Are 30 year or 15 year mortgages better?

Question

We bought a single family property 16 years ago and another 15 years ago using 30 year mortgages.  We paid too much for them and rented to the wrong people in the beginning...and lost a lot of money.  The last 5 years have been great.  We've figured out finding good tenants and rents have increased.  We are finally putting money away!  It's like we are starting over, though.

We are looking to refi to better rates and add to our portfolio.   It looks like 30 year loans will give us the cash flow we need to buy properties more quickly than 15 year loans.   (We'd like to have 15-20 properties eventually)

I'd love to hear more perspectives on this!

Bill F. · Answer

@Pete Frederick is a table saw better than a jig saw? The answer depends on what you want you want accomplish. If I want to cut a sheet of plywood into foot wide strips, the table saw is better. If I want to make a Frostie the Snow Man cut out for my kids, the jig saw is way better.

Same thing with mortgages. What are your goals for RE investing? Do you want to intent to live off the cash flow? If so when do you need the cash flow?

Theresa Harris · Answer

I'd do the 30 year and you can pay it off faster if you want to.

Martin Fletcher · Answer

@Pete Frederick. Here is how I think about it.  When you choose between a 15 and 30 year mortgage, you are trading a modest interest rate differential for 15 years of time.  With a 15 year mortgage you get a lower interest rate but you have to pay the loan amount back in only 15 years. This means your monthly payments will be higher because you pay more principal back each month to pay the loan off in only 15 years.  With a 30 year mortgage, you pay a little higher interest rate in return for getting 15 additional years to pay off the loan. Because you pay over twice as much time, the amount of monthly principal you pay is lower, which improves current cash flow. In the end, a 15 year loan is cheaper than a 30 year but necessitates higher monthly payments and lower monthly cash flow to meet the shorter term.  If the difference in cash flow does not matter to you now and if you believe there is little to no risk it will matter to you in the next 15 years, then a 15 year term may be the best choice.  But if you think extra cash flow could be important in the next 15 years or you just do not want to take that risk, then it may be prudent to do a 30 year term. Two additional things I would give thought to: first, with a 30 year mortgage you can always decide to make extra principal payments if your circumstances permit and thereby shorten the term, but with a 15 year mortgage you cannot unilaterally reduce payments to lengthen the term if your circumstances require cash flow relief. Second, in the current interest rate environment where rates are historically low, you may particularly benefit from a fixed rate 30 year term, because (a) it increases the likelihood that at some point over the longer loan term higher inflation will return and the dollars you repay with will be materially cheaper than the dollars you borrowed and (b) you are locking in the use of long term capital at a rate below which you may be able to access capital in the future.  I am sure others may have different ways they think about these things, but I hope you find the above thoughts useful. Best wishes and good luck.

Pete Frederick · Answer

@Bill F.

I see your point. My numbers lead to me to believe the 30 is best tool for my current project....so pretty simple, I guess!

Pete Frederick · Answer

@Steve Vaughan

@Martin Fletcher

Thank you for sharing your thought processes!  With the interest rates between the 2 being so close right now, I do like the idea of going 30 and paying off early at some point (as other suggested as well)!

Tchaka Owen · Answer

@Martin Fletcher saved me time by writing exactly what I was going to write to you. He sums it up perfectly.

Eric Veronica · Answer

@Pete Frederick 30 year = cash flow.  CASH FLOW!!! CASH FLOW!!! CASH FLOW!!!

Steve Vaughan · Answer

If in a cash-flow-needing growth phase, get a 30.  Also lower DTI if you continue to need more loans.

Check the 15 rates, though.  I got a few 15s in 2012 because the rate was 25% less.  Most of the time a 15 will be .5% lower.

I have never paid a mortgage off and regretted not having 15 years left.  Most go with a 30 and accelerate if they want to.  Nice to have options, but also nice to be done sooner.  Your choice.

Bjorik Mutize · Answer

In my opinion,

Love the amort provided on 30 years.

30 year, fixed rate, low interest. Nothing better.

No rush to pay these things down!

Are 30 year or 15 year mortgages better?

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