Choose: Larger Loan at Higher Rate or Smaller Loan at Lower Rate

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Choose: Larger Loan at Higher Rate or Smaller Loan at Lower Rate

Shefali R.
Investor · Montclair, NJ · Member since 2015 · 150 posts · 23 votes

Hi - Financing experts, need help choosing between two loan options on the table. 

1. Bank A is offering $400k for Prime + 1% (small local bank) 

2. Bank B is offering $435k for Prime +1.75% (large national bank)

All other terms are identical. Is it worth paying an extra .75% on entire principal for an additional financing of $35k? What other factors do you consider when choosing a funding option. 

Thanks so much! 

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Charlie Fitzgerald
Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
9y

No.  Go with A

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  • Charlie Fitzgerald
    Lender · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    9y

    No.  Go with A

    2Reply
  • Shefali R.
    OP
    Investor · Montclair, NJ · Member since 2015 · 150 posts · 23 votes
    9y

    @Charlie Fitzgerald thanks. 

    so basically int rate is key? I should have clarified that both options are HELOCs. 

    for my future reference, in a hypothetical where the funding gap was higher, say $100k would you still have recommended Option A? 

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    You are paying an additional $3000/year which amounts to 8.6% on the additional $35000.

    If you put $35K as cash into the property and you view cash at a investors value of 10% then you are farther ahead to go for B. 

    2Reply
  • Arpan Patel
    Investor · Chicago, IL · Member since 2010 · 504 posts · 191 votes
    9y

    @Shefali R.: Depends totally on what you are going to do with the 35k. If you can utilize it to make more money that the increased % on the loan ten yes otherwise no. What are your plans for the money?

    1Reply
  • Shefali R.
    OP
    Investor · Montclair, NJ · Member since 2015 · 150 posts · 23 votes
    9y

    @Thomas S., I will eventually draw the incremental $35k and invest in something with a 10%roi. I don't have immediate use for the full amount of the heloc but will gradually draw it based on opportunities so will get there in a few months. 

    0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    I would go with A. First off, it's a guaranteed return on the lower rate, and second, within scale your rates on larger sums of money are usually lower, not higher. It is cheaper for a bank to make 2 $500k loans than it is to make 10 $100k loans. That economy of scale should be demonstrated somewhere in your terms. (Whether it is more profitable for the bank to make the 10 loans than the 2, based on points, generation fees, etc, I will leave for some other discussion ;)  ). 

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  • Shefali R.
    OP
    Investor · Montclair, NJ · Member since 2015 · 150 posts · 23 votes
    9y

    @JD Martin thanks! Makes sense 

    0Reply
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