Interest rates and paying points or not?

Question

I'm having a difficult time deciding if paying points is worth it. I currently have 3 deals in progress all will be cash flowing long term holds.

Average mortgage around $150,000.

Interest rate      Points        P& I payment

7.125%               2.25              $1011

7.375%               1.25              $1036

7.5%                    .75               $1049

I calculated paying 2.25 and 1.25  points would take just under 5 years to break even.

I keep thinking I can refi if rates go down so don't pay points now but on the other hand maybe I lock in 7.125% and let it ride because they cash flow, mortgage balance is relatively small, and the numbers work today so let it sit there and get better over time as rents rise.

What are other investors doing in this interest rate climate for long term holds?

Lisa Martin · Answer

Thanks Jonathan that's what I initially was thinking then I started overthinking!

I like to think of the property acquisitions x 10 or x 100  as I scale my portfolio. I sure do miss interest rates from a few years ago!   At least I have properties already locked in at great rates that who knows when and if we will see them again :-)

Jonathan R McLaughlin · Answer

I mean, what are you really getting here for your money? Percentages are one thing but you are talking less than $40/mo? And you pay what? $40/month is lunch with a friend, vs. a few thousand you can actually do something with. Buy a T bill at 4% and beat out all of this.

I guess what I'm saying is at these numbers you will have other inflection points that will determine your return...vacancy, maintenance who knows what else. The debt difference simply won't be that much of an inflection point for you. On the other hand, having an extra couple of thousand in reserves might be very meaningful, and you will almost certainly need it over the next 5 years.