How many years should I finance?

25 Replies

Hi,

I'm trying to get financed for a mortgage and was wondering which is better for a buy and hold rental property, 15, 20, or 30 year mortgage?

I was leaning toward a 30 year just because the payments look lower although the fixed rate is a bit higher.

But the 15 and 20 year may have a bit lower rate, the payments are higher.

I'd be paying the loan off early.

Any thoughts or advice?

Thanks

I agree with George. Take the longer term and save capital.

When financing the next property banks need about 6 months in reserve per PITI ( after your down payment ) Also, saving for major repairs is a good strategy so you are not paying high interest rates to replace a roof or something.

Capital is King and if the property cash flows on a 30 year it is sometimes a good idea to save cash.

I hope this helps.

Ramona

Depends on your goal with the property. If you are trying to maximize monthly cash flow, go with the 30-year. If you are more interested in long-term and equity build, go with the shorter term. 

I'm a big fan of instead of paying any mortgage off early, use that extra money to buy more properties and keep the leveraging going!

Originally posted by @Robert Farris :

Hi,

I'm trying to get financed for a mortgage and was wondering which is better for a buy and hold rental property, 15, 20, or 30 year mortgage?

I was leaning toward a 30 year just because the payments look lower although the fixed rate is a bit higher.

But the 15 and 20 year may have a bit lower rate, the payments are higher.

I'd be paying the loan off early.

Any thoughts or advice?

Thanks

 You get better cash flow with a 30 year mortgage.

Thanks Greg,

So I filled out the application and talked with the credit union rep and she was kind of frowning on the 30 year mortgage idea.

The property I'm after is only $20K so of course she was frowning over that. So I bumped the property value to $35K and the loan amount $25K which was ok, 

It's a bank foreclosure that's in the redemption period with my Dad, and of course she was frowning on that because she's not familiar with that kind of transaction.

She also told me I would need 14K cash at closing, which I told her I had which surprised her

She was trying to get me to do a no collateral loan which of course would be easier but the interest rate is 9.5% for I think 5 years and the monthly payment is $350+....vs. the 30 year which would be $126.

She said she has to talk with someone because this is not a conventional loan and she's not sure if she can give me the 30 year....she mentioned gouging?? kinda weird I thought. I told her I wasn't going to let it go 30 years but she was skeptical of the whole thing.

The unsecured loan doesn't seem good to me even though it would be easier to get.

@Robert Farris ,

I am new to investing myself, but I think I can add some value to your question. I just had my purchase offer accepted today, and had to choose between the exact same terms you did.

I went with 15 years, and I'll tell you why.

Between 30 and 15 there was a $200 difference in payment per month, leaving me with either $600 or $400 in cash flow. I based it on a few things.

1.) I am currently 22 years old, and with a 15 year mortgage I will have to house paid for at the age of 37.

2.) Next, how much work does the house need? If it needs a good amount of things done, than the extra cash flow would probably be useful. If not, and you can afford the difference in payment from 30 to 15 that take the lower term.

3.) I feel like everyone here is failing to note that in the long run you will be paying a significant more interest and principal in 30 years than the 15. Yes you could refinance down the road, but if you can afford it and you don't need the monumental cash flow than pay it off as soon as possible.  

As Ali noted, it depends on your plan, if its long term like mine by building equity and not being greedy with cash flow than 15 years is a no brainer. 

Originally posted by @Charlie Miller :

So are you buying your Dads property that is being foreclosed on?  I'd think banks would have an issue with that (Arms length agreement).

 I already bought one at a public sheriff's sale. 

The one I'm interested in now was at that same sheriff's sale but didn't sell. I've talked with the bank and they're good with it.

I know this wasn't your original question but I chose to do a 5/1 arm on my first property.  It scares some people that the rate could increase but it worked well for me.  I am likely going to implement the BRR strategy on that property and refinance it next year into a 15 year.  

@Stacy E. ,

Thanks for commenting. I'm not familiar with that type of loan. What made you decide to go with that type? Was there an advantage?

The more I think about the BRR strategy, the more I like it!

A 5/1 ARM typically has a lower rate than a 15 or 30 year loan but it is only fixed for five years. After the five years, the rate can adjust up to 1% every year thereafter. It may go up or it may stay the same yearly. My loan had a cap of 5% increase for the life of the loan. It is essentially a 30 year loan but with a lower rate for 5 years then variable. Your mortgage payment can jump yearly. Unfortunately, some people used this type of loan to buy a house they couldn't afford; when the rate jumped they were not able to make the payment and lost the house.

For me it has worked well because I was unsure what I wanted to do with the property.  I did it this way honestly because my aunt a real estate agent told me it was the best.  Her reasoning was that I would save money with the lower rate and I could still refinance it if that is what I wanted. 

Best of Luck to You!

I would go with the 30.  What you have to remember is that you're not paying the interest on the mortgage, the tenant is.  Yes, the tenant is still paying the higher mortgage on a lower term, but that also affects your bottom line in the present.  Also, like @George Hermann said, it will lower your carrying costs when you have vacancies.  

@Robert Farris

My vote is on 30 years for the sake of flexibility. If all goes according to plan, take the surplus cash and pay down the loan early. If you need a new HVAC in a few months, your cash flow calc. are shot for years to come and it will be nice to have lower monthly mortgage payment. In a historical context the current interest rates are very low with not much room to get lower but a lot of room to get higher, which is my rational to stay away from a 5/1 loan for a buy and hold.

All our SFR's and small multis, were on commercial loans. 10 yr loans.

Our newest Apartment purchase:

70% bank loan 20 yr. Currently paying on 20 yr AM. After the Seller pays off, we will add the seller payment to the original bank payment to pay off in 11.5 years.

20 % Seller finance 10yr(to appease bank) paying on a 5 yr AM

We have short payment schedules and still cash flow some. The 32 unit complex will pay off in 11.5 years. Then gross rent of $19200/month minimum with no payments.

We basically baby sit them until paid off. One reason we are able to do this is that we have plenty of other SFR properties that provide cash flow. Plus new house building and other income.

@Robert Farris

Pros of a longer term - 

Lower payments, which also affects your debt to income ratio if you are applying for another mortgage.  Do you plan on buying more properties in the future?  

Flexibility - if you have a tight month or stretch on months, you are not locked into paying the higher rate

Interest is cheap now.  Good to hold onto cash while debt costs are so low

Cons-

Total interest paid will be more over the life of the loan

Interest rate is higher on a 30 year than it is on a 15.

@Dawn Brenengen

Thanks for commenting. I do plan on buying more property. I can tell already REI has an addictive nature to it!...lol

Since a 15 year is lower interest than a 30, it seems that would be more appealing. Seems like payments would still be doable.

Originally posted by @Robert Farris :

Maybe they were trying to steer you into something costlier? $14,000 at closing on a mortgage in that range does seem unusual... is she able to items what exactly the $14,000 is for? 

Banks are in the business of lending money for a fee (your interest rate on the loan), they likely won't be ecstatic if your mortgage is $126 if it could have been $350.

Each bank may have slightly different products, rates and terms. It always help to see what banks in the area are doing.

@Robert Farris If you want to qualify for more loans in the future, you might want to keep the payments low (do a 30 year loan).  The higher payment will adversely affect your ability to qualify for the next loan as it will raise your debt to income ratio.  

However, if you know you will have no problems qualifying for additional loans no matter how much debt you are carrying, then go for the cheaper rate and shorter term.