the bank less. The average mortgage in the US lasts for around 7 years (this is what my agent told me and I'm not sure on the validity of the statement!) so whether you do a 15 year or a 30 year, the odds are you won't keep it for either of those lengths of time. Check the amortization schedule on both options.
If you pay down the principle more with the 15 year - then do that; more with the 30 year - then do that. Keep in mind your tenants are paying for the rent and not you - so there is really no value in paying it off sooner. Even if you plan to hold onto it for 30 years.
It seems like the payment schedule isn't too absurd though - a difference of $2400 a year. However, that $2400 could replace kitchen appliances when they break.
Up to you, but I always vote for the option that puts more money in my pocket at the end of the day.
Hope this helps!
- Member since 2018 · 50 posts · 56 votes7y
Do what you believe is right. If YOU BELIEVE one option is the best option for you, then that is the option to take!
Always bet on yourself when you're the one doing the betting!
- Investor · Fayetteville, NC · Member since 2016 · 16 posts · 12 votes7y
I would say that “DEBT IS CASH”
The more the better. That’s someone else’s money working for you. Why rush to pay it off? As long as you make good on your payments, the bank will gladly give you more loans. Believe me, I’m an active duty soldier making peanuts and I have 7 mortgages. At the end of the day it’s about building that cash flow.
When you progress into bigger properties such as multi family, then worry about paying off the single family homes or refinance them and make your cash flow even more. Just my 2 cent.
- Investor · Fayetteville, NC · Member since 2016 · 16 posts · 12 votes7y
@William Thomas
Also the 30 year helps with the debt to income ratio, which is very helpful when starting off because that will determine if the bank lets you get another loan.
- Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes7y
@Ben Zimmerman That is thorough response. To me the key is exactly what you said, I am accepting more risk for a shorter period of time. I want to get to totally paid off as fast as possible. There is a much greater chance of a catastrophe hitting during nearly any 30 year period. There is less chance within a 15 year period.
Add to that that I would only do the 15 or less after accumulating a good number of properties in a town that can generate, what I consider, true cash flow. To be honest I have purchased some properties on 10 and even 8 year notes. In my town I am buying 3 bed 1 bath homes for $50k in rent ready condition and in C+ or better neighborhoods that rent for $900 all day long.
I definitely understand yours and @Joe Villeneuve's logic, believe me this is a very common discussion between investors.
We have 3 of our 38 units paid off and on track to pay another off this year. We like that situation.
As an aside, I do like the fact that the 15 year note forces us to manage our business in a much more disciplined manor.
- Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes7y
Originally posted by @Jason D.:
@Jacob Sampson just put of curiosity, what is the risk of having debt?
The risk, in my view, is vacancy, and having to pay my own mortgage, or a downturn in the economy, and I have to charge less to get tenants. All of these risks are lower with a 30 year, because you have a lower payment. You're really taking on more risk for 15 years, to have less risk then, but really, in 15 years, there is little chance that my property, financed for 30 years, will ever be worth less that what I owe at that point.
If you had to guesstimate what percentage of businesses that went bankrupt have debt vs how many went bankrupt that were debt free my guess would be that it is rare for a debt free business to go bankrupt. There is literally a regular cycle of real estate investors (and the majority extend their debt as long as possible) going bankrupt.
Debt is absolutely risk. The more you have the riskier your situation, because you have fewer options. If I have a rental with 0 debt I have far more flexibility with how low I can go with rent to keep them rented. I have far more flexibility in how low I can go to unload the property if I need capitol.
I'm not arguing that debt should not be used, clearly I use it. I have 38 properties and only 3 are paid off. I just think people, especially new investors, should understand that they are accepting risk when using debt and you have to be intelligent about it. When people go around saying debt has 0 downside and you should get as much as possible, you should drain the banks ballsack of debt all over your face. Its just not the whole picture.
Guaranteed, in the next 5 years we are going to hear about a wave of real estate investors going bankrupt. I would be willing to bet the vast majority had 20+ year notes, but that won't save them. What will save people is having 0 debt. So getting to 0 debt as fast as possible is the key
- Lititz, PA · Member since 2013 · 595 posts · 272 votes7yCorrect me if I'm wrong, but banks don't see a difference between equity and cash. If you have a 15 year note you will have more equity in the property and less cash, but don't banks treat them the same?
Also, won't most local banks work with people to refi from a 15 year to a 30 year in the event of an economic downturn given their credit is still in good standing? - Rental Property Investor · Martinsburg, WV · Member since 2017 · 111 posts · 81 votes7y
@Jacob Sampson I absolutely take your point and laughed at your response, but can we all agree that's it's "still" fun when it cash flows well? :D
- Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes7y
@Nathan Hall agreed. Cash flow is the game.
- Rental Property Investor · St. Petersburg, FL · Member since 2019 · 4 posts · 1 vote7y
@William Thomas
30 year treat like a 15 year. Edited my response after reading all of the others. Learned some valuable info on this thread. Thank you.
- Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes7y
If you base it off the numbers then a 30 year mortgage is going to be the call every single time. However, there is more than just numbers. I want to have 5-7 properties paid off entirely in 15ish years to provide cash flow and security during an early retirement. The security of those properties being 100% paid off are worth more to me than the additional investments/gains I could have pursued if they were on a 30.
- Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes7y
Should have clarified.... get a 30. Pay it off in 15.
- 7yTwana RasoulBusiness MemberReal Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
@William Thomas it’s not about numbers all the time. Real estate is not all math. Do what works for you and your life goals and plans. Everyone will have strong opinions for either option and neither one is right or wrong no matter what they say, it’s up to you and what you want.
Best of luck!
Compass5122 Reviews - Spokane, WA · Member since 2019 · 25 posts · 42 votes7y
@William Thomas
I’m not sure that this is how it works everywhere but if you do the thirty year mortgage with the lower payment and higher cash flow you can take $200 of the cash flow and pay it strait towards the principle on top of your normal payment plan($650) if all goes well and you could do it consistently you can more than likely match the pay off time of a 15 year mortgage and pay less interest in doing so.
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