Pro's and Con's to 15 vs 30 yr. refi on personal residence

11 Replies

I recently did a rehab on my personal residence. Instead of selling, I will refinance, get cash out to pay off the refi and put myself in a zero debt position (except for the mortgage) to allow easier lending on investments.

15 yr - pay off home faster, better interest rate, higher fixed payments, 26% debt to income ratio, and increase equity for future HELOC's

30 yr - lower fixed payment, 20% debt to income ratio, higher interest rate, less equity for HELOC later.

Which is better way to finance a personal residence for a new investor trying to finance flips/buy-and-holds for short and long term.

15 yr - saves $ (interest) long-term and allows greater future barrowing through HELOC (which can be barrowed up to 95% and the home will be at 80% after refi).

30 yr - more cash in your pocket now and lower debt to income for future barrowings.

What do you think would be more advantageous for a newbie?

It all boils down your to your opportunity cost of capital on the refi 15 vs 30 year decision. If you pay down equity quick, yes you save on interest, however you gave up use of deployment of those funds which could have been put to another use. What is your opportunity cost of capital ?

Once you've figured that out the answer is clear as night and day, what was grey now becomes black and white.

Something else to consider is your equity at risk from an asset protection stand point since home equity is not guaranteed, it has no rate of return, is at risk from litigants, and if you dont live in a 100% homestead exemption state like TX or FL then your equity is at risk from creditors too.

yes free and clear is great for emotional solace, but there is a reason the devil is in the details.

I would go with the 30yr fixed. This gives you the flexibility to pay it off as if it were a 15yr by simply making extra payments and having them applied to the principal balance. Most owner occupied mortgages do not have a pre-payment penalty, so it won't hurt you to make extra payments. It also gives you a some security in the sense that if you are ever laid off or your income stream is reduced for some reason, you can always just stop the extra optional payments.

So let's say your 30yr fixed is $1k/month. You could simply pay $1k/month for your mandatory payment and then pay an extra $1k for a total of $2k payment / month to pay it off faster. But, if you loose your job or you want to divert funds to something else, you simply just go back to your $1k mandatory payment and there's no problem.

For an exmple, when you're first starting off investing, you may want to just pay your $1k payment and save everything else for investing. Now let's say 10years later, your investmetns are really paying off and generating a nice income stream for you and you can afford to make additional payments on your mortgage to really pay it off faster and save on that interesting financing. It's a win-win in my book.

If you go with the 15yr, yes you will pay it off faster, but you are stuck at the 15yr high payment no matter what happens and that could come back to haunt you if something drastic happens and you have huge medical expenses or something like that.

These are great points.  I have considered the 30 year option while making the same payment as I would on a 15 year.  However, I'd be paying an additional $200/month in interest.  So, say the 30 yr mortgage is $1400 and the 15 yr is 1800, I would need to pay an additional 600 instead of 400 against the 30 year to pay it off in 15 years with the higher interest rate on the 30 year mortgage. 

The other aspect I was thinking of is using the equity in the house in a HELOC for investment purposes, so would paying the extra equity in the 15 year essentially be like putting the $ in the bank that I can take out whenever I want through a HELOC?

I was originally going to take out a HELOC on my house in the first place (in-lieu of refinancing), but with the my credit being maxed out at the moment, my score dropped 100 points, which messed up my interest rate. So, I figured a refi is a way to get the lower interest rate and boost the credit score back up. This also would leave my debt/income ratio pretty high until I got HELOC paid off, but would leave me able to barrow against 45% of my homes value once it was paid off in 3-4 years.

I was also thinking about transferring $ from a 401k into a self directed IRA. This would allow me 60 days to get the $ into the IRA. However, it seemed really tight to get the $ from the 401K, to the credit cards/LOC, apply for the refi, get the appraisal, and have the cash from the refi soon enough to put into the IRA.

Any other ideas?

@John Elson if you invest a self-directed IRA in real estate, any debt financing (non-recourse loan) has to be to the IRA not you personally.

What I'm talking about is not a loan from the IRA, it's using hte 401k funds personally, and contributing the funds to the IRA withing the 60 day period allowed by the IRS. However, I don't think that gives me enough room to ge the money back into the IRA account. Therefore, I want to go the way of a refinance. However, I'm torn betweek the 15 and 30 year loans for the reasons above.

30, rates are historic lows and cash is king 

This is a very good topic and the age old debate. For me personally, I go with the 30 year all day long, especially at today's low rates! Secondly, your question of less equity for the future possibility of a HELOC to use for investments, you get that from each months mortgage savings. Rather than placing the extra money towards the 30 year payment, place it into a savings account and when it hits a number high enough to invest with, invest. The future HELIC is never guaranteed nor is your equity and interest rates are likely to rise in the next 5 years, so lock in the 30 year fixed now and take the monthly savings into an account for near future investment options. This version gives you the most flexibility and guarantees you a locked rate for 30 years!

To me, there is no question which way is better, but that is only my opinion.

I have two 15 year loans now they do build equity fast but you are talking about using a HELOC against that equity. This is counter productive if you are planning to take the equity back out because a HELOC will be at a higher rate that a regular refi. So if your goal is to buy properties with equity refi the smallest amount possible and save the rest untill you are ready to invest. Then you will have cash, equity and lower payments/DTI. if you plan to wait 3+ years then a 15 year makes sense but realize that HELOC rates will likely be much higher than your 15yr fixed rate.

do a 30 year and set up biweekly payments. It doesn't cost you any more per month and reduces your term, therefore you interest, by about 5 years or so depending on your situation. Consider doing the same on a 20 year loan and you'd get very close to a 15 year term out of it without the 15 year payment. But definitely use the velocity of money theory to keep the cashflow moving in the direction that creates equity and cashflow - buy more assets.

30 yr can always be paid like a 15yr (at slightly higher rate) 15yr can never be paid like a 30yr.

Originally posted by Account Closed:

30 yr can always be paid like a 15yr (at slightly higher rate) 15yr can never be paid like a 30yr.

Fully agree on this theory.  The flexibility of having the option to pay with a longer term, at ~1% per annum more (spread between 15y mortgage and 30y mortgage rate) makes it almost a no brainer.

Especially important if you are planning to buy more houses and need to conserve as much cash as possible... You can always put more later if you want (say down the road, you have too much cash but nowhere else to invest in, you can always pay off a large lumpsum of money)

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