What’s Better for Investors — a 15-Year or 30-Year Mortgage?

by | BiggerPockets.com

A question that comes up quite often, especially from those looking to buy a new property, is whether to go with a 15-year or 30-year term on their mortgage. While some folks prefer one over the other, it’s not always an obvious choice, whether you’re a new or seasoned real estate investor — or whether you’re an owner-occupant or not.

For the lender, both of these options have pretty clear benefits. With the 15-year term, the loan is paid off quicker, and with the 30-year term, they receive more in interest payments over time, at a higher rate.

But as the real estate investor, how do you decide which option is best for you? And what factors play into this decision?

First, let’s take a look at the difference between these two options.

With a 15-year mortgage, you’re paying a higher monthly payment, but you also have a lower interest rate, and the life of the loan is much shorter.

Your monthly payment is lower with a 30-year mortgage, but your interest rate is higher, and the life of the loan is much longer.

Some of the biggest factors to consider are current interest rates (lowest I’ve seen in decades), time, cash flow needs, and even possible points (prepaid interest) — although points are more common in a higher interest rate environment.

But we should probably consider all of these factors while also looking at the bigger picture.

cash-flow-rental

Related: Should You Refinance Your Mortgage? Consider This.

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Know your goals.

What are your goals for the property? And how does that fit into your overall goals for your portfolio or for retirement?

For me, I’ve only had a 15-year mortgage twice in my life, but in all, I’ve had well over 50 mortgages.

One of the two was when I refinanced an FHA loan on a property that I lived in, and my payment only increased by $10. I was able to knock years off of my loan, and given the fact that interest rates back then were dramatically higher than they are today, I definitely saved money.

The second time was on my vacation home, where I was aiming to pay off the property before retirement.

Even then, there were still times when I regretted the higher payment, especially when looking at my portfolio as a whole, as it did cut into my cash flow a little bit.

Besides paying off a property sooner or saving on interest, there may be other goals that drive someone to choose a 15-year term. For example, someone might start off with a 15-year mortgage with the intent to refinance the property later on and pull equity out to invest somewhere else.

However, if your goal is to build your portfolio quickly, the shorter term loan with the higher monthly payment may be detrimental to your ability to borrow more money for the next property. After all, banks typically look at your amount of monthly recurring debt in order to qualify you for a mortgage.

Plus, it’s a good idea to consider what you may or may not be able to afford in the future.

Be prepared for change.

To be quite honest, I don’t have much incentive to do a 15-year mortgage anymore. Not only are interest rates much lower today, but I also think the 30-year mortgage is safer, and I can usually make additional payments.

For example, you can send the higher monthly payment (15-year) in on a 30-year mortgage. But you can’t send in the lower payment (30-year) on a 15-year mortgage. That’s where the flexibility comes into play.

Also, if, heaven forbid, something bad were to happen — such as job loss, a family issue, or a health problem — could you ensure that you and your family would still be able to afford the higher monthly payment? This is an important consideration, as are other ways to insure your investments or your nest egg (i.e. disability and life insurance, mortgage insurance, etc.).

But what if your goal is still to pay off the property sooner and save on interest?

sheriff-sale

Related: 4 Popular Mortgage Programs for First-Time Home Buyers

Pay extra, if you wish.

While you may not be able to get it down to exactly 15 years by making additional payments on a 30-year mortgage, you could still knock years off of the life of the loan.

For example, let’s say you were to sign up for bi-weekly mortgage payments. You would essentially be making 13 monthly payments (26 bi-weekly) instead of 12. That extra payment would go towards the principal of the loan, reducing both the loan balance and the amount interest charged over the life of loan.

Another strategy is actually something we used to recommend at my old real estate office. Since interest rates were high, we would print out an amortization schedule for the buyer and encourage them to continually send in this month’s payment with next month’s principal. Each time, it would almost knock a payment off.

By the way, if you’re looking for a good, free resource for plugging your loan information into an amortization schedule, check out Bankrate.com.

