Do I take a 4.125% for $0 origination fee or 3.875% for $3800?!!

7 Replies

Hey folks, 

I'm borrowing $380,000 for a primary residence/investment property. It is technically considered a single family but there is  a 4 bed 2 bath house,  a 1 bed, 1 bath apartment AND a studio garage apartment.

Breakdown:

main house will be rented for $2250/mo which will cover the mortgage exactly. 

I will rent the 1 bedroom studio  for $500 and live in the 1 bed/1 bath apartment for free (will eventually rent for $900) 

Do I pay the extra $3800 up front for the lower 3.875 interest rate (mortgage payment will decrease by $54/month and it will take ~ 5 years to break even on the original investment of $3800 for the rate)? I'm inclined to do this knowing interest rates will likely rise soon and in general, this will be a nice interest rate on an investment property. I have the cash to do this. 

Or, do I take the 4.125 rate? Knowing that this is still a good rate and I don't have to bring the $3800 to do this deal?

I'll mention that this is something I plan to hold on to long term and that this is a turnkey property- no real opportunity to BRRRR

Hoping to lock in my rate today. Thanks everyone!!

Me personally, I would take the slightly higher interest rate, with $0 origination (all else being equal).  That's $3800 that could be used toward the down payment of the next deal.  And the return rate to "pay down" the interest is very long.

Don’t forget that interest paid as part of payment is deductible in the year paid, whereas prepaid interest (the $3800) option must be amortized over the life of the loan. Meaning you’d pay $54/month is $648/year deductible interest vs. less than $130/year deductible. Need to factor that in your calculation. I also like calculating breakeven point as you have done.

Generally speaking, I’d rather have the $3800 on hand.

This is pretty straightforward: you invest $3800 for a $648/yr ($54/m) cash flow. This is $648/$3800 = 17% ROI.
Do you want to invest your money for a 17% return - does 17% meet your minimum criteria for investment? If yes, then do it, otherwise pass.

I would compare how much you pay in interest with the lower rate verse the higher rate over the life of the loan and look at it from that perspective

Originally posted by @Amberleigh Hammond :

Hey folks, 

I'm borrowing $380,000 for a primary residence/investment property. It is technically considered a single family but there is  a 4 bed 2 bath house,  a 1 bed, 1 bath apartment AND a studio garage apartment.

 Have you told your lender that? Hate to be the wet blanket, but...

Might be worth giving your agent and lender a call. This isn't always a deal-breaker. You may want to explore "de-unit"ing the garage prior the appraisal.

To answer your original question, like Ryan pointed out the ROI on this rate buy-down isn't bad at all.

@Amberleigh Hammond

Tough call without seeing how this affects the cash flow on the property.

Not sure about the tax reform, but right now you would be able to write off the upfront interest on your income taxes.

You save $54 x 360 = $19,440 over 30 years.

Essentially, you have to look at your cash on cash return difference and your cash on cash return % considering your initial investment would increase by $3,800

Normally, the least amount of cash you put into an investment the better your ROI. But, you also stand to save interest over the 10+ years you might hold the investment.

If you plan to keep the loan 7+ years or more than it may be worth it.  If you are going to sell or refinance in less time than not.  The average loan life is less than 7 years.

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