This is something that not many people take into consideration, but can affect the return you make greatly especially when investing in real estate.
This is because we’ve been led to believe the longer term mortgage is the better option over the short term mortgage.
Because you are left with more money in your pocket, since the monthly mortgage payment will be lower.
However, this is not a wise investing decision, and in this video, I’m going to show you why it’s not.
So, should you get a short term mortgage, or should you take out a longer term mortgage, such as a 30 year?
There really is no right answer, and the length of the mortgage you decide to choose is dependent on your goals when investing in real estate.
However, I’m going to show you why you shouldn’t take out a longer mortgage, such as a 30 year, and opt for a shorter term.
Here is the breakdown of a recent property I was looking to invest in, using a 30 year mortgage.
Based on the mortgage amount, and the length of the mortgage, the monthly mortgage payment is $1106.
This is great because by having a longer term mortgage, the monthly payment will be lower, as a result of spreading the principal amount over the 30 years.
This is what many investors like to do, because this allows you to put more money in your pocket now, and make it so that property cash flows, which is what many investors want.
But you need to be very careful when doing this because...
When you get a 30 year mortgage, the total amount that you end up paying, just by adding even 5 years to your mortgage, if you were to compare to a 25 year mortgage, which you can see below...
IS $30,000 MORE!!!!
This is because of the interest you are paying on this mortgage.
Sure it might be sweet that your buying a property that cash flows...
But at the expense of paying an extra $30,000 over the life of the mortgage!
This is just not worth it in my mind.
Now, this might not matter if you aren’t looking to hold onto the property until it's paid off.
However, as a long term investor, my goal is to own real estate free and clear.
So, paying an extra 30 grand to the bank, is only making them money, and costing me more.
This isn’t the only thing you need to be aware of though.
Many Realtors like to sell investors; especially beginner real estate investors, on cash flowing properties.
I see it all the time, and think to myself when I see their numbers, "How is this property cash flowing"?
I even had an investor friend of mine the other day asking me why he can never match his Realtors numbers.
Knowing the Realtor, I knew what he was doing, he was using a 30 year mortgage.
This, as I said earlier, results in the monthly mortgage payment being lower, and thus, a higher monthly cash flow.
To me, this is just a sneaky way to make a property look like a better investment.
I myself never use a 30 year mortgage when analyzing a property, nor do I take 30 year mortgages.
I usually get a 25 year mortgage, sometimes a 20 year, and once I did a 10 year mortgage, but that was too short.
(The only the reason I did a 10 year was because it still cash flowed, and the goal was to pay it off asap).
The 3 main reasons though for taking a shorter term mortgage when investing in real estate are:
One, it prevents me from buying an investment property that doesn’t cash flow when I run my numbers. The property I went through above, cash flows when using a 30 year mortgage, but not at a 25 year mortgage. Based on the fact that it cash flowed better, I would’ve bought it, and, overpaid for it.
Third, the banks make enough money, and to pay an extra $30,000 in interest or more, depending on the price of the real estate your buying, is not something I like doing. So by taking a 30 year mortgage, it’s only increasing there profits.
In the end, it's your decision.
Force the numbers, so that the property cash flows by taking a longer term mortgage.
This will result in you paying more for the property, especially in a competitive market.
Or be conservative, use a lower term mortgage when running your numbers.
Forcing you to buy a property that still cash flows at the higher monthly mortgage amount, and prevent you from overpaying for it.
WHAT TO DO NEXT
To help you make the right decision on the length of the mortgage, and help you to analyze properties the right way...
Click on the link below, and gain access to the exact spreadsheets I use, FREE.