Mortgage terms, 10, 15, 20 or 30 years and why?

51 Replies

For Mortgages, including Primary Residence and Rentals, Do you choose 10, 15, 20, or 30 year terms and why? We tend to go fewer years, with the mind to pay down principal faster and so far all are buy and hold, with a couple paid off. What is the benefit of going 30 year terms? I have heard some say to never pay off mortgage, to leverage refinance for more properties to save on taxes, but the cost to refi is not free either. 

I think a lot has to do with how much risk tolerance one has. Some people don't mind having mortgages, others prefer free and clear. It's hard to grow without leverage, though. Also, since a tenant is paying the mortgage, it shouldn't much matter how long the term is or how much interest is being paid, as long as you have cash flow. Longer term=more cash flow since your monthly payment is lower. 

Personally, I have two seller financed mortgages that were for 10 and 12 years. I'm basically breaking even and at times wish I had longer notes, but since I'm still young enough and employed, I have plenty of time to grow. I'll either get HELOC's or take out new mortgages once they're paid off and buy more. I also refinanced my primary from 30 years to 15 and lowered my interest rate by almost 2%. I'd prefer my home be mortgage free.

Always! 30 and you can always pay extra to pay off sooner.

You can’t pay less if you do shorter periods unless you refinance. $$

So always do 30 and if you want to pay off in 15 you have the option.
just amortize it’s over 15 years and pay that amount.

this way you are hedging yourself a little against things that might happen if you ever can’t afford that higher 15 year payment.  I really can’t see any argument to do it over a shorter period especially at these low rates.  Longer periods and pay more = shorter payoff is the easiest way and you have options.  You don’t have options the other way around.

@Carolyn Morales I'd go with a 30 year mortgage because I'll be paying a lower monthly payment which helps my overhead. I plan on always leveraging my properties and refinancing existing properties before my mortgage is done. Personally, I like interest only loans, pay off the interest and refinance into a new loan to pay off the previous principle. Although, I only suggest interest only loans if you're purchasing a BRRR and it's a commercial property.

@Carolyn Morales   Do the longest term that the bank will give you.  This gives you the lowest payments and more flexibility.  As others said, you can always increase your payments to pay it off more quickly.  What happens if you have a vacancy or a large, unexpected repair?  This way you have the option to stop the extra payments.

I always go with the longest term, 30 or 25 on some commercial properties. As others mentioned you can pay more if you'd like but have flexibility. This allows for more monthly cash flow to go towards another property. Leverage will allow you to grow faster. And outside of primary residences, you'll still have at least 20-25% equity if you're using a traditional lender. Also, if you're looking at the return on equity that you have in each property, the shorter note will be building up equity faster with a lower annual return on that equity. You have equity building up in the properties that's not getting put to use. With that said I'm still actively growing my portfolio and I understand that people have different risk tolerances and are in different situations and may prefer to be in a higher equity position. 

I go for 30 or 25 as well.  If you calculate your Return on Equity, paying off more is fairly counter productive. Also the safety of having more equity does not make a whole lot of sense to me.  Say you run into a cash flow problem and the market is not doing well. You may not be able to pull the equity out due to valuations or illiquidity in the market. You may also have trouble pulling out the capital at times of need because your financials will look distressed at that point. It is best to keep a measure of cash, refinance out the capital so you have liquidity before you need it.  Of course this is a balancing act with having to pay interest on this capital.

Longer term mortgages allow you to "weather a storm"

if theres no prepayment penalty, you can still pay off early. And if you lose your job, tenant leaves and a major repair item happen all at once, the monthly payment will be lower than a shorter term mortgage, giving you better chance to survive it.

obviously over time the intrest expense is higher, but your tenants are paying for that extra flexibility, not you. 

some people are uncomfortable with debt. And that's something you have to decide for you

Thanks everyone. I hate the idea of 30 years and I wouldn't have 2 paid off if I didn't do 10 and 15 years. I have one 30 year mtg and the rent barely covers it. I hate that one! And you run into 6 to 10 k in refinance fees. I still dont know the difference. 

Originally posted by @Carolyn Morales :

Thanks everyone. I hate the idea of 30 years and I wouldn't have 2 paid off if I didn't do 10 and 15 years. I have one 30 year mtg and the rent barely covers it. I hate that one! And you run into 6 to 10 k in refinance fees. I still dont know the difference. 

