Loan interest rate question

6 Replies

Ok this one might be hard to explain...

I want to either refinance my paid off SFR or get a HELOC so I can buy a rental property. So far I have determined that my rate at least for a refinance will be about 5.25 for loan. Lets say my house is worth 100k and the LTV on the refinance is 70 so I can get 70k out of it to put towards a rental property.

Now lets say I find a rental property worth 200k and put down my 70k on it and finance the rest (130k loan). Also lets say the rate on the 130k 30-year fixed loan is 4.25. Finally here comes my question:

When using the BP rental calculator, I am unsure which loan rate to put into the 'interest rate' field on the calculator. In this scenario, the rental property's loan (130k) rate is only 4.25 but the SFR that I get the equity out of is 5.25. So which interest rate do I use to figure out if it's a good deal to buy a property or not? It's either 4.25, 5.25, or do I add them together since I am essentially paying two loans. I can't imagine being able to find a good deal that allows to me to make good cash flow and pay off 9.5% in interest. Help!

Are these both rentals? If so you use the final interest rate for both. You won’t get 4.25 on a rental. You’ll probably be closer to 5.5 for a 30 year fixed.

Thx Caleb,

Yes the paid off SFR is being rented out and the 200k property would also be rented out so basically I just use the higher interest rate which will give me accurate numbers when calculating deals?

I would make sure when deciding if a property is okay that you give a little room in all the numbers, the interest rate at 6% in case that happens, the LTV give it 5K of room, the down payment give an extra 5% in case the appraisal comes back funny. I would also add up all the basic needs and add something for extras most people do a 1.5 multiplier on expenses.

Originally posted by @John Malcom :

Ok this one might be hard to explain...

I want to either refinance my paid off SFR or get a HELOC so I can buy a rental property. So far I have determined that my rate at least for a refinance will be about 5.25 for loan. Lets say my house is worth 100k and the LTV on the refinance is 70 so I can get 70k out of it to put towards a rental property.

Now lets say I find a rental property worth 200k and put down my 70k on it and finance the rest (130k loan). Also lets say the rate on the 130k 30-year fixed loan is 4.25. Finally here comes my question:

When using the BP rental calculator, I am unsure which loan rate to put into the 'interest rate' field on the calculator. In this scenario, the rental property's loan (130k) rate is only 4.25 but the SFR that I get the equity out of is 5.25. So which interest rate do I use to figure out if it's a good deal to buy a property or not? It's either 4.25, 5.25, or do I add them together since I am essentially paying two loans. I can't imagine being able to find a good deal that allows to me to make good cash flow and pay off 9.5% in interest. Help!

 Hi John,

FYI 4.25% is quite optimistic for an investment property purchase, assuming you're talking about 30 year fixed. But, in any case...

Average the two to find the 'average' cost of each dollar financed. Loan amounts multiplied by interest rate added together, divided by total amount financed. And remember this next time a middle school aged child asks "why do we have to learn this, we will never use it in the real world." :)

[$70k*5.25% + $130k*4.25%] / $200k = 4.6%.

This is also how one can answer the HELOC v cash out question... find out which has the lower average cost per dollar financed.

My banks current offer on the table for rental property is 20% down,  5.2%, amortized at 25 years, with a 7 year balloon. IF I had a property paid off, I would pull out the equity and run the numbers for each property separately. Property 1, do the math with the new loan to make sure that still cash flows. Then the same with property two's loan. Each property should be paying for themselves with rents.