Investment Property - refinance to 15yr or 30yr?

[Peter Ruz]

Hello all. My wife and I bought a condo in NYC in the fall of 2023. Our goal has always been to use this condo as a primary residence for 3-4 years and then rent it out afterwards (we're planning to move out of state in 2026-2027). Given we bought this condo at the time when the fixed 30yr mortgages were really high, we ended up going with a 7yr ARM option at 6.375%, hoping the rates would go down to at least mid 5% by 2025 - 2026. I believe that most (if not all) lenders will require us to stay in this property for at least 1 year after we refinance it to a new fixed rate (maybe that's not actually true though since we've been in this property for 15+ months already?). Given that restriction and our plan to move out of state in the next 15 - 24 months, we would like to refinance our mortgage as soon as possible, especially now that the rates are finally declining a little bit. The lender I'm working with offered me a 6.625% 30yr option or 5.625% 15yr option (both options assume no points). I'm not particularly excited about refinancing to a 6.625% rate given I currently have a 6.375% rate with ~5.5 years remaining on the ARM mortgage, however, given the principal amount is now a little lower than when we got the original mortgage, the actual monthly payment will be very similar to our current mortgage payment. Given the 1.000% difference between the 30yr and 15yr options, we're strongly considering refinancing to the 15yr option. Based on my quick math, if we go with the 30yr option and save ~$1070 in monthly payments for the next 15 years (this is based on ~$580k of currently outstanding mortgage), we would need to invest that ~$1070 at a ~9.8% compounded rate in order to be able to break even between those two options i.e. fully pay off the 30yr mortgage at the end of year 15. This seems to be a pretty high return when compared to historical stock market returns. For context, my wife and I have pretty large emergency savings / cash reserves, so we're not particularly worried about the default risk. We're more concerned about the restriction to live in this condo for at least 12 months after we refinance it as we don't want to move out of state first and then be forced to refinance this condo using the investment property mortgage as those rates are significantly higher than the primary residence mortgage rates. One additional consideration is that we're in the 35% tax bracket, so if we go with the 30yr option, we could take advantage of the tax savings (~$100 - $250 per month for the next 5-8 years depending on how quickly IRS will increase the standard deduction limits).

In an ideal scenario, we would refinance this condo in the next 1-3 months, live in it for 12-21 months and then rent it out. Towards the end of that period we would buy a new house out of state and live in it for the next 15-20 years at least. Once the condo is rented out, that would help us offset the mortgage payment (or at least a large portion of it) for the purposes of the DTI calculation, and hopefully allow us to buy another investment property in the future.

I understand most people on this forum prefer the 30yr mortgage option (with flexibility to potentially pay it off within 15 years), however given the above context, do you think we should consider the 15yr mortgage instead? Thank you very much for your help.