#askbp 15-yr vs 30-yr mortgage

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#askbp 15-yr vs 30-yr mortgage

David Zinn
Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes

@Brandon Turner

Hey Brandon!

What's better: a 15-yr mortgage or a 30-yr mortgage?

I can still cash flow just fine with a 15, so I decided to take it (PITI with the 15-yr is $550/month, while it is $350/month for the 30-yr. Market rent is currently $1200/month after reno).

I think I am happy with the decision, but it is staggering how much less comparative cash flow I will have during the first 15 years ($36,000!). On the flip side, it's even more staggering how much more comparative cash flow I will have the following 15 years ($63,000). Not to mention, by taking the lower rate I will pay $38,000 less in interest by taking the 15.

By just looking at the numbers, this seems like a slam dunk, but I know it is not that easy. When I own it free and clear I won't be able to write off the mortgage interest on my taxes. Also, in an inflationary environment (which I think we can bank on long-term), cash is worth far more in the earlier years than in the latter years. 

Thoughts?

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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30.  In fact I'd take a 60 if they gave it to me.  There are a number of reasons, but keep this in mind.  Whatever one you choose, that locks in your payments.  You can always pay a 30 year mortgage in 15 years, but you can't pay a 15 year mortgage in 30.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    30.  In fact I'd take a 60 if they gave it to me.  There are a number of reasons, but keep this in mind.  Whatever one you choose, that locks in your payments.  You can always pay a 30 year mortgage in 15 years, but you can't pay a 15 year mortgage in 30.

    7Reply
  • Mark Elliott
    Investor · west seneca, NY · Member since 2014 · 376 posts · 211 votes
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    hi david, i would take the 30 year for one reason. you can always add the difference between the two payments to the 30 year payment amount and actually reduce your loan life to less than 15 years. here is an example. 30 year loan payment $350 a month. 15 year loan payment $550. you take the 30 year plan, add the $200 each month to the payment. you are paying the same as you would on the 15 year plan, but the extra $200 goes directly to the principal, thereby reducing your overall principal each month. this would allow you to pay off that loan in 12 years or less. find an amortization chart and plug in the numbers, you will be surprised

    2Reply
  • Colin SmithBusiness Member
    Realtor · Colorado Springs, CO · Member since 2013 · 987 posts · 447 votes
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    Tell us about the deal... Purchase Price? Any Rehab? Etc.

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  • Jerry W.Pro Member
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    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
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    @David Zinn having the flexibility of a 30 year mortgage is nice, but let me give you the other side.  Lets look at a $100K loan and compare between 15 year and 30 year amortizations.

    15 year 4% interest

    Payment $739.69 month, your very first payment is more principal than interest

    Total interest paid $33,143

    30 year 4% interest

    Payment $477.42 per month, you pay more principal than interest on payment 153 (14y 9 months)

    Total interest paid $71,868

    You only get 4 loans on 30 year amortizations, you get unlimited on 15 year loans if you can keep qualifying. 

    If you do not need the cash flow to live off of and can make a property pay its way on a 15 year loan you can save a lot of money.  If you need the extra income to live on then a 30 year loan is the best.  For me it is the difference of having the rental paid off when I am 70 or paid off when I turn 85.  I make enough to live on from my day job.  If I see a property that I really want to buy I can always take a 2nd out on a property with a lot of equity, or refinance and roll the 2 properties together.  If the money was sitting in the bank waiting for me to buy I would be losing 5% on it.  The difference goes up even more as the interest rates go up.  At 5% interest the total interest paid on a 15 year loan vs a 30 year loan is $42,243 and $93,256.  On a 10 house portfolio that is over half a million dollars more you lose to the bank.  If you have to use a 30 year mortgage try to save those for the nicer A or B houses as their cash flow is much worse than most rentals, or use them for your big dollar purchases.  Just something to think about.  Good Luck in your investing.

    3Reply
  • David Zinn
    OP
    Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
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    @Mark Elliott

    Never thought about that before! Thank you.

    I have a better interest rate with the 15-yr, so when I plug the numbers in it is pretty much a wash (I would finish a few months earlier by making extra payments on the 30-yr). 

    @Joe Villenueve

    Great point about flexibility in payments.... 

    I guess it just comes down to whether or not I want to use the 15-yr as a forced savings plan. I could probably do better in the long-run if I saved the extra cash flow for a down payment on another property; I think I might already be leaning towards changing back to a 30-yr.

