15 or 20 year refi?

Question

I'm about to refinance my investment property under the HARP program and was wondering if I should go with a 15 or 20 year fixed.  APRs for both are attractive and the 15 yr. would be about $180 more per month and I would save about $20k on interest over the loan period.  In general, does it make more sense to go with the shorter term considering the savings on interest or is $20k over 15 years not enough to matter?  Are there other things I should consider besides the APR and interest before making my decision?

Rich Weese · Answer

Mark,

I don't know what type of investment property you're talking about but I do have a little information on one that I'm currently working on. I have a rather large apartment complex near Dallas and I'm in the process of trying to refinance it at the present time. One of the decisions that I had to face was my reason for owning this building. Am I planning on holding this forever or do I want to make a property that looks extremely desirable in the future to other buyers? I agree with what most of the other posters have said about cash flow. However, I also want to know I have an exit strategy.

I have a lender that has offered a loan with 30 year amortization and given me the option of a 10, 15, or 20 year balloon. My rate options are as follows:

4.25% for 10 year
4.95% for 15 year
5.25% for 20 year

I had a hard time determining whether I wanted a 10 year or 20 year balloon. I also had to get out my crystal ball and wonder what the interest rates might be 10 years from now. My crystal ball says rates will be higher and therefore the opportunity to lock in a low rate for 20 years became more attractive.

This loan is fully assumable at the existing rate and a nonrecourse loan. It has been submitted for approval and I don't yet know what the conditions might be. In my opinion, an assumable loan at 5.25% will be a valuable commodity during the term of this loan.

I don't know if this type of situation is available for you on your property. good luck. Rich

Bryan Hancock · Answer

Unless you can't generate much yield on your cash it is almost always better to take the longer amortization provided your horizon is long and the rate differential between the short and long is small.

Mark Ossman · Answer

I decided to go with a 30-year fixed based on feedback from this site saying to go with the longest amortization possible on investment properties.  My P&I will be just about the same as it is now, but I will no longer have an ARM, which was my main reason for financing.  I was able to get a pretty good rate too (4.5%) so I'm happy.

Mark Ossman · Answer

Thanks Cheryl.  The issue I have with the 30 is that I will end up paying almost twice the amount of interest over the loan term (120k as opposed to 66k) and the difference in monthly payment is only about $140.  Not exactly a huge amount to invest.

Cheryl C. · Answer

Mark, I believe 30yrs is what I suggested above.  I just refied from 15 to 30 and I'm alot older than you.   I am using the extra cash to throw at the principal on higher rate loans.  This is similar to your plan to invest it in higher return instruments.

Mark Ossman · Answer

..another option would be to do a 30-year fixed.  After all, the interest is tax deductible and my monthly payment would be slightly less, which I could use to invest and/or pay down my HELOC.  FYI, my "horizon" is pretty far away (I am 34 years old).  As long as the ROR on my other investments (stocks, bonds) is higher than the mortgage rate (which it is), I will make more by investing the money rather than paying the mortgage off sooner with a 20-year mortgage.  Does this make sense?

Mark Ossman · Answer

No, not exactly.  I have one investment property, and it is a 3-bedroom single family home.

Mark Ossman · Answer

Yes, the HARP program only allows refi of the 1st, and supposedly getting the lienholder to subordinate isn't a big deal according to my loan officer.

Jon Holdman · Answer

Can you really just refi the first?  The HELOC lienholder will agree to the subordination?  The rule is "first in time, first in line", so unless the second agrees to subordinate, they become the first and your new mortgage becomes a second.

Mark Ossman · Answer

(cont'd)...until the combined LTV drops below 75% (currently at or slightly above 100%).

15 or 20 year refi?

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