Personally, I prefer the 30-year mortgage, not only due to the flexibility, but also because I’m able to cash flow better with the lower monthly payment. Since I’m financing rental properties, my tenants are basically paying off the property, and I’m able to keep more of the cash flow due to depreciation.

So, which option do you prefer: a 15-year term or 30-year term? What will you do with your next property? Or better yet, which option aligns best with your goals for the property (or properties) this year?

Leave your comments below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

40 Comments

  1. Christopher Neeson

    Great article, I’ve personally used 30 year and my new favorite 5 to 10 year ballons.

    Being that I want to utilize my investments sooner then later as equity on larger purchases the ballon is my new favorite. The key is finding properties that still cashflow under this type of lending.

    Once I set my limitations, it became easier to weed out non performing investments and much easier to find investments that cashflowed well enough to not only pay the ballon at the time it came due, but I also found properties that would cashflow enough to pay for themselves if needed in even less time then the ballon payment would come due.

    I’m now a fan of short duration loans, because it makes me work in a tighter set of perimeters thus forcing me to only buy performing properties. I can’t use the excuse of it will cashflow on a 30 year note. If it doesn’t cashflow on a 5 year note it’s not worth my trouble.

    There are so many lending options, be sure to choose your lending after you have confirmed the investments potential. Don’t find lending that creates possible potential. You’ll end up selling yourself snow in the winter when your living in an igloo, or better yet sand in the summer living on a beach in a sand castle.

    • Brett Latour

      Rather than paying cash for a $100,000 property, why not get a loan? You’ll get less than 4% interest on that and you can use that $100,000 on investments.

      I’ll pay you 12% interest on that $100,000 if you fund some of my deals. After one is paid off I’ll have another one lined up… You will be consistently making a 8% spread on money that you would’ve spent.

      If you aren’t comfortable with me then use someone local. Either way, debt, if used properly, can be good.

  2. Kyle Hipp

    I started with 30 year notes however I have since transitioned to 15 year notes. As I have grown, I found it easier to get commercial mortgages and they offer a 15 (now 20 as well) year amortization with a 5 year balloon. As Christopher mentioned, it narrows down the pool of what deal will work when you start with looking at a 15 year amortization. I have found that I am able to get financing even easier this way. The reason is my cashflow is still strong but I also have a much better loan to value ratio providing flexibility. The biggest thing I hated on 30 year notes is that you make hardly any progress in the first 7 years, on 15 year notes, half your payment is going to principle within the first year or so. The only downfall with that is that I am actually showing a profit on my portfolio because of the lack of interest, however that is not necessarily a bad thing…

  3. Jerry W.

    I have historically used 15 year loans or occasionally a 20 year loan. The reason for this is that I wanted the places paid off by retirement time. Another reason was to save interest and bank equity quickly. Since we were in acquisition mode we did not want to park cash in the bank and wait for it to build up, we wanted it applied to loans to keep interest payments down. At the end of 5 years we would refinance and use the 20% of added equity as down payment on another property. Every 5 years it gets enough equity to use for a down payment on another property.
    Another reason for 15 year loans was I bought a few houses with the owner financing the 20% down payment in interest only payments with a 5 year balloon. In 5 years on a 15 year loan of 80% of sales price, you have 40% of the loan paid off. I can refinance back up to 80% and use the left over 20% to pay off the balloon to the Seller.
    Just in the last 6 months I have been considering longer term loans to increase cash flow for possible retirement.

  4. Darin L.

    My goals tie loan payoff to retirement time, and like the author, I like tight parameters of cashflow on a 15 year or no more than 20 years now. My first two rentals were on 30 years and it seemed that the payoff would never happen.

  5. Ben Gammon

    Great Read! Really puts everything in perspective. I’ve always been a 30 year fixed for cash flow and flexibility but I could see later properties being 15 year fixed down the line once the snow ball starts rolling.