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  • David Zinn
    OP
    Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
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    @Colin Smith

    Purchase price: $92,324

    I am putting 20% down ($73,859). 15-yr interest rate is 4.125%, 30-yr would be 4.75%. Needs about 10k in rehab. Taxes and insurance will come to about $200/monthly.

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  • Eddy Dumire
    Investor · Stafford, VA · Member since 2014 · 246 posts · 83 votes
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    Originally posted by @Mark Elliott:

    hi david, i would take the 30 year for one reason. you can always add the difference between the two payments to the 30 year payment amount and actually reduce your loan life to less than 15 years. here is an example. 30 year loan payment $350 a month. 15 year loan payment $550. you take the 30 year plan, add the $200 each month to the payment. you are paying the same as you would on the 15 year plan, but the extra $200 goes directly to the principal, thereby reducing your overall principal each month. this would allow you to pay off that loan in 12 years or less. find an amortization chart and plug in the numbers, you will be surprised

    Mark,

    Your posting really intrigued me because I had never heard that before and it seemed counterintuitive.  So I first went to Bankrate's mortgage comparison tool.  Using a mortgage amount of 100k with a 5% 30 year loan my cost (P&I) is $536.82.  A 15 year 100k loan at 4% interest costs me $739.69.  The difference is $202.87.  If I then go to the basic mortgage calculator at bankrate and apply the extra $202.87 to the 30 year loan, the payoff date is March of 2032.  A 15 year note would payoff in July 2030.  Unless I entered something incorrectly or bankrate's calculators are wrong, what you're saying is incorrect.

    I personally believe in the strategy of taking the 30 year over the 15 because it adds flexibility and it's the cheapest money you can easily find, but it will cost you more in the long run versus taking a 15 year loan, and you certainly won't pay off the loan earlier by taking the 30 year loan.

    Eddy

    1Reply
  • Nigel Whitmarsh
    Investor · Wilmington, NC · Member since 2015 · 56 posts · 19 votes
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    Jerry W. So you can get an unlimited quantity of 15 year mortgages? I never realized this, thought it was limited to 4 notes, but didn't realize that was qualified with a 30 year term. Is this specific to your area or nationally? Or specific to you and/or your lender?
    1Reply
  • Eddy Dumire
    Investor · Stafford, VA · Member since 2014 · 246 posts · 83 votes
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    Update...

    Amerisave's rates with the lowest points for 30 year fixed investor loans at 75% ltv are 5% for 30 year and 4.375% for 15 year.  If I apply these numbers the payoff is July 2031 on the 30 year with $221.80 in extra payments.  Still a year longer than the 15 year amortization, but a smaller difference.

    In general as the difference in rates between the 30 year and the 15 year narrows, the difference in time to payoff also narrows until it reaches zero.  The only way you will ever pay off a 30 year earlier than a 15 year is if the rate on the 30 year is lower than the rate on the 15 year.

    1Reply
  • David Zinn
    OP
    Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
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    @Jerry W

    Thank you for your input! Timing is exactly one of the things I was thinking about. My son will be going to college in 15 years (haha, if he wants I suppose), and getting that extra cash flow at that time would be nice. 

    I also do like the idea of building equity at a faster pace, especially if I wanted to exit the property before the loan fully amortizes. But then again, by taking the 30-yr and extra cash flow, I know I would be building personal wealth at a faster pace. Man I feel like I could go back and forth on this all day.

    I didn't know you could only get 4 30-yr's and unlimited 15-yr's. Very interesting.

    Question: What do you mean by "If the money was sitting in the bank waiting for me to buy I would be losing 5% on it"? If you are using equity from one property to purchase another, won't you end up paying more than if you had just had cash for the down payment? (because of interest on the HELOC or the cost of refinancing)

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
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    For the majority the 30 year gives more flexibility but I can see in some cases where a 15 might make sense.

    It depends on your income and what deal sizes you are going after. 

    I like payments low today myself versus principal build up. I would try to increases equity other ways then to have myself higher debt service payments. Some use the 15's as a forced retirement savings plan so I get it.  

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  • David Zinn
    OP
    Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
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    I was giving rough estimates earlier, but here are the exact payments:

    30-yr PITI: $385/monthly

    15-yr PITI: $550/monthly

    @Eddy Dumire, you are right. If I just add the difference ($165) to my monthly payment on a 30-yr mortgage, it would take 16 years to pay off at a 4.75% interest rate. I would need to be adding more in order for it to be around or below 15 years.