If you have 2 paid off and don’t have that equity pulled back out investing in more....shame on you! :). But seriously  

A 30-year mortgage is a no-brainer because the mortgagor can turn it into a 20-15-10-5-year mortgage by prepaying the principal, but not the other way around.

@Simon Collins,Of the 2 paid off,  1 is a 1684 sq ft ground floor Florida Condo in a gated Community. The other is actually an owner financed mortgage paying me 5 more years. I had a hard time finding a lender to refinance a Florida condo that was not a primary Residence any more. Other than that, we buy bank owned or shore sale primaries and live in rehab them to later rent, way later. 5 x over now and the latest is a 5 acre farm. But I also buy land and tax deeds on the side for extra easy money. I have made 85k just in tax land on 3 otc lots since 2017, no tenants toilets or rehab, easy money!

@David Adams I am with you in that train of thought! I wonder if anyone has done all the math on the long term for the different scenarios? Refinance is not cheap or free either

I also prefer a bit shorter term, generally 20 years. Interest rates are better, the equity safety net grows quicker. Yea I know - pull the equity out and reuse. But personally I like to be just a little more conservative, and I don’t need the cash flow.

@Carolyn Morales I typically always do 30 to increase my cash flow, but if the deal is REALLY good and a solid brrrr I may consider the 15.

One cool thing I got from some commercial real estate classes was an excel spreadsheet calculator that helps me with rates of returns, amortizations, and more. I’ve found that one extra payment per year takes it from a 30 year down to a 17.5 year. So with this new finding I will begins this new strategy. if I don’t have a lot of expenses I take some of that cash flow and make an extra payment.

Also, if you make bi weekly payments it saves some as well because the interest is calculated differently. So I’m interested in trying to do both strategies at once and see what happens! 🔥

It really depends on your situation and your goals. It is less risky to have a 30 year mtg because your payment will be lower in times of need and will be easier to weather a storm. There is nothing wrong with the shorter terms and once they are paid off there is no risk. I personally have a 10 year loan on my personal house but it is only an 18% dti so not very risky. I also have big investing plans once the house is paid off.

I like to have as little debt as possible. Why? Because debt costs money and no matter what anyone says, it is not the tenant paying the mortgage it is you. Any funds that do not go to the mortgage will go in your pocket. Also, the idea that interest saves you taxes - sure- but you have to spent 3$ to get 1$ in tax savings (apprx, everyones rate is different) 

So while there are times to leverage, doing it “just because” to me does not make sense.  If possible keep that extra $$$$$$$$ for yourself and save it for the next property instead of having to borrow more. 

@Mary Mitchell, I am with you on that. I would rather have fewer houses paid off than 15 houses financed to the hilt that I have to wait 30 years to own if I dont sell them first. Financing is not free either. 

@Carolyn Morales

I am a numbers guy. I run math models for fun.

Personally, I feel 20 years is the best but I will only do 30. 4% is cheap money.

10-15% is too aggressive and my money is best spent working for me. Your money is better spent in another RE investment or an index fund than working to pay off a 4% loan.

When running risk analysis, I’d rather get a 30 year but pay off at a rate for 20 years. The reasoning if hard times fall, I can stop making extra payments and be ok. Another thing to consider is the tax deductions on interest and if they apply.

My logic assumes recent interest rates. If this was 1980s rates, this would not be the same discussion.

@Joe White,

What lender is approving investor loans at 4%? Is that really a thing for an investment property? We are refinancing our primary at 3% but usually investor mtg or refi is a much higher interest rate and points tacked on up front.

For me it depends on the rate difference.  In 2012 it was over 20% less for a 15, so I got 15s.  All being equal I'd probably lock in a 30 for the flexibility even though I've paid off a bunch if mortgages and don't  miss them one bit.

I have a 10 year from a private lender on one apt building and the payments are brutal.  7 years to go of no cashflow but then will own it outright.   Better to me than a commercial loan with annual reporting requirements, call risk, adjustable rate, etc.

Depends on a lot of things.  Where you are in your RE career, where you are in life.  

30 yr allows you the most flexibility.  You can always pay it down if you want.  It will give you the most cashflow in your pocket in case you hit a recession along the way.  

What takes ppl out in recessions is not the value of their property falling.  It's the capability of not having cashflow to weather the rainy day.  Cashflow allows you to make it thru the RE 'cycle'.  

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