30-year of 15-year Refinance

13 Replies

Hi BP Masterminds :)

My husband and I will be refinancing our first rental property. However, we are not sure if it makes sense to do a 30-year or a 15-year mortgage. We really like the idea of owning the property outright in 15 years and paying less in interest long-term. But, obviously that means less cash flow (current PITI= $990 and rental income + $1250, not impressive - I know - but it was our first). Plus I'm not sure if this particular property is worth paying off since it is an older home. We also plan to buy our 4th property in the next 3-5 years and think that having a higher cash flow will be better in terms of getting a 4th mortgage.

We would love to hear your thoughts on this. What would you do? What other factors should we consider? We are fairly new at REI, so your generous advice is greatly appreciate it. Here's the info that I got from the mortage broker....

If we did the 30 year refinance the rate today would be at 3.50% with .125 in pts to get there, if we don't roll in the .125 then the rate jumps to 3.75%. The payment on the 3.50% would be est at $772 per month which will save you $217 in monthly payment and if I put your current loan side by side with this loan your interest savings over the term would be est $50,349. To give you an idea of the importance of staying at the 3.50% with the .125 pts, if we went to the 3.75% the payment is $787 but the interest difference saves you $8026 ( the .125 pts rolled in is only $136 in order to save $8000 in the long haul)

You could also do the 15 year. The rate would be at 2.75% today with 0 points to get it and the payment would go up to $1021 per month which is an additional $30 per month but the kicker is that your interest savings side by side jumps to $119,915 by cutting off the years. Think of it this way, by cutting off 11 years of your loan you will have $130,680 less money you will even send to the bank over that term.

I am not a BP mastermind and I feel bad even replying to your post. But it strikes me you've hit what I think is the biggest nail on the head.. the opportunity cost of less cash fow for going with 15YR vs. 30YR. Personally, I go with 30YR since liquidity is important to me and I never think we will see rates like we see today ever again.. so saving < 1% on rate and doubling my amort payments isn't personally attractive to me. Especially as you have a property targeted to buy already, that you may not be able to buy if you go with 15YR. One analysis you could do is a combined return analysis.. what would your return on capital be if you went with 15YR financing, vs. going with 30YR and picking up that additional rental property (which will have return associated with it as well)? Debt is cheap right now, so for me, I am trying to get as much of it as possible (while of course staying prudent, with plenty of reserves, realistic expectations, etc.) and putting it into assets that can generate higher returns...

Michelle, I am a big fan of leverage applied responsibly and my take is to amortize your loan today for as long as you can. Yes, you pay more in interest, but keep in mind, at the lowest rates in history, you actually pay less than when intent rates were at 7%. Secondly. While many will argue that owning free and clear properties provides no risk and more cash flow, I argue that you give up the power of leverage, not to mention the tax deductions essential to having cash flow almost tax free.

Once you have a home paid off, you have equity sitting in the walls of your home earning you 0% return! That is wasted opportunity in my mind and I am betting that in 15 years, assuming you did a 15 year term, rates will be higher than today so why not use leverage over 30 years or more (there are now 35 and even 40 year terms) locking in the lowest rates in history!

I think you need to analyse your goals. I am an investment property buyer for long term properties. I started 6 years ago with the 30 year mindset. I know only go with 15 year mortgages. A part of this is because I want to retire from my day job at age 40, so about 13 years from now. I don't neccessarily need the income right now as I am employed, however in 13 years I will have several properties paid off and/or very close.

I still cashflow $100/door as well. I do then show income on my tax returns even after depreciation and expenses but I am ok with that. Even in the top tax rate, I would rather pay $3,500 in income taxes instead of $10,000 in mortgage interest to save $3,500 in taxes. I also get 75 basis points lower in interest rates on a 15 year note compared to a 30 year note.

The biggest benefit I have it that it gives me options down the road. In 5 years I have paid down roughly 30% of my mortgage. I do not have to worry about one of my properties being short on equity, thus hurting my chances of acquiring financing for another property. I also have the opportunity to pull money out of these properties with a HELOC or other similiar fashion.

