15-year loans may appear to save money over 30-year loans because they have a lower interest rate, but you may want to have the flexibility of a 30-year loan.
Buying rental properties is a great investment, especially when you are able to use a mortgage to buy the properties and still get great cash flow. Many investors will get a 15-year mortgage because the rates are a little lower and they can pay off the properties quicker.
However, a 30-year loan when buying rental properties can offer more cash flow. Plus, the flexibility of having greater cashflow to buy more properties. Let’s break it down.
Why is a 30-year loan better?
You will pay less interest on a 15-year loan than a 30-year loan. However, you are paying a higher payment every month on the 15-year loan. Cash flow is king, focus less on the interest and more on the payment factor. When you calculate the difference in monthly payment in a 30 vs. a 15 year mortgage, that monthly payment savings is significant and strategic.
That extra money can be used for many things that will make you much more money than the interest you save. You can save up the cash flow to buy more rental properties. You can use the money to build an emergency fund. You could also pay extra to the mortgage and if you ever need the extra money later, you can stop putting extra money into the mortgage.
If you have nothing to invest that money into, it might make sense to get the 15-year loan. If you want to keep buying rentals and build your empire, the best bet is to get a longer-term loan and buy as many rentals as you can now.
Why does a 15-year loan make it harder to buy more rentals?
Consider this…
Another huge factor when considering whether to use a 15 or 30-year loan, is qualifying for more properties. When banks qualify an investor, they will look at debt to income ratios. A 15-year loan will have a higher payment and increase your monthly debt payments. The higher your loan payments are, the less cash flow you will have, and it will be harder to qualify for new loans.
Many banks will only count 75 percent of your rental income when qualifying an investor for a loan. Even if you are cash flowing with a 15-year loan, if you can only count 75 percent of the rental income, you may show a loss each month. If you have many rental properties showing a loss, it will be very hard to qualify for new loans. In the end, a 30-year mortgage lightens the load on your overall debt to income ratio, to be able to purchase more rental properties.
Why is a 30-year loan safer than a 15-year loan?
Many people have a tough time saving money and the higher your mortgage payment is, the harder it will be to save. Having an emergency fund is very important for financial stability. If you do not have an emergency fund, do not get a 15-year mortgage.
Get the 30-year mortgage, and save up for the emergency fund. Once the emergency fund has enough money (6 months of living expenses) you can pay off your mortgage early if you would like to.
Remember that you see no real benefit to paying off your mortgage early unless you pay off the entire loan, refinance, or sell. Your house payment will stay the same until the loan is paid off in full. If you need to access the equity you have in your house, you cannot ask the lender to give you back what you have paid early. You will have to sell the house or get a brand new loan (refinance or home equity line of credit).
If you get a 15-year loan and have a medical emergency, lose your job, or cannot work, the bank will not lower the payment for you. You have to keep paying that high mortgage payment every month. If you had a 30-year mortgage and were paying more every month, an emergency would not be nearly as devastating, because you could stop paying extra.
