Best approach to refinance? 15-yr vs 30-yr fixed mortgage

10 Replies

Hello Biggerpockets members. I am pretty new to real estate investing but have been a Biggerpockets member for ~1.5yrs now. Like most I've read countless forum posts (thanks to all the contributors!), listen to the podcasts, read startup books etc but somehow still managed to let fear hinder me from expanding my portfolio. I somehow gained some confidence after reading David Greene's BRRR book and viola here I am. Anyhow, here's my scenario hoping to get some insight from you all (again i'm relatively a newbie so still learning). I purchased a condo about a year ago, mostly with the help of a relative (because i had no idea what i was doing), did some renovations to it and was able to rent it out to a section 8 tenant. Purchase price was $115,000 [Mortgage $103,500 @ 5.25% 30-yr fixed], current cashflow ~ $500 a month after all expenses. Great tenant, minimal maintenance monthly. Of note, I put in almost 23k in renovations into the property (again really did not know what I was doing). Comps in the area are going for about 150k-180k ARV. I am thinking about refinancing to get a lower rate so I and called two credit unions in the area; credit union A offered me a 15-yr fixed mortgage w/ no cash out @ 4.25% and credit union B offered me a 30-yr fixed mortgage @ 3.87%. Going with option A, i would increase my monthly cash flow by roughly $100 and $150 w/ option B (hopefully i did the math right). Please correct me if i missed anything.

My question therefore is, with a good tenant, minimal maintenance etc would you guys strive to pay off the mortgage quicker i.e. 15-yr fixed mortgage (Option A), OR opt for a higher monthly cashflow by extending the loan overtime i.e 30-yr fixed rate. Difference in monthly cash flow is about $50. 

My apologies in advance for the long post! Any additional advice/recommendation greatly appreciated.


I'd really like to see all of your numbers, @Manny Awa. It's highly unlikely that you're actually making $500/month on a single condo after accounting for vacancy, repairs, CapEx, HOA fees, management, etc.

To your refi question:

  1. I think the approach of taking a 30-year mortgage, but paying it off like a 15-year is the best one. This allows you to pay down the property faster, but allows maximum flexibility. The payment on a 15-year are typically ~50% higher than a 30-year. What if your HOA fees suddenly doubled or you were hit with a special assessment? Sure would be nice to be able to instantly lower you debt service in response.
  2. Keep shopping around for other lenders, if you're not happy with what's in front of you. The 2 offers look weird. The 30-year had a lower rate than the 15-year. Is that correct? It's usually the other way around.
  3. I calculated a difference of $361/month, based on what you wrote above (loan amount of $128k).

Thank you for your response @Jaysen Medhurst . I actually had not thought about that strategy of taking the 30-yr fixed option and paying it off like a 15-yr to allow room for any unplanned circumstances. The monthly cashflow is actually a little higher than $500 i.e. what i keep after paying off the mortgage+HOA without accounting for repairs, PM (manage myself) etc. As mentioned earlier, repairs are very minimal. Tenant maintains the property well and I have only spent about ~$2300 since purchasing the property just over a year ago and a chunk of that was to replace the washer and dryer. But here are the numbers (3bdr, 2baths) :

Purchase price: $115,000

Loan amount: $103,500 @ 5.25% 30-yr fixed [I took care of the closing cost, down payment, rehab cost etc]

Mortage + HOA* = $899 +$543 = $1439 [*HOA covers all utilities]

Rent = $1,998

Essentially, used somewhat of the BRRRR strategy to buy below market value and rehab to increase value.

re:  The 2 offers look weird. The 30-year had a lower rate than the 15-year. Is that correct? It's usually the other way around. --> these rates were from two separate credit unions; one offered me a 15-yr fixed and the other a 30-yr fixed. But i will definitely keep shopping around. What rates are you seeing in your area currently?

So....why don't you take the 30 year one, cash out at 75 or 80% LTV, then repeat and buy another one. If you're at $500 a month and looking to increase cash flow, replicate the first one and now you have $1000 a month. And it seems like you'd get more money out than you ever put in the first unit.

I made the mistake of paying off a property when I had the chance, for increased cash flow. And while I have the increased cash flow, I could have gotten even more cash flow by buying several more properties. Lesson learned.