This is the best strategy for me for my goals and yours might be different. I might build slower but I also believe I am taking less risk and building much stronger. In 13 years when I will desire the income I will be cashflowing extremely well which will again give me a lot of options which is most important for me. I can make much better decisions when I have options.

Good luck, I hope that was of some help in your decision.

Thank you everyone. Really appreciate your advice.

@Michelle Santiago

There are a lot of factors which go into the financing term, including, your age, your tolerance for risk, where you are in your invetsment career, whether the property can carry the financing.

But I general I have always thought to borrow the most money for the longest term possible, like 30 years, fixed interest rate.

Exceptions to that might be you're retiring soon, planning on selling the property soon, in which case I probably would go to the expense of re-fi at all.

On the other hand I do like the 15 year terms, and the interest rate is lower. Just settled one for 2.75% fixed for 15 years. The monthly payments are higher on the shorter term, and I would only do that if the property can support the higher mortgage payment associated with the 15 year term.

I would always chose a 30 year mortgage. You can always make extra payments and pay it off in 15 years. But if you get a 15 year mortgage and can't make the payment you could lose the property.

A 15 yea mortgage is a 15 year mortgage. A 30 year mortgage is a a 30 year OR 15 year.

Good luck - Ned

Just one more reason to go the longer distance as Ned pointed out above.

For Kyle. So you're only netting $100 a month cash flow per door?
Yikes. How is it you're showing any kind of profit at all on your tax returns. Your depreciation should be enough to offset any of that cash flow given how low it seems.

What do you do for a vacancy though? Seems like you'd have to dip into your reserves every time there's a vacancy or a significant repair.

My strategy is to preserve the reserves even when a large item pops up. New roof? There goes this months' profit for all my houses. But at least I never have to dip into my reserves or, worse still, my own pocket.

I would be extremely leery of investing in real estate where the net profit was $100 a door - unless you're talking multifamily maybe. But for a house, thats a money loser to me .....

@Mike H. ,

The lack of cash flow would be because he is paying so much in principal per payment. Also he is paying off more in principal than he is deducting with depreciation.


I think it depends on your goals for that property, and where you are at in life.
Personally, taking advantage of these low rates for as long as possible makes complete sense to me. Use the money that you save vs. the 15 year mortgage to reinvest in more property, or make 15 year payments on your 30 year loan with the flexibility to pay the lower payment if you have a bad month.

We refinanced our personal home from a 30 (we had 25 years left) to a 15 last year, for us the case of your own home is different.

Hope that helps,

I would definitely go with a 30-year loan. When I first started the buy-and-hold for rental properties, my first one I got a 10-year loan, because I got a low interest rate and 0 points, and liked the idea of paying the whole thing off in just 10 years. After the mortgage payment (which included property taxes and insurance) and the water/sewer bills, the property got me $400 per month extra which I'm holding onto for a "repair escrow". Unfortunately, even though $400 per month sounds like a lot, it quickly gets eaten up by a big expense (and lots of little ones).

Like the advice stated, if you get a 30 year, you have the option of turning it into whatever year loan you want. You might be surprised at what you will come up using that money for.

Mike H.

I only have 5 properties currently, I live in the lower of one of the 4 duplexes and the other is a single family. We are in the process of purchasing a single family home of our own so that will be 6. Steven was correct. I have one property that I bought on a 30 year note and has a higher interest rate. That one is hurting me the most or saving me the most on taxes, however you would like to view it. My other properties are all 15 year notes with low interest rates 4%, 4.25, 2.75, 0%(until I refinance). These rates and terms makes my interest payments very low. Last year I netted about $600/m and lived for free outside my personal utilities. The way I operate I purchase properties that I can force a decent amount of appreciation by fixing them up as well as improving them. My expenses are usually quite low. I do have a large amount of capitalized costs but I have a detailed plan going in which allows my properties to be improved properly for maximum long term value and efficiency, increases rentability and value.

I do not neccessarily need the income from my rentals right now. I want that later in life. This is wby I structured the way I do. I even take a decent chunk of my W2 income and invest in my real estate investing growth. As for vacancy, I don't know what to tell you, I have not had a vacancy in 7 years. I had one tenant wait 7 days to move in but this was to remodel a bathroom. I know vacancy will come but I just need to continue operting in a manner that makes it very rare.

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