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.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
11y
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.
Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
11y
Thanks @Steve Vaughan
Yeah, it is a difficult decision. Of course I don't want to forfeit $29,700 in the first 15 years, but knowing that I will have an additional $99,000 the following 15 years seems pretty awesome.
I know that I could more or less do that by paying an extra on a 30-yr, but I would have to pay more per month to make it happen and it would require more discipline. More flexibility requires greater discipline.
Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes
11y
It is all about what your overall plan is. We started with 3 cash paid for houses(plus a paid for personal residence). Then starting leveraging. Since I, and the wife had jobs, we always used 10 year terms.
Then when we started getting commercial lines of credit and term loans, they were all on 10 year terms. Even our apartments are on ten year terms.
If you have enough properties, the cash flow takes care of expenses. We basically babysit some of the properties, until they pay off. Like the last 32 unit apartments we bought - 10 year on the bank loan, 5 year on the seller financing share. We cash flow a couple grand a month for 5 years. $6,000 per month for the second 5 years. Then 10K per month after the 10 years. But then, after they are paid off, we plan on spending $20,000 per unit in renovations. The renters can then pay that off.
Its all about having other business interests, etc. that provide some of your income.
It is hard to live on rentals until they are paid for. Unless you have a boatload.
Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes
11y
30 year is my answer as many stated above.
The biggest reasons are Debt to income as the 15 year will make it much harder to qualify for more properties because the payments are much higher.
I also like the flexibility of paying off early or not. Sure maybe now it makes sense to pay off early, but what if you change your mind? With a 15 year you are stuck and the 30 year you have options.
Remember cash now is worth more than it will be in the future due to inflation. Earning more in cash flow today is more valuable than earning more in cash flow tomorrow.
Plus you can save your extra cash flow for expenses or more houses. Sure it doesn't add up to much with one houses, but it does when you start buying a lot of houses.
If you are going to add more properties, I would get a 30 year. DTI management is important as you get many loans in place. Pay extra on the 30 as you want/can. It's also a good interest rate so you can lock in cheap financing for a long period of time with the 30.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
11y
There is no right or wrong answer here. It's just whatever works best for you and your individual situation. Do you need/want the loan paid off sooner? Then go with the 15 yr loan. Do you want to lock in these low interest rates for a longer period of time and/or have lower payments? Then go with the 30 yr loan.
I would point out that the comment earlier about how "you only get 4 loans on 30 year amortizations and you get unlimited on 15 year loans if you can keep qualifying" is not really accurate. That may be one lender's policy (though I'd be surprised), but it certainly isn't the policy of most lenders.
There are certainly lenders who will go above 4 loans on 30 yr amortizations. And for the lenders who do have a restriction on the number of loans you can have (most have some number they max out at), then it likely won't matter if they're 15 or 30 yr loans. I have talked to many lenders and never heard of one who allowed "unlimited 15 yr loans". Not saying that it isn't possible, but it certainly isn't the norm. If anything, you will likely end up being able to get a LESSER number of loans with 15 yr amortizations because your DTI will be higher. Just something to be aware of.
Investor · Chicago, IL · Member since 2015 · 677 posts · 309 votes
11y
Guys I haven't found the clubs I was speaking about since it was a while back but you might look up the URL below . As an alternative investment that will help you grow your money to use in paying off a mortgage early and generate even more income.
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!
I agree with you on the tax issue. I'll split it with you. There's a difference between a "tax deduction" and a "tax credit".
I would still commit to a 30...but I can pay that 30 off in 15. The 30 commits me too lower payments, and I can add more to the principle any/every month if I want to. If you run the numbers, you actually pay less in interest this way. The 30 yr monthly payment and amount you add to the principle each month will be less than the 15 year payment
Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
11y
Thanks everyone. My plan is to purchase several homes, but I could potentially see going beyond that. For the DTI reason alone I think I will go with the 30-yr. Going with 15-yr mortgages is really a double whammy in this regard, because not only does the level of debt I need to service increase, my monthly income will also be less than what it could be as a result of the lesser cash flow.