@Manny Awa I agree with Jaysen, I think your numbers are a bit off here. Firstly there's no way that comparing 15yr and 30yr loans will only change your cash flow by $50. Even if you're comparing a no cash out refi on a 15yr with a cash out to 75% refi on a 30yr, your 30yr payment will still be around $150 lower. Also I think it's very important you take vacancy, repairs and CapEx into your cash flow calculation like Jaysen mentioned.

Regarding your question, there's absolutely no reason why you'd take the 15yr option over the 30yr if the interest rate is lower on the 30yr. 3.87% is insanely low for a 30yr fixed on an investment property - I'd jump at that without hesitation. 

My opinion (and there are lots of different opinions on this) would be to take the 30yr and still pay it like it's a 30yr without extra towards principal. Then take the extra cash flow and save up for your next real estate investment. Mortgage debt is smart debt, you'll be able to scale faster with higher cash flow on 30yr mortgages as opposed to 15yr and also have a bigger write off on taxes. 

Originally posted by @Jaysen Medhurst :

@Manny Awa, yes, 30-year is typically higher than 15. I’m seeing 4-4.5% for residential and ~5-5.5% for commercial. Really pays to shop around, especially with CUs.

Noted. I will continue to shop around. Somewhat just beginning the process so wanted some insight before jumping in. Thanks again for your input! 

Originally posted by @Michael King :

So....why don't you take the 30 year one, cash out at 75 or 80% LTV, then repeat and buy another one. If you're at $500 a month and looking to increase cash flow, replicate the first one and now you have $1000 a month. And it seems like you'd get more money out than you ever put in the first unit.

I made the mistake of paying off a property when I had the chance, for increased cash flow. And while I have the increased cash flow, I could have gotten even more cash flow by buying several more properties. Lesson learned.

Michael you are absolutely right! Initially when I bought it, I really didn't know much about the space was still learning (and still learning) so I wanted to just test the waters and see how it plays out. I am looking to scale now so looking to refi cash out and hopefully pick up another property. Essentially, that was my question initially...if there's any benefit to paying off the mortgage sooner vs opting for the longer loan term and still maintaining a good cash flow etc. Thanks for the insight. Much appreciated. 

 

Originally posted by @Kevin Luttrell :

@Manny Awa I agree with Jaysen, I think your numbers are a bit off here. Firstly there's no way that comparing 15yr and 30yr loans will only change your cash flow by $50. Even if you're comparing a no cash out refi on a 15yr with a cash out to 75% refi on a 30yr, your 30yr payment will still be around $150 lower. Also I think it's very important you take vacancy, repairs and CapEx into your cash flow calculation like Jaysen mentioned.

Regarding your question, there's absolutely no reason why you'd take the 15yr option over the 30yr if the interest rate is lower on the 30yr. 3.87% is insanely low for a 30yr fixed on an investment property - I'd jump at that without hesitation. 

My opinion (and there are lots of different opinions on this) would be to take the 30yr and still pay it like it's a 30yr without extra towards principal. Then take the extra cash flow and save up for your next real estate investment. Mortgage debt is smart debt, you'll be able to scale faster with higher cash flow on 30yr mortgages as opposed to 15yr and also have a bigger write off on taxes. 

Kevin you are correct. I went back and recalculated the potential change in cashflow for both options using the mortgage calculator on here and my numbers were in fact off. Based on your feedback and the other comments seems like it's a no-brainer to go with the 30-yr fixed mortgage. In terms of budgeting for vacancy, repairs capEx, with this first one I saved all the cashflow as reserve geared towards that should anything come up. But as I begin to scale will def budget appropriately for each item. Thank you again!

 

To be honest I wouldn’t be too concerned with the interest rate for either or at the moment because mortgages rates are going to keep falling and you can always refinance again after the seasoning period and you still have a cash flow either way. 

The biggest thing I would be questioning is how solid is the area you bought in? Take out the equity while you can in case the value goes down. Typically condos are the first to depreciate in a downturn so while you have the equity it would be smart to take advantage of it. 

Originally posted by @Account Closed :

To be honest I wouldn’t be too concerned with the interest rate for either or at the moment because mortgages rates are going to keep falling and you can always refinance again after the seasoning period and you still have a cash flow either way. 

The biggest thing I would be questioning is how solid is the area you bought in? Take out the equity while you can in case the value goes down. Typically condos are the first to depreciate in a downturn so while you have the equity it would be smart to take advantage of it. 

 Will definitely be keeping an eye on the interest rates. I feel pretty confident about the location in terms of stability but can never be too confident. I plan to refi before the market corrects, cash out and pick up something. Thanks again!