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  • John Hyatt
    Investor · Glendale, AZ · Member since 2015 · 113 posts · 47 votes
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    Hi David,

    I think it depends on your intentions with the property, your financial situation, your risk tolerance, your preference. From an investment standpoint and a leverage standpoint its always better to take a longer loan due to the fact that you are making more money with less (at least for the first 15 years) and you can acquire more loans easier since a 15 year loan will increase your debt to income ratio (granted not much, but if you buy all your properties at 15 year loans it will add up). We are taught by all the guru’s and real estate financial wizards to buy as many properties as possible and use leverage to create wealth. Another reason a 30 year loan would be better is if you are flipping the house or plan to keep it for only a few years. There is no point to have a larger monthly payment and it will cut down on your Cash on Cash return.

    All that being said, if you plan to keep it for life and your goal is to set yourself up for retirement and you only need a couple of houses to do that, then I say why not? If you only need 4 houses to retire let’s say then the 15 year loan would probably be best (unlessyou are stretched too thin and can’t qualify for all 4). I took the dave ramsey course and he recommends the 15 year loan because of the interest saved and he just doesn’t like debt at all mainly. In theory the 30 year loan is the better option, but in reality I say it is up to you. You know your situation and your goals best. If I were 60 years old and wanted to retire in 15 years then I would do a 15 year loan too…but I am only 24 and plan to use leverage and time to build my wealth.

    P.S. the tax savings and inflation is all good on the 30 year loan, but in reality I don’t think that makes much of a difference to most of us. Unless we have millions of dollars’ worth in assets under our belt or hundreds of thousands of dollars in income a year (which may be your case) I don’t think it matters so I am not even going to factor it in at this point. I think the cool thing is that you took action and your are better off than 90% of Americans, great job on creating passive income!

    -John

    4Reply
  • David Zinn
    OP
    Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
    11y

    Just processing this externally, bear with me.

    An extra $165/month is not going to move the needle in a significant way for me. That is true today, and I can't imagine how much more true it will be 10-15 years from now. An extra $550 admittedly won't mean as much to me 15 years from now as it would today, but it will certainly be a more meaningful kicker to supplement the cash flow already coming in from increased rents over the years.

    Call me pliable, but I think I'm tilting back to 15 again : )

    1Reply
  • David Zinn
    OP
    Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
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    Thanks for the kind words @John Hyatt

    I hadn't given too much thought to the debt-to-income ratio down the line. You're right, not a huge difference; but if I bought five houses just like this, that would give me $3,410 in monthly mortgage debt, instead of $1,925 (if I were to use 30-yr mortgages). I guess at that point I could use cash flow from four of the houses and aggressively pay of one; then debt-to-income ratio would change drastically. 

    0Reply
  • Joshua Springer
    Residential Real Estate Agent · Columbus, OH · Member since 2013 · 281 posts · 110 votes
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    99.9% of the time the 15 year will pay off earlier even if you make the same payments as "extra" on a 30 year because the 15 year rate is significant enough difference typically to let a 30 year be compareable.  Now when you get to much smaller mortgages...say 75k and under the  payoff time difference becomes almost unnoticeable(assuming low rate environment).

    WIth that being said the huge benefit of a 30 year mortgage is flexibility. You can paydown extra if you want, you can keep the high cash flow if you want and you will qualify for new loans easier if you get 30 year mortgages because your DTI will be lower.

    The interesting idea would be to see what kind of principal paydown it would take to accelerate a 30 year amo into a 15 year time period so you'd receive benefits of low DTI while still paying it off in same amount of time(obviously only beneficial for a small group of people).

    This all being said I keep rentals at 30 years and personal at 15...want to pay off my personal residence asap so if the unthinkable happens..major injury, death to wife or myself etc we'll be able to live in comfort on 1 income and keeping extras for kids futures.

    1Reply
  • Derek B.
    Greensboro, NC · Member since 2014 · 212 posts · 143 votes
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    @David Zinn

     I used your interest rates you posted above with a $74k loan (rounded up) and came up with the following:

    15 year / 4.125% / $552.02 P&I (not including T&I)

    30 year / 4.75% / $386.02 P&I (not including T&I)

    The concept that @Mark Elliott outlined does not work in your case.  If you apply the $552 payment to your 30 year loan, you'll pay off the loan in 16 years.  Note:  if the interest rates on the 2 loans were equal, then applying the 15 year payment to the 30 year loan would retire that note in 15 years.  The only way that 15 year payments will pay off a 30 year loan in under 15 years is if the interest rate of the 15 year loan is higher than that of the 30 year loan.  That would be rare to see.