Whether or not I pay extra on the mortgage is another question altogether. Based on a blog post a couple days ago, I might pay extra for the first year or two to decrease principal and get maximum benefits/number of payments reduced, and then put the money to use elsewhere.
Investor · Tromsø, Norway (Europe) · Member since 2015 · 431 posts · 194 votes
11y
@DavidZinn Great question. Only you can decide what is right for you. Although one can run the numbers all day long the answer you're looking for depends on where you are in your investing career, and what your next big milestone is.
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
11y
I quadruple what Joe said.
When you're starting out as an investor, you want as much cash flow as you can possibly get. Its the one thing I tell every lender I borrow from or speak to - the real risk in investing in real estate is not the LTV. Its the cash flow I have.
Show me a house that you have an LTV of 60% and it loses you $200 a month and then show me another one that has an LTV of 80% and it makes you $300 a month. And the bank is getting back the first house more times than they're getting back the second.
Why would anybody give back a house thats making them money? Take the 30 yr am every time you can get it.
As Joe said, you can always put in more money in your payment so you can pay it down quicker. But if you take the 15 yr am, they're not going to let you pay less. :-)
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
11y
Sorry. Forgot to add.
You may think you're saving 63k over the second 15 years. But what if you took the additional 36k you made by taking the 30yr am and bought a couple of houses with that money? Thats really the value of boosting your cash flow today.
The more profits you have, the more options you'll have to buy more houses today.
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.
Eddy,
Thank you for running the numbers out on this claim. It didn't make sense to me that you'd cut any time off the loan by paying the same amount on the same balance, so I ran a quick example using simpler numbers and got the same result you did. When you factor in the better interest rate for the 15-year, of course you can't beat that by making the same payments on a higher interest loan.
Investor · Osseo, MN · Member since 2015 · 9 posts · 15 votes
11y
In the investment business you will always be in need of cash for your next deal. The more cash the bigger deal. So, I'm not a fan of 15 year mortgages. The reduced cash flow may in fact make it harder for you to qualify for your next deal. Banks look at your monthly obligations count that against your income. Right now, 30 year fixed rates are historically low. Buy a house with a cap rate of 8% and finance it at 4.5% for 30 years. Now that's a solid, low risk, long term investment with very good cash flow.
Related. I do think it is good to pay down one property and get a line of credit on it. A 50 to 100 k line of credit on your primary residence works great to stash money for your next deal.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
11y
Another aspect to this is where you are at in the investment cycle for that asset class.
If you have great deals to buy then it might make sense to use 30 year amortization to buy multiple deals at the bottom before the run up. You will also have a lower payment and more cash flow to then accelerate your ability to buy another property etc.
Investor · Round Rock, TX · Member since 2013 · 42 posts · 34 votes
11y
If you only plan on owning just a few properties and don't need to free up cash for more down payments, go with the 15 yr.
Every time a friend of mine buys a house (primary residence) I encourage them to get the 15 yr loan. I explain how much they'll save in interest payments over the term of the loan, and they always tell me they'll get the 30 yr loan and invest the difference. Guess how many of them have invested the difference?
Human nature is tricky because you've got this optimistic guy that says 'I'll pay it off early!', but then the car breaks down or you get a ton of medical bills and you never do. I like 15 yr notes because they force your hand.
For what it's worth, I have 3 duplexes and my primary residence on a 30 year note, and 4 single family residences on 15 year notes. We were throwing a lot of extra money at the duplex (30 yr note) with the lowest balance and making good progress. But I left my day job and our 2nd child is on the way so that's stopped temporarily. And guess what, even though paying it down was 100% the right decision, if someone gave me the chance to take the money back, it would be tempting.
My point is, life can get in the way of the 'we'll pay off the 30 yr note early' people, even those that do have the ability to delay gratification, and a proven track record of making good decisions with money.