  6. Brett Latour

    I understand wanting to pay it off sooner, but why pay the minimum?

    The payments are much lower with a 30 year loan and everything over the minimum goes straight to the principal. If you pay the same on a 30 as you would on a 15… We’ll, I’m not the only person that can do math, but, I’ll give you a hint… You come out much better… Of course banks want you to do a 15 because they make more interest. Of course there are other factors that sometimes come into play but for the overall a longer term where you double the payments ends up saving money.

    Same with a car.. stretch it out as long as you can and double the payments.

    Some people pay all cash.. Why pay cash when you can get such a low interest rate? Use that money for anything that makes you more than the interest charged and you’re making money on that money rather than spending it.
    I know investors that will pay you 15% interest for your money. And you’re only paying 4% for that mortgage or car. That is a 11% spread that you are receiving on that money that you would’ve spent on a cash deal.
    I’ll pay you 12%…

  7. nick jackson

    Educating article. I have a question that I was hoping someone could enlighten me on. I have purchased a couple buy and hold properties commercially under an LLC that I have formed. Both are 5 year terms on 30 year schedule with balloon at the end. I just closed on another property, have a 1 year commercial loan on, and was initially going to flip it. After thinking about it, i decided i wanted to refinance after 6 months and keep as a rental as well. I have this home in my LLC entity as well but found out through conversation with banker that i could only refinance at 15 or 20 years. Id love to get some feedback and opinion on whether it is better to have the protection and shelter of LLC but sacrifice cash flow, or keep it retail and not have the protection. Is there a way to accomplish both? I was told that I can’t personally be the guarantor for the property and deed it to my LLC. Thanks for any help!

  8. Susan Maneck

    Here is a third alternative for those of us following the BRRRR model. It works especially well on cheaper properties (less than 50K.) . HELOCS. Most banks won’t give them for investor’s properties but Wells Fargo does. Usually you can get a teaser rate for the first year. But if you pay it off in a year, you can get another teaser rate. I handle my HELOCs like most people do balance transfers on their credit cards. In fact, I work my credit cards and my HELOCs together. I might use a balance transfer to pay off my HELOC, then call for a new teaser rate which in turn will be used to pay off balance transfers. I currently have two HELOCs I use this way and the interest rates on both is less than 3%.

  9. Oscar from Washington state, Great article Dave, I have a question though which I have asked before and so far no one has giving me the answer; talk of 15, 30, 20, ballon payments is always being mentioned, however when I applied for mine, I was told that a 30 wasn’t an option, that it was the amount that determine the term, whether a 15 or 30, I applied for 85000 and they told me only a 15 year was my option due to the amount, can anyone explain to me if this true and why? Thanks

    • Clint Bolton

      Hi Oscar, that is something that depends completely on the lender. They all have different loan terms, especially if you’re dealing with local/portfolio lenders. I use three different local/portfolio lenders here in my market and all of them have different terms they are willing to allow. A lot of this has to do with my relationship and past history with each. The one I’ve worked with the longest will sometimes finance almost 100% LTC if the numbers are good enough. Other times the same banker wants 15% down. This same banker will also allow me to choose between a 15, 20 or 25 yr amm with a 5 yr balloon. One of my other bankers will only do a 15 yr amm with a 3 yr balloon max. From what I’ve seen, it all depends on the individual bank/lender and what they are willing to do. I think it varies some market to market because most lenders around me offer the similar products for investors but I’ve talked to investors in other markets that can get 30 yr loans from portfolio lenders. That’s unheard of in my market. Hope this helps some.

  10. Greg Rittenhouse on

    Susan,
    I wasn’t aware that you get a HELOC for property purchase. I’ve had them in the past for other things. Are they difficult to obtain for a property purchase?

    • Dave Van Horn

      Greg,

      Some banks give you the option between a HELOC and Home Equity Loan to purchase a property but I’m not sure there’s any loan that’s easy to get today unfortunately. I will say though, it’s more common to get a HELOC on a refi if you paid cash for the property – usually at 15 to 20 year terms.

