30 yr Fixed or 5 yr balloon amortized over 15 years??

6 Replies

Just looking for some advice.  An offer has been accepted on my first rental house.  Closing costs were much more than I was expecting (and what was originally quoted for me) on a fixed 30 year mortgage so now I am exploring another option.  Here are the details:

Option 1:

Purchase price:  $37,000

Down payment: $7,400

Closing costs with 30 year mortgage: $2743 plus $987 pre paid costs due at closing (tried to negotiate some of the origination fees but the bank wouldn't budge one penny)

Monthly payment with 30 year:  $272.72

Interest rate:  4.5%

Option 2:

5 year balloon amortized over 15 years

Same purchase price and down payment

Closing costs:  $1527 with no escrow so no pre-paid costs up front

Monthly payment:  $327 (including insurance and taxes that will be paid separately)

Interest rate:  4.75%

The bank only charges a $350 renewal fee at the end of the 5 years

Monthly rent after management will be between 585 and 630. 

I know this is not a ton of info on the deal but hopefully someone can weigh in.  I am at work and had to type this up quickly. 

I want to buy another home this year and the $2200 difference in closing costs will help me to do that sooner.  I understand the cash flow will not be as great and that's what I'm weighing.  Seems to me that saving that $2200 up front would make up for years of the difference in cash flow.  Opinions?

@Martin Warren very rare I would go for a 5 year balloon vs 30 year money - but this loan amount is so low and the bank fees on the 30 yr are outrageous.

I am confident rates will be higher in 5 years than they are today, they can't get any lower. So I think it is best to ask look at how long you plan to have the property? 5 years from now, in a 15 yr am you will have a lot more principal pay down vs the 30 yr. If you need to extend it is going to likely be at a higher rate.  When you compare the amount paid toward interest and the fees, I think you will find the rate could increase significantly in 5 years and you are still ahead with the 5 yr balloon.

How will the lack of cash flow affect you next deal? I understand the importance of $2,400 to funding your next deal. That being said you have to be able to keep qualifying. We found that it was MUCH harder to qualify for the next house with the higher payments that 15 year loans require. So even though for us 15 year loans would be perfect we couldn't grow at the rate we would like with those loans!

Another food for thought! Interest rates are at a all time low, I think even an almost historical one. So you will have no idea what rates will be in 5 years. Personally I am locking as many low rates in as possible!

Without knowing more details about your goals and situation, it's impossible to recommend one or the other:

Will you be able to pay off the loan in 5 years if interest rates make extending the loan unattractive and/or you can't sell the property?  

Will you cash flow in both scenarios?  

Will your cash flow be sufficient to cover reserves and any other cash you need?  

Will both scenarios allow you to hit your CoC target?

Will both scenarios allow you to hit your IRR based on your hold horizon?

Why are the closing costs for the 30 year 1000 more than the 15 year?  Are you paying a point to buy down the interest rate?

It might be worth going to another bank or mortgage broker to see if they can do better on the closing costs.

@Jesse T.  

The bank is charging me an "administration fee" of $895 plus a $231 discount fee.  I know I can get rid of the discount and take a slightly higher interest rate, but the $895 is not negotiable.  I asked a banker friend of mine about it, and he explained to me that they are charging that fee because the loan amount is so low and they need it to hit their margins.  If it was a $150,000 loan, I could negotiate it down or maybe even get them to waive it all together.  That is not an option on this small of a loan.  I have checked with another bank and the closing costs were very similar.

@Jesse T.  

Also, the 30 yr is a mortgage that will be sold on the secondary market.  The 15 yr was bank loan from a local bank (no appraisal fee, no escrow, etc)

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