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Be Wealthy & Smart

Jul 22, 2016

Learn why a 30 year mortgage can be better than a 15 year mortgage when investing in real estate.

Here is our listener question this week:

Hi Linda,

You talk about using leverage to purchase rental properties as well as making an extra payment each year to pay down the mortgage quicker.  I have a rental property that currently has a 15 yr note at 4% and we are paying approximately $360 per month out of pocket to cover the mortgage (incl. taxes, insurance, and PMI).  We refinanced about 4 years ago into the 15yr in order to reduce our interest rate and pay down the principle faster since we were underwater at the time.  Now we are back in the black and were considering refinancing into a 30yr mortgage (which would also be at 4%) in order to increase our cash flow and invest the savings each month either in the market or save it toward a down payment on another property.  Our payment would go from $1260 to $760.  I wanted to hear your thoughts on this plan.  We currently receive $900 per month in rent, which is slightly above market value, so I would not expect rent to go up for a few years.

Thanks so much. Love the show.

I love this question!

This is why I don’t like 15 year mortgages!

1). All debt is not bad

2). Debt will enhance your return. Example: $100,000 cash vs. 10% down

3). A 30 mortgage will shift your cash from from negative to positive cash flow

4). You can still pay off your 30 year mortgage early by making extra principal payments.

5). You control the payoff, not the bank.

6). Pay extra to get rid of PMI payment. Need to get to 20% equity. Can pre-pay, get a new appraisal, refi, or remodel.

7). $1260 current payment - $760 new payment = $500 per month less, which would cover the $360 negative cash flow. Why not?

Then: $900 rent - $760 payment = $140 positive cash flow
All this talk that debt is evil is bunk! Debt is your friend in real estate. It’s called leverage and helps you get higher compounding rates.