      Thanks for reading!

      Best,
      Dave

  11. I like your article Dave. When people ask me this question, I almost always recommend the longer term mortgage like a 30 year. A borrower can always make extra payments to the principal to simulate a shorter term note and yet retain the safety associated with lower payments of a 30 year note.

    For example: A $100,000 home with 25% down requires a loan of $75,000. This note at 4% for a 15 year term has a payment of $554.77. A 30 year note is usually slightly more expensive. Let’s assume a 30 year note has an interest rate of 4.25%. The payment is $368.95. The difference in payments between the two is $554.77-368.95=$185.82. If you opt for a 30 year note and have the lender apply the difference to the principal every month, the loan will be paid in 15 years and 5 months!

    Total interest paid on the 15 year mortgage is $24,857.87. Total interest on the 30 year is $53,902.13. Total interest on a 30 year paid as described above is $25,603.98.

    Everyone has different objectives and situations. Personally, I like paying the mortgage out of my own pocket and then applying the rent payment to the principal. This takes a 30 year note down to about 4 years usually. I loose some ROI because I am eroding the leverage from the loan, but it accelerates my progress, reduces my risk, and reduces the number of properties I must buy to keep new money invested.

    For those looking to “run” there own numbers, I LOVE “Karl’s Mortgage Calculator”, a free app. Thanks again for writing the article Dave! Great topic!

    • Oleg Shalumov

      Doug,
      Great job. I would even add this example to the article as it would make it much more clear to the reader (examples always do).

      Dave,
      Thank you for the article. This is basic, and everyone needs to understand this to make the decision on which loan to take. Unfortunately not everyone does, and hopefully this article would make it clear to those people.

  12. Our commercial lenders in WV are not willing to extend a rental property loan beyond 20 years. I thought a 30-year loan was reserved for your primary residence. I must be misinformed.

    • Dave Van Horn

      Hi Rick,

      That’s because it’s a commercial loan, although sometimes I’ve seen them extended to 25 so I’d also suggest shopping around in terms of lenders. Now if you’re buying properties personally, outside of an LLC, you can buy up to 10 properties with a 30 year term mortgage (you could also put some in your spouse’s name as well).

      Best of luck,
      Dave

  13. Keisha Bell

    I think this article is informative and I agree that it is based on your situation in life, strategy, and goals. A 30 year mortgage may be useful for a rental property since tenat is making payments towards mortgage and you may yield a higher ROI. However, if you have a primary residence and you want to pay it off early and you have a great interest rate than a 15 year would be more appropriate but advantages to a 30 year with lower payment leaves room to make more payments. Lastly, if you have a vacation home and your primary residence have no mortgage then maybe a 30 year could be beneficial for tax reasons depending on residency or if your older versus younger than a 15 year may be appropriate. It is all about your situation in life, goals and strategy.

  14. Courtney Sorrell

    Great post! I agree with you on choosing the longer term with prepayment options if feasible. Awesome to have these choices, isn’t it? I’m working towards owning half of my properties free and clear, so I’ll definitely be making some extra payments this year. Cheers!

  15. Chris Field

    I typically deal with commercial mortgages but I have seen terms from 10-15 year fixed; to 20 and 25 with 5-7+ year adjusts two over prime. My loan values are all over $1m Idk about the smaller stuff.

    I don’t know about balloons never asked don’t want one.

    The key with portfolio lending is it’s all about relationships with your bankers. All the terms are negotiatable if you deal with the right bankers.

  16. Eric Jones

    I’ve analyzed this exact topic from a financial/mathematical point of view many times and always come to the same conclusion – a 30 year loan is almost always better, but the extent to which it is better changes over time with the shape of the yield curve. I am young and am in the building phase with my real estate and other investments, so I (hopefully) have time on my side.

