30yr Loans vs 15yr Loans

[Curt Davis]

So of the 20 rental homes I personally own in Memphis, the first 9 of them were put on 30yr loans and the other 11 on 15yr loans.   To give you a simple  example of the difference, here is what you can expect:

$100k price, P&I at 4.875% 30yr - after paying $529.21 for 30yrs, the amount of interest you have paid is $90,514.36

$100k price, P&I at 4.875% 15yr - after paying $784.30 for 15yrs, the amount of interest you have paid is $41,173.54

Depending on the market you are in, if a home provides a high amount of cash flow you might consider a 15yr. No one can truly realize the potential until the homes are free and clear. 

The negative of a 15yr is less cash flow and when you have a vacant home it takes the cash flow from more homes to cover it. 

Is anyone else doing 15yr loans? If so would love to hear why you put them on a 15.

[Brian Larson]

Hey @Curt Davis

I probably show as a broken record on this topic as I give my .02 quite a bit but here is my thought and why I choose 30 year over 15 (you asked about 15 but I am giving you why not 15...for me)

Here is the thought, yes, if you crush it with a nice cash flow you can likely cover that 15 year not no problem and will save on interest AND get that much closer to the free in clear asset.

But as I said, I do not go that route and here is why...I go 30 year note and pay it like a 15 year note (simply run the calc and pay the payment just like you would a 15). This allows you to have a throttle back option if needed (long term vacancy, rents drop dramatically, big capex and the reserves just were not in place like you thought, etc)

Now, you do not get the advantage of the lower rate (generally a 15yr is 1/8-3/8 lower than a 30 yr note so it is not an apples to apples BUT you do get that safety blanket if needed.

Again, just something I heard a long time ago from a veteran mortgage broker and has stuck with me. Note that his advice was actually on my primary residence but the same concepts apply (pay more principal while you can, throttle back when you cant)