Posted by BillK602 on May 26, 2005 at 22:08:17:
Thank you for your insight, it has been very helpful. I am 30 years old but I am fortunate enough to have a good job as a commercial lender so my personal cash flow is solid. I think that I will go with the 15 year option and save the money on the interest and build equity faster.
Thank you again for your help
Bill
Best Amortization Strategy - Posted by billk602
Posted by billk602 on May 26, 2005 at 20:52:06:
I am in the process of buying my 2nd rental property and I am hammering out the terms of the loan. At a 15 year fixed the deal wiill cashflow after accounting for my mgt fees, maint., etc. but it is pretty tight. Maybe a $100 per month net. If I do it on a 30 year I will improve cashflow by another $100 but the interest expense will be almost 50% more over the life of the loan due to the terms and difference in rate. Even if I am it on a 30 and pay the an extra $100 per month to additional principal, I will be paying about $40 more per month. I would appreciate any advice on strategies?
Thanks
Bill
Re: Best Amortization Strategy - Posted by Dave T
Posted by Dave T on May 28, 2005 at 11:52:47:
Go with the 30 year amortization. You can always pay extra against the principal to reduce your loan term, but when cash flow is tight (a couple months vacancy, for example) you may appreciation the lower monthly debt service with the 30-year note.
Just because you have a 15 or 30 year note does not mean that you will always hold your property for the full term of the loan. I always consider that if the property cash flows, my tenants are really paying my mortgage and the interest they pay on my behalf is my tax deduction.
I don’t think you should be too concerned about paying off your loan as soon as possible unless you have no other source of income an need the cash flow to support your lifestyle.
Re: Best Amortization Strategy - Posted by DaveD (WI)
Posted by DaveD (WI) on May 27, 2005 at 08:21:13:
The best strategy is the one that lets you pay down as quickly as possible without strangling yourself. As long as you are in a market where rents tend to stay even or ahead of rising expenses, you should be OK, and burn your mortgage 15 years sooner!
Re: Best Amortization Strategy - Posted by Sailor
Posted by Sailor on May 26, 2005 at 22:02:11:
Your best strategy depends a lot on your age & stage in life. If you are young & poor, sometimes you do what you have to in order to secure the property (you can later restructure the finances when your circumstances change). However, to me, paying interest is like tearing up $1000 bills & tossing the pieces into the wind. If you are over 35 & established in your career, it is usually better to bite the small monthly bullet & save the 50%, knowing that you are more rapidly building equity. As you get even older, it is time to again reasses strategy.
My own methods have changed w/age (though I planned the changes several decades in advance). When I was young, the most important factor was leverage so I could gain appreciation on the entire property, even if most of it was mortgaged. In my 40’s I started putting in more equity up front. Now long since retired, the peace of mind that comes from not having to generate a high income to make mortgage payments is a major motivation for me. That’s why I retired my last mortgage years ago & now only buy for cash. I do fewer deals, but I pay 0% interest & it makes life a lot easier. I not only don’t have to work so hard for my $$$, but I make more this way.
Low interest loans have made some folks careless about mortgages, but remember that nothing is as cheap as cash. Building equity every month is a great insurance policy against market turndowns. Those who find themselves upside down because they have depended on appreciation-only to accumulate equity are the ones who won’t survive the next market correction.
Tye
Re: Best Amortization Strategy - Posted by BillK602
Posted by BillK602 on May 28, 2005 at 14:34:51:
Thank all of you for your great feedback. I really appreciate all of your help. I will talk with the lender on tuesday.