Simple case where a 15yr mortgage is better than 30yr

[Assaf Furman]

In a recent article, @Scott Trench discussed the advantages of a 30 year note over 15 year (or lower than 30 in general). While I agree with most of what's there, I'd like to discuss a case where to me at least, it seems that a 15yr note is far better:

Let's take Jerry - a 30 year old employee, loves his job and has a positive outlook for his future in the industry. His goal is to accumulate enough equity so that he would have the option to retire in his 50's. Like many, he doesn't understand nor trust the stock market as a reliable source for passive income and wealth building, so he would rather direct his savings towards purchasing rental properties one at a time. Since he wants to gain equity rather than produce cashflow, he needs to structure the deals so that in the end he would pay the least amount for the properties plus have free and clear rentals that produce the maximum cashflow for the retirement period. 

Here comes the fun part of doing the math. For the sake of simplicity I took easy numbers to work with which meant to compare the two options - you can and should do the whole calculation yourselves with numbers that work for you.

The average price for a rental property that worked for Jerry is $100k, and every year he saved up $20k to buy a property*. After 10 years he finished buying, and started using the residual income to pay down the loan of the first property so that it clears of debt faster. Then he moves on to paying the second and so on.

Option 1: 15yr mortgage at 2.625%** comes down to a total of $96,867 with monthly payments of $538/mo

Option 2: 30yr mortgage at 3.5%** comes down to a total of $129,325 with monthly payments of $359/mo

When I use these assumptions to calculate which option works better for that particular scenario, the 15yr loan wins big time. For example, the total difference in the mortgage payment is $324,580 which is a lot of money to gain (or lose) just by strategizing properly. Also, by the time Jerry celebrates 55 he has at least $1MM in the shape of 10 properties, that add $5380 more to his monthly income. In fact, he began adding that sum even earlier since he was able to pay down the loans faster using his salary and any leftovers from the rent. That couldn't have happened with a 30yr mortgage. Even with less properties, different prices or whatnot - as long as the rent covers the total expenses that would result in a faster accumulation of wealth with a 15 yr mortgage. 

Bottom line: More often than not I see and hear people who show why a 30yr mortgage is better, which makes others believe that's the ultimate way not thinking about the simple case of Jerry which may even represent them. I know this post will result in angry replies but all my intention was to bring a different point of view that would support Scott T's saying that the choice between the two depends.

* That may seems like a fast pace to save that much, but in reality it's possible to save a lot more especially when the spouse works as well

** The rates were taken from bankrate.com and are relevant to 8/5/2016