Disagreement Between Husband and Wife on Loan Length

11 Replies

My wife and I are under contract to purchase our first "on purpose" rental property. We have a rental property in Northern Virginia, but that was due to a transfer and we chose not to sell in 2010 when things were still a little rocky in the market.

Fast forward to today and we're ready to fire up an honest to goodness real estate business, but we're running into a bit of a disagreement on whether we should go with a 15 or 30 mortgage.

I'm all for the cash flow and using extra money to pay down principle more quickly, yet have a buffer when things arise. She simply wants to get it paid off more quickly, which I totally get also.

We are getting a good price, so the positive cash flow will either be approximately $500 vs. $300 per month.

Maybe the compromise is to go with a 20 year...I'm not sure. Has anyone had this discussion with their spouse/partner and what was the solution?

When we didn't agree on the terms we split the difference but you need to talk to the mortgage company because the term contributed to the interest rate. I think when we settled on 20 or 25 year the interest rate was the 30 year rate but I could be wrong. Keep in mind you can prepay but if the money is in the house it is harder to get it out. 

We have one house that the payment amount was too high and we did pay it off. I am sorry in some ways that we did but it was a relief to not have that payment being so tight every month when I was looking at a layoff. When you have a personal crisis a bigger cushion with the mortgage payment can be helpful. This month the entire rent for one place went to cover the plumber but I did not dip into the repair fund. You have to decide where can you both have peace of mind?

You will quickly hear from the max leverage people to always go 30 fixed.  And if you are trying to quickly scale to a business that pays your bills, this is probably right.  Different people have different goals, however, and that means one approach is not for everyone.

I have 15's. That is because my goal for my first 4 houses has been to get them bought, rehabbed and paying for themselves entirely independently of the rest of my portfolio, and to have them paid off in time to gift one to each of my children. I'm not trying to own 100 houses, I'm fortunate enough that I'm not going to hit any DTI issue anytime soon, and my credit union waived all fees and gave me an exceptional rate on 15's.

Another reason for having a 15 instead of a 30 on which you make extra payments is if your goals call for early paydown and you are concerned about your ability to remain disciplined enough to actually make the extra payments.

I would simply ask her what exactly the concern is, that would be mitigated by a 15 instead of a 30.

FYI, while I know banks will vary, in my case there was almost no advantage in rate or costs between a 20 or 25 and a 30, but a very significant difference for a 15.  YMMV.

Colleen and Richard,

Great advice. I definitely see the benefit of a 15 (our primary residence is a 15). I am eligible to retire from the Army in seven years, and my goal is to have enough cash flow to equal what my retirement pay will be (50% of base pay), thereby creating (essentially) a 100% of base pay retirement.

My concern is that if we are buying properties on 15 year mortgages, DTI may become an issue and cash flow won't be where I'd like it to be.

Can't really add to what's been stated here other than to give my opinion. If you're looking for cash flow, go 30. You can always pay more but banks get funny when you try and pay less! When times are good, take the extra $200/month mentioned and apply to principal or, better yet, buy another rental! Let us know how it shakes out and congrats on becoming an "on purpose" landlord! 

Originally posted by @Brooks Rembert :

Colleen and Richard,

Great advice. I definitely see the benefit of a 15 (our primary residence is a 15). I am eligible to retire from the Army in seven years, and my goal is to have enough cash flow to equal what my retirement pay will be (50% of base pay), thereby creating (essentially) a 100% of base pay retirement.

My concern is that if we are buying properties on 15 year mortgages, DTI may become an issue and cash flow won't be where I'd like it to be.

 Given that goal, I would tend to agree than a 30 is a better idea.

@Brooks Rembert  It is all about the discipline and what your goals are.  I got that  you're trying to replace half your income when you hit twenty, but will this one and a couple of more suffice?  If not then you may want to look hard at the 30 year.  Also if you tend to fritter away (be honest with yourself) the extra cash flow, then 15 years would be better. 

Also how do you plan to replace BAH?

Cal,

Our primary residence will be paid off when I retire, so BAH will be a wash.

The plan is to have about eight houses (about one per year) by the time I retire.

I suppose the saying holds true that you make your money on the purchase price. If we can negotiate good sales prices that allow for good cash flow with a 15 year mortgage, then WORST case scenario, we can simply refi to 30 year mortgages down the road if we want to increase cash flow.

We feel right now it's better to take the longest fixed term they will allow at these low rates, and instead of paying them down (I did that on a higher interest rate one instead of refinancing and found it to be a mistake as very difficult getting cash out of an investment property when you have more than 4 mortgages), put the funds towards the next down payment.  Especially when/if rates rise, we will be happy paying all 30 years of a 4.25% loan and using the cash flow elsewhere instead of paying the low rate loans off early.  Before 2008, 6-7% was a great rate for investment property, and our first home, we assumed a first mortgage of 11.75% in order to buy it from the bank, so we appreciate this low-rate environment as we feel long-term that this will be seen as a small window of opportunity, maybe lasting a few more years before rates rise again.         

@Brooks Rembert  

We started off picking up rental properties as a hedge for retirement and our initial goal was to pay them off as quick as possible to start replacing our income.  We opted to do 30 year notes figuring that we can always pay at a 15 year rate if we wanted to or if times got tough could drop it to the 30 year payment.

After we started to get a ton of appreciation in the properties over the past few years we tried to refinance to pull some of it out and were not able to because we had too many notes.  Long story short we have several hundred thousand in equity in rental properties and cannot do a thing with it unless we sell them.  The deals today are nowhere near as good as they were when I bought the properties so it does not make much sense doing rollover's into a worse investment.

In hindsight I have turned into a fan of having as many properties as possible with as much 30 year debt as possible.  You never know what financing options will be available in the future but everyone pretty much agrees that rates are only going to go up.  Cash in hand is always better than equity tied up in a property.  With cash you always have options to do whatever you want in the future, pay off your current houses or buy more.

Originally posted by @Brooks Rembert :
Fast forward to today and we're ready to fire up an honest to goodness real estate business, but we're running into a bit of a disagreement on whether we should go with a 15 or 30 mortgage.

I'm all for the cash flow and using extra money to pay down principle more quickly, yet have a buffer when things arise. She simply wants to get it paid off more quickly, which I totally get also.


 Easy solution ... get a 30 year and pay it down faster.  If you run into any issues you can just pay the 30-year amount and use the extra money toward whatever the issue is.

The above answers have covered it all, so I'll just give my vote and why.

I would pick 30 years because I like options.  30 years gives you options.  You can pay it off in 15 if you want the effect of a 15 year mortgage or you can use the money in an emergency or if tough times come.  

When you do a 15 year, the bank is your discipliner.  If you worry that you may use the extra money and not put it towards the mortgage, then by all means go with the 15 year.  You both know yourselves better than anyone else, so go with what you know will work best for you.

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