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Mortgage question for first investment property

D

DEO

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We have just purchased our first investment property. My thought was to obtain a mortgage with a 30 year amortization to lower the mortgage payments and therefore increase cash flow. We have been offered a closed mortgage with a prime minus .5 variable rate for a five year term. This mortgage has a 25 year amortization. We asked the mortgage broker who obtained this for us about a 30 year amortization, but was discouraged from obtaining one as we were told there are extra fees associated, a higher interest rate, and many lenders aren't offering them anymore. We are putting 20% down so we don't need mortgage insurance. Is this information correct in regards to 30 year amortizations with 20% down?



Any input would be greatly appreciated.



Thank you!

Don Oulette
 
25 year mortgages are a good habit as you pay down your mortgage almost 14% in five years or over 30% in ten. If you have no cash-flow and zero value appreciation you will make over 120% on your cash invested in ten years on mortgage pay down alone .. More if there is value appreciation.



See here on this three-course meal analogy from Don's Little Book of Real Estate.



Many, but not all lenders now differentiate between investment and personally owned properties, and with 25 vs. 30 mortgages their risk is lower, thus a lower interest rate. 2.5% is a great rate, and soon it will be 2.25% or even 2.0% when prime drops another 1/4 or even 1/2 !



So, yes, it is better to save on the interest rate than paying 20-33% more for your money with a longer amortization. Since real estate is very capital intensive, the cost of the major ingredient, money, is absolutely vital !



Once this is well managed : onto the next one !
 
Longer amortization can be an excellent way to improve your DCR, but as Thomas said, it decreases your profit.



One option is to go for the longer amortization to keep the required payment lower, and then make extra payments to maintain your profit margin.



As for the extra fees for longer amortization, I am not sure about that. That wasn't the case for the last 30-year that I got, but things change. It is true that many lenders aren't offering 30-year, and it is true that rules can differ between owner-occupied and investment properties.
 
I can't blame you for wanting to increase cash flow. I just obtained a 30 amortization with the same rate as you on a variable so they are out there. Mine was with Scotia. There are no extra fees and shouldn't be a higher rate, but I am not a broker so I don't know how that works. I don't mean to be negative about your broker, but they seem like they may not be a broker that is going to get what you need especially when you buy a few more properties and when the banks are less likely to want to give you mortgages. You might want to look elsewhere next time.
 
The broker channel has less access to 30 year mortgages than the banks directly.
 
Thank you Thomas. We decided to go with the 25 year amortization. I appreciate the advice you provided. What a great resource this forum is!



Take care,

Don
 
Thanks for the advice Sherilynn. We are new to this way of investing and it sure helps to have experienced real estate investors share their wealth of knowledge.



Take care,

Don
 
Thanks DanW!



I'm not sure why we were told that. I was given different information from another broker afterwards. It pays to find the right one.



Don
 
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