Whats better? Shorter term or lower interest? - Posted by Sean

Posted by Kent C on August 15, 2002 at 22:23:35:

This gets into financial planning. Depends on a lot of factors. Is your income stable? If you are likely to get an increase in the future and Mom needs surgery now, you might need a 30 year loan. For a 50 yr old you need a 10 year loan. 20 is the longest loan I would EVER consider unless it was very expensive commercial property with good cash flow.

I recommend a 15 year myself. Of course you can get a 20 year and make advance principle pmnts but how many really do. I would go for the forced savings of a 15 year note.

Your current note (minus escrows) is $722.81/mo
Your proposed note is $745.57
This is a savings of 5 years time and $37905 in interest. At a cost of $22.76 more per month. Every dollar of this extra amount saved you $7 in interest.

I’ll bet that you can get a 15 yr for 6 1/8%.
This would $850.62/mo and a savings of $63730 at a cost of $127.81 more per month than the 25 yr loan. Every dollar of this extra amount spent saved you almost $3 in interest.

One thing to consider is this. IF you blow the extra money and need forced savings go for the 15 year. If you use money wisely the extra $100/mo can be made to return a MUCH better rate in your hands investing it into realty. This would indicate the 20 year note.

Also, passive realty losses cap at 25k$ losses per year. It may generate a little better return to have a maxed out, continuos home mortgage (at the lowest rate possible) since you can write off the interest paid above and beyond the cap rate of passive realty. $25k losses plus home int amt. But maxing out a home mortgage (or keeping it maxed due to longer terms or a LOC) is ONLY wise if you are using MOST of the money for adding value to your portfolio and not buying play toys.

Kent C

Whats better? Shorter term or lower interest? - Posted by Sean

Posted by Sean on August 15, 2002 at 21:21:00:

I have a FHA loan that I owe about 100K/30 which I have had for approx. 3 years. The original loan was for 105K. I did one of those streamline refinances last year to reduce my interest rate to 7.25%/25 year. I can do it again today to get 6.5%/20 year. My question is would it be better to get a 20 year term with larger payments and pay a small amount of extra principal every month, or keep the 25 year(with lower payments), and pay a larger amount of extra principal off every month?

Re: Whats better? Shorter term or lower interest? - Posted by Dave T

Posted by Dave T on August 17, 2002 at 09:19:33:

No matter what you decide to do, consider getting a conventional loan instead of FHA. It appears that you eventually want to pay off your loan balance, but with a FHA loan you either have mortgage insurance payments, or you make a hefty mortgage insurance lump sum prepayment at settlement.

Consider conventional financing which will allow you to cancel PMI once your loan balance is less than 80% of the appraised value of your property.

As to your question on refinancing, I probably would not do it. Going from a 25 year note to a 20 year note with only a small reduction in the interest rate actually increases your monthly payment. I know that you will save quite a bit of money by avoiding the last five years on the longer mortgage, but what if you decide to sell the house before you get to the 20 year payoff date? How do you know that you will keep the house long enough to pay off the mortgage?

I suggest that you keep the mortgage that you have in place now – after all you have already paid all the closing costs and settlement fees for the loan. If you want to make your loan term shorter, just add a little extra to the principle payment each month. The mortgagee’s loan servicing department can help you set up an automatic draft to make your monthly payments and at the same time deduct a little extra to pay down the loan balance faster. By the way, adding enough to your debt reduction to equal one extra mortgage payment during the year takes about seven years off your loan term.

Depends on your Goals - Posted by M

Posted by M on August 16, 2002 at 10:50:54:


For example, if this is your personal residence, it really comes down to when you want it paid off, how much can you afford to pay per month and your opportunity cost (what are your other investing alternatives, if a 2% MM account is about all you invest in, prob wouldn’t hurt to take on the higher payments of a shorter term note…however, if instead you have investment options for 20%+ returns, prob want to consider keeping payments lower, even if at higher rates since you’d be earning more on your money saved).

However, if this is property you rent out (and you plan on holding for awhile) you probably want your payments to be as low as possible so your rents will cover and create a nice monthly CF.

In either case, it really depends on your personal goals. There are more than plenty of exceptions to the above mentioned scenarios.