Over at the Outlier Model, owning and renting out property forms a big part of our master plan for early retirement. We started with our first property when we were 25 years old and we’re hoping to add another one soon!
When you buy property, you typically take out a mortgage with an amortization over a particular period of time. This is the lifetime of your loan – the amount of time it takes you to pay it back, including interest. Two common options are the 15 year mortgage and the 30 year mortgage. There are advantages and disadvantages to both approaches.
If you are able to afford the higher monthly mortgage payments, it might be prudent to consider a 15 year term. With the recent economic downturns, interest rates on 15-year mortgages have been close to historical lows. A 15-year mortgage presents several advantages to borrowers. With a shorter term and a lower rate, borrowers pay less interest over the lifetime of the loan and own their home sooner.
For example, consider a $300,000 mortgage with either a 30 year mortgage at 3.75% or a 15 year mortgage at 2.75%.
On the 30-year term, that works out to (approximately):
On the 15-year term, it is:
Clearly, there are a lot of savings available to borrowers who can afford the monthly payments! If you intend on staying in your home for a long time, paying it off the mortgage as quickly as possible and with as little interest as possible is a great option. But for many people, myself included, the 15 year mortgage is just not realistic.
Instead, we opted to take a 30 year mortgage with our first property. Based on our purchase price and the interest rates at the time, we had ended up with a monthly payment that was less than what we paid in rent. Even though we would pay more in interest over time, there were several other advantages.
And even with a 30 year mortgage, it’s important to note that you can still save yourself interest charges by making extra lump sum payments towards your principal or by increasing your monthly payment.
Whether you end up choosing a 15 year mortgage or a 30 year mortgage depends entirely on your personal financial situation and your future plans. With our rental properties, we want to keep the mortgage payments low while maximizing our cash flow. That’s why we stuck with the 30 year term. But there are many benefits to the 15 year term as well. Perhaps when we buy our “forever home” we’ll feel differently.
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