15yr vs 30yr Mortgage. Which do you use and why??

Question

Hey guys,

I've been doing some thinking and was wonder what most people used on BP. It seems like from an investment standard the 30yr is better because the excess cash can yield higher rates elsewhere than sitting as equity.

Bill Gulley · Answer

Good points, and you can take a 30 year and pay it off as you like, you just don't have the obligation to pay the higher payment.

James H. · Answer

The savings on the interest rate from 30 to 15 is marginal. 
Amortize the loan over 30 years for both rates and you will find that it does not make that big of a difference than if you just made extra payments. The nice thing about being on the 30 year is that you can plan to pay off by 15 years, but the option is always there to pay a lower paymentt if push comes to shove. Additionally, the 15 year loan payment is higher which will hurt your ability to get more loans because it will increase your DTI ratio.

If you get a 30 year and pay it off in 15 yeas, then you know you were the 15 year type. If you don't pay it off in 15 years, then you will be glad you didn't lock yourself into the high payment obligation. 15 years is a lot shorter time period than 30 years. Then again, 15 years is a long time and it is always nice to be able to change your mind 5 or 10 years down the road.

Rob Gillespie · Answer

Jack,
On investment or personal, I believe in paying it off as fast as ya can! 
I hate debt! I would go 15 and pay it off even quicker. Even better, I would buy a cheaper house free and clear to rent out.  Just my 2 cents.

Jack Lee · Answer

Great. I just wanted to make sure my own logic matched the rest of BP's.

John Chapman · Answer

Here's my own personal experience.  I did my first three on 30 year mortgages.  I then did the next three with 15 year mortgages because I perceived it almost like a forced savings plan. I wanted to force myself to pay off the mortgages in a reasonable amount of time.  (This was more a psychological than an investment decision.)  The rate was cheaper on the 15-year and it is very cool seeing the mortgage statement each month with a big portion of the payment being principal.   However, I've already come to regret not having the flexibility to drop to the lower payment a 30-year mortgage provides.  The larger payments do mess with your DTI and impact your ability to obtain financing.  I'm now back to doing 30-years, though I suspect in the long run I'll be happy with having forced myself to pay off a few rentals sooner.

Erik Kubec · Answer

Solid math above.

I would offer that leverage is directly related to risk-affinity.

Putting more $$ down and getting a higher cash flow rate per property limits your possible highs and lows.

If you maximize leverage and minimize cash flow for each property, your margins are tighter.  If property prices move up and rents move up, you win.  If rents drop and vacancies go up, you could be sitting on vacant properties.  Combine this with a job loss and things could be tight.

I don't know and would venture to guess that a lot of folks here are fairly novice like myself and have day jobs, families, etc. and can't afford to make six figure mistakes.

My last property that I used leverage for I put 25% down (getting a better interest rate) and it cash flows almost the same as my carrying cost:  (before escrow readjustment, my cost to carry was $650 and I am getting $1300 for rent, now it is $700 cost to carry, so I am still getting $600 gross cash flow after principal, interest, taxes, and insurance).

My next property I hope to do the same.

I feel these investments are pretty 'bullet proof':  if rents drop an unheard of 20%, I still cash flow.

Of course, if I were to utilize more leverage, I could perhaps accelerate my goal of acquiring enough properties to retire.  However, given that I am a novice investor, this tactic puts too much emphasis on my limited experience and related skill in property investing.

Mark H. · Answer

I'm a small-fish compared to some on this board (only 2 rentals ) , but I went with 30's on the properties I bought, not so much because i have a use for "excess cash", but because the lower monthly "nut" makes it easier to finance more properties, should I come across any.

Nathan Emmert · Answer

Philip... I encourage you to do the math on leverage.  Real estate varies from other businesses as leverage (debt) brings additional cash flow.  Not all businesses scale with debt.

Look at a property... now decide if you'd rather pay cash or finance at 75% LTV.  Lets assume it's $100,000 and that it would rent for $1,500 a month.

Buy it in cash, you get $750 a month in free cash flow and get to depreciate say $2,000 a year against that house.

Or buy it with leverage... and use that $100,000 to buy 4 houses.  Your NOI is now $3,000 a month.  Okay, okay... so now you have a $1,520 a month mortgage (well, 4 mortgages really)... your cash flow is $1,480 a month.  You also get to depreciate $8,000 a year and expense a large portion of that $1,520 a month reducing your tax burden below what you pay above.

Buying cash, your $100,000 nets you $9,000 a year... a 9% CoC return, a safe investment.  Buying leveraged, the same $100,000 nets you $17,760 a year... an 18% CoC return.

Using leverage, in less than 2 years I have enough of a down payment for a 5th home.  Using no leverage, you're waiting 11 years to buy your 2nd.

If the market goes up, I have $400,000 in assets rising, you have $100,000 meaning my net worth is growing 4 times as fast.

Remember, the goal isn't to maximize cash flow PER property, it's to maximize total cash flow.  In a land where cash is king, having cash tied up in equity is generally a bad investment.

Philip Klinck · Answer

5 year is even better. The sooner you own it the higher your cash flow and the more you have to invest into your business. Or at least that is how my non-real estate business works.

Nathan Emmert · Answer

Yep.

Some risk adverse people prefer the 15s... but they are generally high DP, anti-leverage sorts of folks looking to own things free and clear so they sleep better at night.

15yr vs 30yr Mortgage. Which do you use and why??

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