What factors do I consider in choosing amortization?

[Tootse]

Hi everyone.
I am close to finalizing a deal on a duplex that will cash flow either $220, $340 or $430 depending on whether or not I amortize 25, 30 or 35 years, respectively. I can`t decide what amortization I want. What factors influence this decision? Are there some hard and fast rules or recommendations? Or does it depend on what your individual strategy is? The 25 yr amortization is attractive because after 5 yrs when I renew the mortgage, there will be less to mortgage, but I make less monthly. The 35 yr amortization is attractive because I make more monthly, but have a higher amount to remortgage at the end of 5 yrs. I`d appreciate hearing any of your views on this.

Tootse.

 

[kboughen]

QUOTE (Tootse @ Jan 6 2010, 08:39 AM) I can`t decide what amortization I want.
Hi Tootse, setting the mortgage up with a 35 year amortization will improve your TDS/DCR as the monthly payments are lower, this will assist you in qualifying for more mortgages in the future. If paying down the mortgage is more important to you than the extra cash flow, you could use the extra monthly cash flow to pay down the mortgage, effectively lowering your amortization to 25 years (check the pre-payment conditions offered by your Lender).

 

[Esaum]

Hi Tootse,

In my opinion the 35 year amort. allows you to be safer, lowering your break-even revenue to be cash-flow positive. Personallly I would want to have the 35 year, because it allows me to have the cash now and not have to re-finance to have it.

Also letting me sleep better at night knowing that I could lose 4800$ in revenues for the year and still be positive cash-flow.

I do not know however of any set rule of thumb,

just my $0.02,

Eric

 

[fumbrunner]

Personally, I think it depends on how new you are to investing in real estate. Early on, good cash flow is important to build up reserves, enjoy some of the fruits of your labour, and hopefully pay down the existing mortgage (ie..longer amortizations). As you build up your portfolio, equity becomes as important as cashflow, if not more so. The more equity you have, the more you could invest. Therefore, shorter amortizations become important. That is my view, for what it`s worth.

 

[GaryMcGowan]

A 35 yr am for this property would be my choice. As you mentioned the cash flow is not as strong with the 25 yr am.
Take Kevin`s advice very seriously as the choices you make today will effect how you can get mortgages in the future. Make sure you have a great Mortgage Broker that you are working with that understands investing and what you want to accomplish over the next 1,2,3,4, and 5 years.

 

[mortgageman]

Go with the longest amortization possible. It improves cash flow and gives you flexibility. If you decide later on that you want to be aggressive about paying down the balance you can make accelerated bi-weekly payments or make lump sum payments.

 

[Tootse]

Thanks everyone. I am leaning more towards the 35 yrs now. After 5 yrs I can look at my options.

 

[Karma]

Also, another reason why you may want to go for the 35 yr. is that even though you will pay more interest it is fully deductible against your income so can lead to a nice refund. But again it depends on short term/ long term strategies and whether you are looking to continue to build your portfolio.

S.G.