I'm about to close on my fourth property and up until now, I have opted to pay whatever points were necessary upfront to lock in the lowest interest rate. It just made sense at the time: Go for the lowest interest rate, especially while rates are particularly low to begin with.
But I'm now realizing that if my goal is to buy and hold for the long term (which it is), it may make more sense to accept an interest rate that's higher while keeping that extra money in my account for future investing...given that cash flow is still positive.
Example: 20% down for a loan of around $66k... IF I chose to pay $1200k for a 30 year loan at 5.1%, how can I work those numbers to see how long I will be paying on the property for that to equal or surpass what I get if I choose to pay $200 for a 30 year loan at 5.5%.
Anyone happen to have a formula you use to determine this on the fly? Or maybe you believe that, all things considered, it rarely makes sense to go one way over the other.
Usually, it's a personal decision. You look at things like how much savings you can expect, how long it'll take to break even, how long you expect to keep the loan before you sell or refi, things like that. In your example, you'd save about $16 a month buying that rate down to 5.1%, so it'd take about 5 years to recoup the extra $1000 it'd cost do buy down the interest rate and break even.
@Jason Howell not sure if it’s a formula but here is a good way I think to calculate this if it’s worth it or not.
So a loan of 66k at 5.1 percent is a payment of 491 and at 5.5 it’s a payment of 508, for a difference of 17 dollars. The cost difference is 1000 which means it will take you 1000/17 or 59 months or 4.9 years to make that difference up.
If you plan to keep the loan longer than that it may be worth it, if not then it’s not worth it. At that tiny payment difference I would probably not pay the points but that’s just me.
Quick math; you’re paying 1.5% of loan amount to save .4%/yr—about 3.5 years to get ahead.
Awesome responses, thank you to all who replied!
I really hadn't considered the fact that paying up front is less reasonable when considering the possibility of a refi down the line. I don't expect these properties to appreciate like gang busters in the next 4-5 years... but I suppose anything is possible and if they did, I'll be less incentivized to refinance as a result of paying up front. Something new to consider going forward.