Wednesday, May 30, 2007

15 or 30

i posted a while back about whether it was better to go with a 15 or 30 year mortgage on our house. in the end, for flexibility, we opted for the 30 year. this made me think about whether it would be better to go with a 15 or 30 year note on an investment property. now, generally speaking, i think rents on investment properties probably allow you to take in some passive income if you're on a 30 year note, but it's probably much more difficult to do on a 15. but, of course, you get the benefit of depreciation, so it's probably doable. my question is this -- is it better to build equity in an investment property (say a small house or condo that likely appreciates slower than your primary residence) quickly with a 15 year note and possibly take on some investment losses until the mortgage is paid off, or take some gains while paying off the mortgage and go with a 30 year note?

3 comments:

broknowrchlatr said...

On a primary residence mortgage, I like the 15 year mortgage because I do not plan on staying in 1 place for too long. In a 30 year mortgage, you are essentially "paying" (with a higher interest rate) for the right to continue to have that rate during the later years. This point is obvious if you compare rates of a 7/1 ARM, a 10/1 ARM, and a 30 year fixed rate mortgage. The rates I see from 1 company are 5.875, 6.25, 6.375. So, if you are going to move in 5-7 years, a 7/1 ARM will save you a lot of interest.

On the other hand, the dynamics of an investment property are different. A 15 year mortgage might be too risky since you likely have to fork out money each month on it on top of the rent. I would get a nice long mortgage (30 year, 40 year) on an investment property as it is a better financial move to keep an investment property for a long time (rather than turning over every 10 years)

One could say the same of your residential mortgage, but I find it too tempting to make a move in 5 years or so. Sure it would be cheap to keep my starter home forever, that's jsut not what I want (and I'd venture that many other people feel the same)

aggressive saver said...

broknow,

i agree with you, but i actually did quite the opposite thing. my reasoning was basically the same as yours, though.

we plan on staying in our home for a long time, so we opted for the 30 year (but you know what they say about best laid plans). we live in texas suburbs, which haven't been experiencing the kind of appreciation that others may have seen.

on our investment, we took a 15 year. it's a tiny bit short of break even right now, but in a few short years, we'll be able to leverage most of the rental income. we got a great rate on the mortgage when we took it out a few years ago, too.

Super Saver said...

Agressive Saver,

The strategy I use is get a 30 year mortgage and pay it off in 15. The benefit is that I have the flexibility to pay lower payments should I need to do so. If I were locked into a 15 year, I couldn't reduce my payments if needed.