30 yr or 10 yr fixed?

17 Replies

I own a property property outright and am looking to do a cash out refi of it. The property is in an LLC but is a single family. In talking with different local lenders I have two options:

Option 1: 30 yr fixed rate at 5.25% with a bank I don’t have a current relationship with.
Option 2: 10 yr fixed rate at 3.35% (20 yr amortization) with a bank I have a relationship with.

Property is worth about $425,000, looking to take out ~$300,000 to reinvest in additional properties. No prepayment penalty on either option unless I refinance with a third party.

Which is the better deal and why?

Thanks for the help!

First, under no circumstances would I EVER get a 10 year fixed on a SFR. NEVER. I only get 30 year fixed on a SFR. Main reason is it would utterly kill your cash flow potential. Secondary reason is do you think rates will be this low again in 10 years or will they be higher? Personally, I think we are heading into a decade of high inflation and the only way the Feds can cut inflation is by hiking interest rates. Will it get as bad as the 70s/80s with 16% interest rates??? IDK, but I wouldnt take that risk.

Second, You can always pay more down on your mortgage, if thats what you want to do, but you can never pay less. So if you get in a bind for some reason you are stuck with a higher holding costs each month. 30 year loan just lessens the risk. 

Third, keep shopping for a bank. 5.25% on a 30 year fixed is high. I just got a mortgage for a duplex, non-owner occupied, for a 30 year fixed at 3.75%. You might only have about $150/m difference now (which is a lot in my book) but if you get a loan at 3.75% theres $400/m difference. Go find another bank. At least aim for low 4s. I would have to be looking at a commercial loan to settle for 5.25% in this market right now. 

@Nik Moushon , I totally agree that rates will be higher in the future, hence wanting to do something right now to lock in these low rates. We haven't found other banks that are willing to give 30 yr fixed on an SFR when it's held in an LLC. All other ones see LLC and immediately go over to the commercial lane with 10 yrs being the longest fixed they'll give.

Originally posted by @Andrew Magoun :

@Nik Moushon , I totally agree that rates will be higher in the future, hence wanting to do something right now to lock in these low rates. We haven't found other banks that are willing to give 30 yr fixed on an SFR when it's held in an LLC. All other ones see LLC and immediately go over to the commercial lane with 10 yrs being the longest fixed they'll give.

 This is the reason I only use LLCs with Commercial assets.  Residential liability risk is super low.  Insurance co's will give me $500k in liability protection for $10s of dollars per month.  In the name of 'asset protection', low fixed rates aren't available to you. 

LLCs are more of a legacy, asset protection, capital preservation move. Thats my lense, so  I'd go with the 20 yr, 10 yr fixed.  Cash-flow isn't my primary focus. 

 Hard to be in the cash-flow, expansion phase of your journey playing with a balance sheet / capital pres hand.   Choose one or the other. 

@Andrew Magoun I guess I'll be the contrarian here and side with the 10 yr fixed. This all depends on your goals, but comparing just the two options you describe, I think in most cases the 10 yr fixed would be better. There is security in knowing you've locked in a relatively low rate for 30 years, but 30 years is a long time and who knows how your goals might change between now and then. I suggest you plug both options into a mortgage calculator and compare. Then you'll see that for $300,000 the monthly payment will be about $60/mo higher for the 10 yr fixed with 20 yr amort. Over those first 10 years though much more of your monthly payment will go towards principal on the 10 yr fixed. After 10 years you will have paid just over $54,000 on your principal for the 30 yr at 5.25%, but you will have paid $125,000 on the 10 yr at 3.35%. That $60/mo more you were paying for the 10 yr will put a little bit of a drag on your cash flow, but over 10 years, that adds up to only $7,200. Unless you feel certain you will hold onto the property for much longer than 10 years, AND that interest rates will definitely be a lot higher in 10 years, the 10 year option makes more sense. Note: this math changes if you can find a 30 yr with a more competitive rate.

Originally posted by @Andrew Magoun :

@Nik Moushon, I totally agree that rates will be higher in the future, hence wanting to do something right now to lock in these low rates. We haven't found other banks that are willing to give 30 yr fixed on an SFR when it's held in an LLC. All other ones see LLC and immediately go over to the commercial lane with 10 yrs being the longest fixed they'll give.

I did right read over that you mentioned it was in an LLC. That does change the lending a bit and I understand why you are getting the higher rate quotes now.

If you are stuck with your property in a LLC I would look around for a 20 year fixed loan. Like @Steve Vaughan suggested. Its the same concept as the 30 year. My goal is to get as long of a fixed rate as possible. You can always get lower rates but they come with lower fixed years too. 

One of the things I always look at when I'm looking to refi or start a new loan is buying points. This HIGHLY depends on what your long term plan is with a property. If you are planning to hold for at least 10 years then consider buying points. Run the numbers and see how long it would take to pay that back. If it takes much more than 10 years to pay it back (after factoring in my normal cash flow) I don't consider it. When I first got quotes on my duplex it was over 5% too and was considering buying points down to at least 4% because this is a forever property for me. At 4% on a multi unit property is pretty darn good and allows for the cash flow margins to flux with the economy and I would still sit just fine. I would still consider doing this with a 20 year fixed if you can find one. I probably wouldnt with a 10 year though. 

