15 yr or 30 yr

[John Carrington]

My banker suggested I would get financing easier if I chose a 15yr note on my investment properties. He says those are commercial loans which his bank treat differently than 30 yr notes. Does this sound correct? I don't need cash flow, so I don't mind doing 15 yr notes. I have 5 properties that are paid for and I am looking to leverage those to grow my holdings.

THanks.

[David Collins]

John, there are various factors to consider (get a better rate on the 15, e.g.?), but holding all other factors constant for a moment, think "opportunity rate"--what's the best return you could get with any 'extra' dollars you have each month by going with the 30 instead of the 15?

Suppose I have a note that I could amortize over either 15y or 30y, and its rate is 7% either way. By going 30, my payment is $250 less. Well, if I can put that $250 to work at, say, a 9% return, I'm better off with the 30y amortization. Sure, I pay a lot more interest by the end of the note, but the build-up of my 9% money more than makes up for it.

On the other hand, if the best I could do is earn 5% on any 'spare' cash, I'm better off using that 'spare' cash to paydown the 7% note--in other words, pay it off in 15.

Hope this helps, and good luck!