Loan Terms: How long or How Short?

Question

This goes for buy and hold. Assuming both result in positive cash flow, what do most investors do?

Do you make more money in the end getting the longer term and smaller down payment - Or is a shorter term larger down payment better.

In one case you use more of your own money upfront, but do you recoup this because of paying less interest to the bank?

I am closing on my first house to live in. Purchased a short sale for 94K. I wanted to do 10% down with 15 year loan. I wanted to do this because I can afford it and want to pay less interest. But this is a starter house and I want to rent it out in 3-5 years when I upgrade. So should I go with a 30 year/ 3.5% down instead?

Steve Babiak · Answer

This works by the mechanism that the '>>' shortcuts use on the forums, in case you were wondering. There are three things needed to link directly to a post given the way BP works today; the way BP works has changed over time, so this may not apply at some future point. First thing, you need to know the thread that contains the post you want to jump to. Second, you need the page in that thread. Third, you need the post number; you find the post number by hovering your mouse over the "quote" link alongside the post, and you will see the post number at the end of the link; for a really long link, you can use the web browser to copy the link at the "quote" so that you can see the post number. Then you assemble the info you've gathered. Keep in mind that BP links have no spaces in them, so don't insert any if you want things to work correctly. I create these links manually, by typing the [ then the word url then the ], and I close them similarly by first typing [/ and then the word url and then ]. So after that opening url tag you place the thread link. Immediately after that you place a question mark and the word page followed by an equal symbol and the page number within the thread. Then you use an octothorpe character (also known as hash, octothorn, pound sign, number sign), followed by the letter p and the post number. If you are curious, you can always hover over a '>>' on the forum dashboard page to examine a link, or you can actually press the "quote" link alongside a post where I (or somebody else) has done this and you will see the exact text used in BP's mark-up syntax. Sorry for putting in such a long post that veers off topic.

Steve Babiak · Answer

Bill Gulley - that's not quite right :) ; Charles Perkins and Brandy Y. have both said something more like: "a dollar saved is worth more than a dollar earned". Links to threads where they posted are in thread below. http://www.biggerpockets.com/forums/223/topics/61447-what-is-the-best-piece-of-advice-you-ve-received-on-bp-?page=2#p451190

Bill Gulley · Answer

LOL, yes it is in several ways, just using ole Ben's saying with inflation added! LOL BTW, page was not found????

David Beard · Answer

And please throw aside this canard about paying less interest. Think like a bank!! As a buy-and-hold investor, you are attempting to earn an attractive spread on the money you are borrowing from the bank. So paying the bank lots of interest is optimal, as long as you are earning even more on the underlying investment property. As long as you have solid positive spread (ie. borrow at 5% to buy a house that will net you 10% after all expenses and reserves), then you should be seeking to maximize your borrowing. Just make sure that you have a strong ratio of gross rents-to-P&I of at least 3.0 (I like 3.50, personally), protecting your cash flow. To keep this ratio healthy, always go for a 30 year amort if possible.

Account Closed · Answer

Adam, I second what John said above. Go with the 30-year fixed at 3.5%.

Bill Gulley · Answer

You techies crak me up, I have no idea what you said! LOL But thanks for the infofor those that do..... :)

Dave M. · Answer

That's pretty slick, Steve. How do you link directly to a post? I only know how to link to the thread (or page within a thread).

Steve Babiak · Answer

Bill Gulley - thanks for the heads up, I fixed the link.

Stephen Masek · Answer

Short, as in zero days. Paying cash is the way to go.

Bill Gulley · Answer

I think what David is getting at is your "use of funds management" there is an optimal point to leverage your properties at a certain cost, but saving on interest is never a bad thing. It's more likely that your returns will fluctuate more than the mortgage rate you pay on your money over the long haul. Interest expense is taken off your gross to get your taxable income, but a dollar saved is a dollar earned. :)