Also, try and look for a bank that you could do a portfolio loan with and group in the several other properties you are going to buy with your new cash. Talk with them and bring it up. Suggest something along the lines of: you will take the 30 year fixed at 5.25% and if I bring in 2 or 3 more loans to your bank you will give me 30 year fixed at 4.25% on the new loans and change the first loan as to that as well. Something like that. Doesn't hurt to ask, right? Try to negotiate something. I would think they would love for you to bring that $300k, in cash and loans, right back to them. 

Just to also piggy back a little on what Steve said about properties in a LLC. I agree with him that SFR rentals are very low risk. If you are really concerned about liability just pay for a $1m umbrella policy (or higher if you want). This makes getting the loan and refi much easier. With that said though, I will be moving my duplex into an LLC here soon-ish. My reason is different than just straight liability that most people think of. I plan on doing a lot of development in the near future. That comes with a LOT of risk and a LOT of liability. So I am moving it to a LLC to protect it from the high risk factor that comes with developing property which is completely different from the risk of a law suite from a pissed off tenant. So thats my reasoning behind a LLC. Not sure what yours is and its completely up to you.

Originally posted by @Andrew Magoun :

@Nik Moushon , I totally agree that rates will be higher in the future, hence wanting to do something right now to lock in these low rates. We haven't found other banks that are willing to give 30 yr fixed on an SFR when it's held in an LLC. All other ones see LLC and immediately go over to the commercial lane with 10 yrs being the longest fixed they'll give.

If they are lending to an LLC, then any loan would be a commercial or business loan. By definition, a personal loan will be in your name.

Are you sure that 30 year fixed loan will not require you to have the loan in your personal name? 

As far as which option to choose, the payment is pretty close. The 30 year option will be around $1657 and 10 year (20 amortization) will be $1748 so you are paying $91 extra. Over ten years that $91 extra will cost you $10,920. At the end of ten years with the 30 year option, you will owe $245,948. At the end of ten years with the 10 year (20 amortization) option, you will owe $175,948. That means after accounting for the payment difference, you will be ahead by $58,976 at the end of ten years. Of course that doesn't take into account the opportunity cost of that $91 per month.

I don't believe that interest rates will be much higher in 10 years. The lower rate in this case will allow you to build more equity by paying down debt faster. It should be easy to refinance in ten years when you will owe 1/2 to 1/3 the value of the property.

In this case I would go for the shorter term and lower interest rate. If the interest rate was similar, I would go for the 30 year lock.

@Joe Splitrock , the 30 yr fixed is able to do LLCs. They’ve just started to offer this and only do it up to 4 families. Thanks for double checking though. 

I’m leaning heavily towards the 10 yr as I like the idea of having a lot more principle paid down by that time as opposed to the 30 yr. As you mentioned, the payment differences isn’t that much. 

I feel the answer to this question is determined by how long you anticipate owning this property.  Few investors I feel hold sfh for any lengthy period of time of 10 yrs or longer.  Is your portfolio large enough to support a higher payment with a quicker pay down or do you need the cashflow to stay afloat?  I personally run 5 yr fixed with 20 yr ams as it gives me a decent mortgage price will still receiving lower rates.  When you refinance its always nice to up your cash flow but even when rates go up the pay down would offset most increases in rates over the 10 yr period you laid out.  Personally I vote for the 10 year for this fact as I assume you've crunched the numbers and either scenario works for your current need.

Most important question on the 10 year fixed: how does it adjust after 10 years? Some adjustable loans jump crazy high when they adjust even if rates stay at these record low rates. Find out if the 10 years were up today at today’s rates, what would your new rate be? Sometimes they have a very high minimum rate. It would force you to refinance after 10 years and pay alotta closing costs again.

@Andrew Magoun I agree that we need to know your goals and concerns. Are you really focused on cashflow? It's not everything. My wife and I focus on a mix of flow and equity. She's big on needing the security so that's part of our compromise. Also, what are the terms of the 10 year fixed/20 year amo post the first 10 yrs? Is it prime plus 1 or something else? While I highly doubt we'll see rates this low for another 5-7 years I can say, I've been focusing on the 15-20 mark for payoffs.

@Jim Spatzenfeld and @Alan Ouellette , good idea on asking about what the terms are after the 10 yrs and where the rate goes to then. I hadn’t thought about that yet (more than there’s a good chance that rates will be higher than they are today.) If I did the numbers right, rates would have to go up to over 10.25% for the payment amount to be the same on the remaining principal as it is today on the initial loan.

In terms of goals, I'm a buy and hold investor. This SFR is part of a larger portfolio of about 30 doors (a mix of smaller multis mostly) so overall both the property and portfolio can make the payments work at either the 10 yr or 30 yr rate.

Quick update: 10 yr fixed would revert to prime at the end of ten years. 
30 yr fixed rate came down to 4.5% with no points. 
Both still have no prepayment penalty (unless I refi with another bank).