Small monthly payment with long term loan or the other way around

3 Replies

Hello, I am looking at buying a multifamily property with 4 units. I already have one apartment for rent, mortgage free, and I was wondering what is smarter as I need to get a loan for this new one:

- smaller mortgage monthly payments but longer repayment plan, or

- bigger monthly payments, which means less cashflow, but shorter period of loan.

Number 1 means more cashflow which could be invested somewhere but number 2 means a loan which could be repaid in 13 years instead of 20. Then the cashflow is much bigger.

Any suggestions for one or the other?

Madeline,

Get the longest term you can and pay it on a shorter amortization schedule.

Here is the logic: If you take the longer term, then you have the lowest possible payment. If you take a shorter loan, you are locked into a higher payment.

If you voluntarily pay on the shorter loan schedule, and something happens (which inevitably it will) then you can always make the minimum payment (revert to the longer payment schedule). If you are locked into the shorter term/higher payment then you don't have any ability to reduce those payments without refinancing, or trying to negotiate with a bank.

This works well for loans with no prepayment penalties. Those with yield maintenance or prepayment penalties need a bit more math to determine which is best.

Good luck!

Jim 

  

Are you looking for the best cash flow possible out of both properties as possible and is the other apartment building your looking to buy worth as much as your free and clear property you own and rent now????

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