    By using the excess cash flow from a 30 year loan and reinvesting it at much higher rates of return, I can increase my net worth significantly more with a 30 yr loan. A 15 yr loan on a rental property results in lower cash flow, and therefore less cash left over to invest at higher rates of return. Those who choose to use excess cash flows to prepay a loan are basically choosing to make a guaranteed return that is equivalent to the interest rate on the loan. My loans are all in the 3.5 – 4.5% range, so by choosing to prepay I’d be implicitly saying that I don’t think I can earn more than 4.5% elsewhere. Since I know of many ways to make 10%+ returns, I choose to not prepay, and use the cash flow to invest at higher rates of return.

    Since a typical yield curve is upward sloping, a 15 yr loan generally offers a slight rate advantage over a 30 yr loan (currently about 1%). In other words, I only pay a 1% premium to borrow money for 30 yrs vs 15 yrs. If the yield curve flattens or inverts, a 30 year loan is an absolute no-brainer. But in general, for those who are young and are trying to maximize compound interest over time, a 30 year is the way to go – this assumes that the extra cash flow with the 30 yr loan will be reinvested at a higher rate of return. If you are not disciplined to reinvest your excess cash flow, a 15 year loan might be right for you since it is basically a forced savings plan. For those who are disciplined and want to maximize compound interest over time, go for a 30 yr loan, and reinvest all excess cash flows in high yielding investments.

    • James Harper

      Eric, Great points about reinvesting the funds at a higher interest rate, or grabbing up more properties, etc.

      I think this also depends on when you are looking to also cash out. For myself, I am 48 with a goal of retiring in the next 7 years. I am looking for more cash flow to cover my needs versus increasing my portfolio much more.

      For my needs, I still prefer the 30 yr mortgage for flexibility of liquidity, versus your opportunity to reinvest the funds.

      • Eric Jones

        Thanks!

        I hear you – timing is everything. Personally, I used to be a big proponent of prepaying (and it did help me get ahead!), but now I’m on the opposite side of the spectrum and avoid it (especially since I have fixed rate loans with no interest rate risk).

        In your situation, approaching retirement and having existing loans, have you ever considered putting your excess cash flow in a REIT ETF, bond etf, or closed end fund instead of prepaying? There are many funds out there that pay monthly dividends/coupons (for bond funds) of >5%. One of my favorite funds is a closed end bond fund that pays out monthly coupons and has an annual coupon yield of about 10%. I don’t worry about changes in the principal (NAV) over time – just in it for the cash flow, professional management, and liquidity. By doing this my cash flow increases every month with each additional dollar I invest. I figure my RE loans are being paid down by tenants so I’d rather use excess cash flows to increase my cash flow even more. But peace of mind is hard to put a value on, so if you sleep better at night by having no debt, definitely go for it!

        • Eric Jones

          Sure. Here’s an old article I found with a quick google search, but it should give you an idea of what to look for specifically.

          Personally, I like PFN a lot. It’s a high yield bond CEF with intermediate maturities and low/intermediate duration (so it isn’t ultrasensitive to rising interest rates). Keep in mind that most CEFs use leverage to maintain such high yields, so they can be more volatile than a mutual fund or ETF. There are many good REIT ETFs… VNQ is a good one, and I like DIV which is blended with some other high yield sectors. Obviously, do your own research and pick your own investments – I was just trying to point out the idea that cash flows can be parked in high yielding funds temporarily or permanently, and it may be a smarter choice than prepaying. I like to keep money in high yield funds for a while, then lock up the paper gains and use it to acquire real assets (usually rental RE or hard money lending).

  17. James Harper

    Great Article and even better conversation. For my traditional rental properties, I have them all set up on 30 year Fixed Mortgages. I do however use the excess liquid funds to pay off my most expensive (highest interest rate) mortgage. I prefer the flexibility to pay down the loan I want, rather than being tied to paying them equally. I would recommend that due to the 1/2 percentage point between a 15 year mortgage vs a 30 year that if you want to pay off the loan in 15 years, just amortize the payments appropriately and pay it down.