    I would go with the 30 for several reasons:

    1.  Debt to Income Ratio - @Joel Owens noted that it depends on your income and it does. If you lock in the higher payment of the 15 year loan, that will be calculated in your DTI. Do that several times and your DTI may become too high that it's harder to get loans. If your personal income is high, then hitting a DTI ceiling on these payment sizes is less of a concern.

    2.  With a young family, you never know when you will need that almost $200 spread.  I personally would lock in the low 30 year rate and pay it down in 15 or 16 years, but still have the flexibility to make the lower payment if life or that property throw something unexpected your way.

    That's my .02.  Best of luck to you.

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  • David Zinn
    OP
    Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
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    Thanks @Derek B

    At what DTI do lenders start turning you away?

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  • David Zinn
    OP
    Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
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    Thanks @Joshua Springer

    DTI might be a one of the biggest factors in this question now that I think about it. If you want to buy more than four or five properties, taking a loan with a longer amortization period makes a whole lot of sense.

    Truth be told, I'm not sure what I want yet. I definitely don't want a ton of properties at the moment because managing them or other managers at that level doesn't appeal to me. Having a few seems like a great idea, though. I figure that through this and maybe a second property I will start to get a clearer picture of where I want to go with it all.

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  • Gilbert Dominguez
    Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
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    Here is an idea for you to consider. There are investment clubs that will manage an investment account for you. They pool your money with others and lend it to GC's and rehabbers or for transactional funds earning an average of 12%/yr. Take the 30 year mortgage and lend out your $200.00/mo at 10% to 12% over the years that will earn a nice sum of money for you. Reinvest the money along with the earned interests and keep lending it at the same 10% to 12% gain. In This manner you could definitely come out ahead and be able to pay of the 30 year mortgage in less than 15 years. If you take the 15 year mortgage you would in effect be committing to spend that money any way per month, right? This is another way you can think of and accomplish both paying off your mortgage in 15 years or less and have it be far more economical for you. 

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  • Bryant Moran
    Real Estate Agent · New York City, NY · Member since 2015 · 36 posts · 14 votes
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    I second what Joe said! 

    He makes an excellent argument. You can always pay more to the principal over time in addition to your to your amortized 30 year loan. The 15 year loan charges more so you are therefore less flexible with whatever other property you are saving up for. 

    On top of making more payments on a 15 year plan, you are also making less on a cash-on-cash return, or your ROI. Ideally, you want to make the most use of the money you're putting in. (in other words, leverage) I would go for a 30 year mortgage, you can always apply more to the PRINCIPAL balance which would in turn lower your interest over time. 

    Plus if something were to go wrong such as an unexpected repair, you'll have more money to take care of the situation..

    Happy investing!

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
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    I refinanced a bunch of properties to a 15-yr in 2012 and I am glad I did.  Sure the payments are a little higher, but the faster pay-off is worth it to me.  If you can afford the small cash-flow hit, I think it will be well worth it.

    The interest rate tax deduction argument is silly.  Send me $10,000 and I'll send you back $2500 any day of the week!

    1Reply
  • John Newman
    mechanical engineer · Garner, NC · Member since 2015 · 40 posts · 16 votes
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    Originally posted by @Gilbert Dominguez:

    Here is an idea for you to consider. There are investment clubs that will manage an investment account for you. They pool your money with others and lend it to GC's and rehabbers or for transactional funds earning an average of 12%/yr. Take the 30 year mortgage and lend out your $200.00/mo at 10% to 12% over the years that will earn a nice sum of money for you. Reinvest the money along with the earned interests and keep lending it at the same 10% to 12% gain. In This manner you could definitely come out ahead and be able to pay of the 30 year mortgage in less than 15 years. If you take the 15 year mortgage you would in effect be committing to spend that money any way per month, right? This is another way you can think of and accomplish both paying off your mortgage in 15 years or less and have it be far more economical for you. 

     Hi Gilbert,

    I am very intrigued by this concept.  Can you give some examples of these investment clubs?  Do they have minimum investments?  Can you contribute periodically?  Are there restrictions for withdrawals? 

    Thanks,

    John Newman

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  • David Zinn
    OP
    Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
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    Great idea @Gilbert Dominguez. At this point I just don't know of any type of fund like that where I could earn 10-12% right from the get-go with a $165/month deposit. I've actually never heard of a fund like you just mentioned, but I am going to a local REIA next week for the first time next Thursday. Maybe I'll meet some people who know about opportunities like this.

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  • David Zinn
    OP
    Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
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    Thanks @Bryant Moran!

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