Truly, if you can get a 30yr or 15 yr loan for a rental, you're improving your financial position. It's a win either way. Just don't overlook human nature and murphy's law :). I'm on team 15 yr note.
Residential Real Estate Broker · Vienna, VA · Member since 2015 · 8 posts · 1 vote
11y
I wish I had taken a 15 year mortgage on all those properties I bought 15 years ago. I have heard the argument a thousand times "I would take a 100 year Mortgage if I could" but let me tell you, figure out what would be Enough Cash to make you happy at the earliest point possible because you don't want your mortgages to out live you. There is nothing better then some remaining youth, and a paid off property.
Investor · Newport News, VA · Member since 2014 · 43 posts · 20 votes
11y
@Brent Coombs
LOL! Someone once told me that I look like a character in that show but I never looked it up.... until now. That is a much more flattering doppelganger than another one I get from time to time: Dirk Nowitzki.
LOL! Someone once told me that I look like a character in that show but I never looked it up.... until now. That is a much more flattering doppelganger than another one I get from time to time: Dirk Nowitzki.
So that IS you? Doppelganger for sure! (In the meantime, I was still deciding which actor I might use as mine - maybe Chuck Norris? Or, Brandon Turner? - er, better not)!...
Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
11y
@David Zinn, let me try to explain my model a little more. First using a 15 year not a 30 year amortization is not for everyone. If you need the extra $150 to $200 per month to buy food, or make your car payment go with the 30 year loan. I use only the 15 year amortization for several reasons. One quick reason is that 2 of my properties were bought with the owner financing my 20% down payment by taking a note for 20% of the purchase price at 2% with a 5 year balloon payment. let me show you those figures based on a $100K house purchase.
Purchase price $100,000 Down payment $20K at 2% per year done with 2nd mortgage to Seller with 5 year balloon. Banker was advised of the 2nd mortgage.
Purchase price $100,000
Down payment $20,000
Financed at bank $80,000
Monthly Payment $632.63 Balance Due at end of 5 years $59,646
You can now refinance back to an $80K loan and use the $20K equity to pay off the Sellers 2nd mortgage for $20K.
Using this scenario you must pay about $400 per year interest to the Seller or $33 per month.
This allows you to buy a property when you have no money down and be sure you can pay off the balloon in 5 years. If you get below 60% of debt left you can take a 3nd mortgage if needed to get equity out to pay for down payment on another property. If you put the extra money from your payment if you had a 30 year mortgage in the bank that can accumulate in a savings or checking account. When you have $200, or $1,000, or $500 you still wont have enough for a down payment, but the savings account only gets you .25% interest. If you used that money to pay down on your mortgage you would be saving 5% on it. Pull it out later with a second mortgage or if needed refinance the old property and the new property together into one loan to avoid having to pay cash for down payment. Thats what I meant by your savings account costing you 5%.
As to the number of loans . My bank sells their 30 year loans to Fannie Mae or Freddy Mac, as they don't want stuck with a fixed interest rate for 30 years. it is my understanding that you can only have 4 of them sold that way now instead of 10. When the bank does my 15 year loans they do not sell those to Fannie Mae, they keep them in house as they have a 5 year ARM. Thus they do not limit me just by number of loans it all goes to my ability to qualify for new loans. I do not know if most banks sale their 30 years loans to Fannie or not. My bank would limit me to 4 loans with 30 year amortizations, but I have about a dozen assorted 15 year loans. If the day comes when my DTI gets too low, I can refinance a property with a lot of equity, and pay off another loan completely. This will help out my DTI ratio a lot. If I get in a bind for ready cash for an unexpected sewer line or other unanticipated costs I can always take out a line of credit on one of my properties. If I had the money sitting in a checking account I would spend it.
Sorry to be so wordy I tried to keep it simple, but in the middle of this post I got a fire call, and now its 1:30 a.m. Hope this explains my strategy some more. Good luck whichever way you choose to go.
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.