    On my Self-Directed IRA properties, they require a non-recourse loan. I have found that the rates for the non-recourse loans is significantly higher 1-2 % more than traditional loans and they will typically loan 60% Loan-to-value. For these reason, I have taken 5-1 ARMs with a 20 year amortization. My goals on these loans is to pay them off within 5-7 years, so the balance remaining after the initial 5 years should be minimal, and the increase would not hurt me. This still allows me the flexibility, if needed to conserve funds if I needed to, or to invest in another property.

  18. Darryl S.

    Sounds like a 50+ year mortgage is the way to go. Do they have 100year mortgages out now? I have never really believed that old wives tale about the borrower being slave to the lender. I am ready to get my debt on now after reading this.

  19. Brandon Moore

    There are some additional considerations….only smaller investors can get a fixed rate. It doesn’t take very many mortgages to become strictly a commercial borrower and going into the world of variable rates. I believe that number is currently only six…and if you live in a home already, you are looking at just 5 rentals. Plus if any of the rentals are more than 4 units or commercial property they won’t qualify at all for fixed rate in the majority of cases. Based on not getting a fixed rate, I think it would seldom be wise to do a 30, unless it was some type of short term flip or you had some certainty of selling the property in a few years. A nice option is a 20 year loan. Not too long, not too short so cashflow isn’t hurt much by it. A 20 year will also help you alleviate some of the interest rate risk you bear as the principal will be repaid much more rapidly than in the case of a 30. So even if rates go up..you will owe much less and would be better able to withstand the increase.

    Another possible way to do it is what I am going to do. I took out all 20 year or shorter loans and then am going to pay about 10 to 12 years on them. At that point, I am going to flip the much smaller balances and go with 30 years mortgages. This will cause my cashflow to explode and will happen sooner than a full repayment. I can then use some of the collateral freed up to invest in some larger projects or just retire sooner on the greatly increased income I will enjoy! I could also consolidate some of the mortgages of several properties into fewer mortgages and try for fixed rates at that point, but even then I don’t think I would be anywhere near 5 mortgages.

    So if just starting out, go ahead and take advantage of fixed rates if you are able to the extent you are able. It won’t last forever, but it will help you when your portfolio gets larger and you at least have a percentage of it that can only increase as taxes, insurance, and maintenance costs increase over time.

    To the people saying to take cash and just buy properties for cash I have to SMH. If you aren’t buying real estate using some type of leverage you are missing out on the biggest component of your return…..being able to buy more assets with less money. If purchased right in my market you can make north of 50% ROI. But if you take cash and buy those numbers are closer to 8%. I wouldn’t want to deal with tenants to make 8%…just saying!

  20. Jiri Vetyska

    Great article Dave! There are some people who are no friends of debt and they want to pay off the debt as fast as they can to be debt free and increase their cash flow income.
    However for most, if growth is the goal, than the smallest payment is the winner.
    I have used 15 year amortization, and actually even 10 year amortization, during the 2008 great recession. It made great sense then. Stocks were going down. Savings rates were falling. But also mortgage rates were falling. So refinancing to a shorter term mortgage made perfect sense:
    – improving cashflow due to lower interest rate.
    – being able to refinance in the near future if rates fall further, which they did consistently.
    – refinancing at no cost (accepting slightly higher rate), but being able to refinance anytime again.
    – faster principal buildup, which, again helped with future refinance to lower rate even in environment of falling RE prices.
    – ability to take out HELOC at very low rate to invest when the time is right!

    • Dave Van Horn

      Hi Casey,

      Although they don’t promote it much, most lenders should allow bi-weekly payments. In fact, I just did it with few properties of my own and it was actually free (years ago they would charge money to set it up which I think had to do with setting it up with a third party servicer).

      Anyway, best of luck! And thanks for reading!

      – Dave

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