30 vs 15 and paying early vs saving for rental property

[Travis Provin]

I’m 31 and will be buying my first house in the next 6 months. Since the interest rate environment has changed dramatically over the last 6 months I’m torn with what to do.

I am hoping to be able to house hack to help with the mortgage. In the long run I’d like to purchase a rental property to diversify my investment portfolio. Right now I'm planning to purchase a $375,000 home with 20% down ($75,000)

The three options I am kicking around are:

1. Take out a 15 year mortgage at 6.2% and pay it off early. This leaves me with net income of $1,000 after maxing all retirement accounts and paying all expenses (maybe more if house hacking is an option). Putting an extra $1,000 towards the mortgage means paying it off in 9 years. Once the primary home is paid off  I would be able to save the mortgage plus the extra $1,000 for a down payment on a rental. This is the option I am leaning towards as it means a paid off primary home and then quickly saving for a rental. The downside is that it means not obtaining a rental for about 10 years but having plenty of cash to purchase and get it up and running once I do purchase it.

2. Take out a 15 year mortgage at 6.2% and do not pay it early. This is the middle ground approach. It means being able to save $1,000 per month for a rental down payment and obtaining a rental in 5 years. I would then put the $1,000 towards paying off the primary mortgage.

3. Take out a 30 year mortgage at 6.8%. The longer loan term leaves me with an extra $500 per month which means saving $1,500 per month for a rental down payment. It would mean obtaining a rental in about three years but it would also mean paying the most in interest and having a mortgage on the primary residence and the rental.

[Allan C.]

If you’re just stating out on your investment journey, there are not many reasons why a 15 yr loan makes sense. A prudent investor should always achieve higher returns than prevailing interest rates, thus minimizing down payment and maximizing loan tenure should be your goals. You want to maximize your cash position to diversify your investment portfolio. A 15 yr loan achieves the opposite. 
You can always pay down more principle if you wish, so you only give up slightly better interest rates by going with 15 yr option.  And let’s face it, interest rates are not enticing regardless of loan product at the moment, so you’ll want to refi whatever loan you get as soon as interest rates drop 75 bps.