Investor · Jacksonville, FL · Member since 2015 · 504 posts · 217 votes
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.
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, regarding your question about not paying vs paying off the mortgage. The reason why you may decide not to pay off a mortgage has to do with your rate of return. If you have a mortgage with a 5% interest rate, you are borrowing money at a cost or 5%. So basically a -5% return on investment. However, if you turn around and use that borrowed money to invest in an asset (like a rental property) and can get a 15% return on investment, you are gaining 15% return on your investment. This nets out to 10% (15%-5%=10%). Which means this net 10% is being added to your wealth.
If you decide to not invest your money in to another asset and decide to pay off your mortgage, your rate of return would be equal to the mortgage rate. By paying additional to your principal, you are getting a return of 5% as you are saving yourself from paying that 5% interest in cash from a future payment. So if you have a mortgage of 360 months, and you pay extra principal each money and only end up paying for 320 months at the end, there are 40 months of payments that you did not have to pay interest on the cash you borrowed. But this return to you is still only 5%.
@Brian Spies, How is me paying 5% interest on a mortgage a 5% return on my investment. Does not the return depend on how smart I acquired the investment? That is tickling my brain, what you said. Please put a picture up...
The trouble with taking the longer terms and "accelerating" the payback is it requires you to have the discipline to keep up the larger payments. The intention is to only "fallback" when needs arise, yet the tendency is to "fallback" and enjoy the better cash flow.
Among the folks in my local group, we try to stick to 20 year loans or less, especially when there's a balloon involved.
Theoretically, with a 20 year loan with 20% down and a 7-year balloon there should be enough equity when the balloon comes due that you should have little trouble refinancing at that point, as long as credit is not an issue. Naturally, we always do commercial property in an entity. So, that's business credit we're talking about. Your personal credit should still be maintained, of course.
My credit union just financed my investment property at 3.875% for a 15 year with one point last week. You can find lenders that will get you rates around 4% or less for investment props.
@Carolyn Morales the longer the better always without question. The reason we borrow as investors is because our ROI is greater than the cost of the money. If you are no longer deploying it and just spending your cash flow as personal income, then consider paying it down because at that point your yield is 0%.
Interesting thread. My wife and I are considering refinancing our primary from a 30 to a 15. If my intention is to take out a HELOC on the primary equity for purchasing additional properties (brrrr) would we be better suited changing it to a 15 to increase equity faster for more buying power, or leaving it a 30 and putting that extra premiums directly toward down payments for additional properties?
if you have the means to pay the higher payments with the shorter terms - its a great thing to do so you can extinguish the debt .....if you cringe a bit when making the payment ..I suggest using 30 yr fixed option due to 1) utmost flexibility as you can make the smallest payment if needed / desired or you can pay extra to effectively pay it off at whatever pace you want or you can do both 2) depending on the scenario - the interest rate difference is likely to be relatively small ..maybe .375% - 5% in rate
@Tony Lee I think that what he is saying is if after PITI + CapEx + vacancies etc...if there is not positive cash flow with a 15 year mortgage, then he passes. I was the same, but have become a little more flexible with the current market. I still use it as a test to see if the deal is worth looking at.
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.
So you are saying paying off a mortgage when rates are 3-4% because you don’t like debt is a smarter move than making that cash work for you at double or even triple that interest rate by putting that money into other investments?
@Carolyn Morales the longer the better always without question. The reason we borrow as investors is because our ROI is greater than the cost of the money. If you are no longer deploying it and just spending your cash flow as personal income, then consider paying it down because at that point your yield is 0%.
Exactly
the best thing about real estate as an investment is leverage
making the return on an asset that is worth many more times what you have put down for it.
everyone has their own risk tolerance and comfort level too
as the saying goes “different strokes for different folks”
Interesting thread. My wife and I are considering refinancing our primary from a 30 to a 15. If my intention is to take out a HELOC on the primary equity for purchasing additional properties (brrrr) would we be better suited changing it to a 15 to increase equity faster for more buying power, or leaving it a 30 and putting that extra premiums directly toward down payments for additional properties?
You'd lose money on the refi with costs. Why don't you just put down the extra each month that you'd have to pay on a 15 year? This way you are in control; you are telling the bank whether you're paying the extra money....rather than them telling you.
@Carolyn Morales The longest you can acquire. If you want to pay is down sooner, do it with the extra cash flow. Shorter terms are more risky to me, especially during any rare time of vacancy.
I believe in 30 year mortgages. This gives you the lowest payments possible. It is the best of both worlds for those investors with self control. The lowest payment gives you the most cashflow and depending on your goals you have the ability to pay extra on those mortgages and fast track them to pay off or enjoy the cashflow.
I am personally in acquisition mode but my future plan is to debt snowball the remaining mortgages using the cashflow from all real estate to pay off the lowest mortgage first. Then once that first one is paid move onto the second etc.
However with everything; run your business with your specific goals in mind!!
@David Adams - completely agree. That is exactly what we do as well - if it is negative cash flow with a 15 year amortization, we pass on the property.
That's why "cash flow" is such a variable term - there is a big difference between my property that cash flows $100/month versus someone else who cash flows $100/month on a 30 year note - it's apples to oranges.
I prefer to go with a fifteen and pay it off early. If you look at an amortization schedule the banks do pretty well for themselves. I'm a pretty conservative investor. I want to own the property as fast as possible.
@Carolyn Morales I’ve got 4 properties I own free and clear. 2 that have 30 year mortgages, and 3 that have 15 year mortgages. I’m probably going to go ahead and pay off the 30 year mortgages in the next 6 months and maybe the 15’s too. I don’t need the cash flow. No matter what anyone says, having debt is costing you money.
I love how you stick to your guns no matter how much anyone tries to convince you otherwise. I can see advantages in both long-term or short. It's a preference. I lean towards a longer term with a lower rate but always want to pay it off in 15 years or less.
@Carolyn Morales. You would only get a 5% return on your investment if you pay additional in principal. Since you are paying additional in principal on top of the normal principal payment, that is money at a future date you wouldn't have to borrow at the mortgage interest rate.
To everyone that thinks that paying down the principal balance reduces risk, there's another side to consider with this that may actually increase your risk and exposure. Essentially the reason for paying down principal is to avoid ever being upside down in the event of loss in market value of the asset. However, fluctuating asset values are not really relevant if you are holding long term and have adequate cash flow (with the exception that you have certain loan covenants to sustain a certain DSCR). Of course, that's a big "if", but I'm presuming that's the prudent investing approach most on here are using. Now, I'll direct us to the question that often comes up about transferring title to an LLC. The reason we do this is for asset protection, of course. Let's say you have $100k of equity in one property at 50% equity. Assuming you hold title in a special purpose entity, if you're sued, one could tie up that $100k of equity in that one asset. Why not, instead, have $50k of equity in one property at 25% equity, and another $50k of equity in another property at 25%? This way, assuming you hold each in separate spe's, you're only at risk to lose the equity in each property if sued related. Risk, in my opinion, is more about the amount of equity you have at risk to lose vs what you may temporarily "lose" in asset value. Essentially, you're mitigating risk by spreading your equity across two assets vs having it all in just one. Disclaimer: I'm not an attorney and this only reflects my opinion of the way I understand it and based on conversations I've had with other qualified professionals.