I would like to get your opinion on the following scenario.
I want you to show me what I can not see. If that makes any sense.
Scenario
You buy a home that rents for $900 and you finance 40k at 7%
taxes are 1500 and insurance another 500, and you also have 5k as an emergency fund
[tr][td]30 years
266.12 mortgage
125 taxes
41.66 ins
184 cashflow[/td][td]
15 years
359.83 mortgage
125 taxes
41.66 ins
90 cashflow[/td]
[td]
10 years
464.43 mortgage
125 taxes
41.66 ins
-14 cashflow[/td]
[td]
5 years
792.04 mortgage
125 taxes
41.66 ins
-342 cashflow[/td][/tr]
30 years
I can’t see any pros here. In my head this is the last resort
15 years
I would feel very comfortable with this loan. It seems to be a very low risk
10 years
The risk seems to be well balanced with the 10 year term. Moderate risk.
5 years
Big negative cash flow. high risk of loosing the home. Very high risk.
On the other hand you own it free and clear in only 5 years
Today I would choose 15 years, since I am self employed and I never know how much I am going to make. I would be able to hang on to the property even when sales are very slow.
You financed about the same amount as we did on our property. We did 15 yr fixed and didn’t even think about extending out to 30 yrs. Because of what you said about your income, I would not intentionally go into a situation you know will be negative cashflow. So I would stay away from the shorter terms. If you want to get the property paid off quicker than 15 yrs, maybe you can throw some extra cash at the mortgage when times are good and you have good money coming in.
If greater cash flow and lower risk, then go with the 30 year mortgage.
If lower cash flow and higher risk, then go with the 15 year mortgage.
Regardless of your goal, the mortgage terms with a negative cash flow should be discarded from further consideration.
Personally, I would go with the 30-year and use excess cash flow to build up my reserve account to $10K. After that I would add extra to the principal payment each month to pay off the loan faster if a free and clear property is my goal.
If your goal is a free and clear property, then both the 15 and 30 year loans get you there, and each can get you there in the same amount of time.
If you take the 15 year loan term, you are obligated to make the higher loan payments each month even if you don’t have any income coming in. You can always pay off a 30 year loan in 15 years by adding about $90 extra to the principal payment each month.
If you want to buy a second rental property, the lower debt service with a 30-year loan helps your debt/income ratio more than the 15 year loan, making it easier to qualify for another mortgage loan to purchase your next property.
What I tell my customers who want to shorten their term is to get the 30 year term but pay it like a 15 year. The difference in interest rates between the two is currently very small. This way you can pay it off much quicker, but if you run into a patch of bad times you can go back to the lower payment for a month or two and then go back to the higher payment when the rough patch is over.