15, 20 or 30 year mortgage for analysis?

Question

Is the common practice to only analyze a deal financing over 30yr amortization or is it also common to use 20 or 15yr?

Edward B. · Answer

@Mike Bicho, I completely agree with @Alexander Felice. Yes if you actually paid off the loan in 15 years the 30 year loan would cost you more to the tune of several thousands of dollars. But the flexibility of not HAVING to make that larger payment more than offsets that cost in my opinion. The 15yr mortgage is really just a forced saving plan. So if you need to be forced to save money somewhere that is difficult to get at then you may want to consider it. However, if you are disciplined with your money, you will not want it locked up in equity where it is difficult and expensive to access. After all it is very difficult to get seconds on investment property so you will be looking at refinancing or selling to access the equity, both costly options that totally wipe out the benefit of the 15yr, i.e. the lower rate. You may as well consider ARMs if you want to get your rate down and plan to access the equity in the future. Of course, I believe it is better to own property on your balance sheet, not outright, so my opinion may not count for much.

Alexander Felice · Answer

15 year doesn't really provide much benefit. you might get a lower rate, but that shouldn't affect cash flow much. You may build equity faster, but you can't spend equity.

take the 30 year, the higher cashflow, and the lower payment.

You still have the option to pay the loan off in 15 years, but with a 15 year note, you lose the option to pay it off in 30.

Bryan O. · Answer

@Mike Bicho I would recommend using all of them just to see the difference. If you are putting them in your own name, focus on your 30-year. If you will hold them in an entity, you'll probably find the 20 year to apply to you. You decide which numbers are important based on what your own goals and abilities are.

Mike Bicho · Answer

@Kevin Hunter, thank you for pod cast tip, I'm on a flight right now and have 2 hrs to kill.

Also thank you to @Alexander Felice and @Edward B.

Kevin Hunter · Answer

@Mike Bicho, You should listen to Podcast 153 with Linda McKissack.  She and her husband started investing in their 40s as well and they utilized the 15 year mortgages because of the compressed timeline.  It is a great podcast and sounds like you are in a similar situation.

Mike Bicho · Answer

@Kevin Hunter, great advice.  I do need to consider the end game first.  In my situation, cash flow is not as important to me and I would rather pay less interest over the life and gain equity.  I'll start by analyzing using 15 and 20 yr amortizations. I am 47 and want to use gained equity to continue buying.

Mike Bicho · Answer

@Kevin Hunter, great advice.  I do need to consider the end game first.  In my situation, cash flow is not as important to me and I would rather pay less interest over the life and gain equity.  I'll start by analyzing using 15 and 20 yr amortizations. I am 47 and want to use gained equity to continue buying.

David Chwaszczewski · Answer

@Mike Bicho  It all depends on your investment strategy for that deal.  If you are looking for cashflow then 30 yr is your best friend.

Edward Peugh · Answer

@Mike Bicho a typical analysis doesn't include debt service.

One reason for that is that creating cashflow by leveraging debt is artificial.

Do the analysis without considering debt, then find how to finance the deal.

Happy to discuss specific numbers if you would like.

Ed

15, 20 or 30 year mortgage for analysis?

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