Mortgage A vs. Mortgage B - Which is a better choice?

20 Replies

Would love to learn from the community on what is the better deal for an investor. 

Bank A is offering me 3.69 5 years fixed 30 year amortization - CIBC is offering me 4.89% 5 years fixed 30 year amortization but with 5% cash back (equals out to 9,400 at closing) looks to me like even though the 4.89% is higher, the cash back incentive could go towards another property or value add. Although the interest rate is a little more than 2% higher, the cash back seems to be a better investment as the cash flow from the is still in a safe spot.

Am I missing the boat or do I make a good point in going with the higher rate? 

It's not really "cash back". They just reduce your closing costs by that amount. It's cash back in the sense that it's money you don't have to bring to closing. What is the difference in interest paid over 5 years? A whole percentage point at $100,000 is $10K, just for one year. Amortize that over 5 years.

What is the difference in the monthly payment? How long will it take for that difference to equal $9,600?

More importantly, what does the money mean now? If you are about to close on a property in one month and this $9,600 is necessary for that purchase, maybe its a good idea. If that $9,600 is just going to sit in the bank while you shop for your next deal, it may not be a great idea.

Originally posted by @Andrew B. :

What is the difference in the monthly payment? How long will it take for that difference to equal $9,600?

More importantly, what does the money mean now? If you are about to close on a property in one month and this $9,600 is necessary for that purchase, maybe its a good idea. If that $9,600 is just going to sit in the bank while you shop for your next deal, it may not be a great idea.

 This is basically what the money will do. It will be sitting in a bank until the next deal. 

188k @ 3.69% = 861/m. 188k @4.89% with 5% CB = 991/m. Difference in cash flow if you don’t reduce the o/s mtg balance with cash back is $129/m

You can't properly analyze this without all the numbers.

1 - What is the actual down payment in $$$$$ that the cash back is offsetting?

2 - What is the difference, in actual $$$, in mortgage payments during the first 5 years between the two options?

3 - What is the balance, in actual $$$$, between the two options?

...and the big one,...

4 - What happens after the first five years in each of the two options?

You may be correct in your assessment of the two options, but with the info limited to the short term impact only, my fear would be you are only seeing the short term impact.

Originally posted by @Tyler Sellars :
Originally posted by @Andrew Boettcher:

What is the difference in the monthly payment? How long will it take for that difference to equal $9,600?

More importantly, what does the money mean now? If you are about to close on a property in one month and this $9,600 is necessary for that purchase, maybe its a good idea. If that $9,600 is just going to sit in the bank while you shop for your next deal, it may not be a great idea.

 This is basically what the money will do. It will be sitting in a bank until the next deal. 

188k @ 3.69% = 861/m. 188k @4.89% with 5% CB = 991/m. Difference in cash flow if you don’t reduce the o/s mtg balance with cash back is $129/m

 You're firing numbers at us, without definition of what these numbers mean.

Originally posted by @Joe Villeneuve :

You can't properly analyze this without all the numbers.

1 - What is the actual down payment in $$$$$ that the cash back is offsetting?
The downpayment is $47,000, now in Canada, the 5% cash back is going in as cash directly to my Pre Authorized Bank Account linked to the Mortgage. 

2 - What is the difference, in actual $$$, in mortgage payments during the first 5 years between the two options?
Lower interest
Total Payments: 51,677.40
Total Interest: 32,773.25
Total Principal: 18,904.15
Balance: 169,095.85

higher interest w/ CB
Total Payments: 59,461.80
Total Interest: 43,706.27
Total Principal: 15,755.53
Balance: 172,244.47

3 - What is the balance, in actual $$$$, between the two options?
Balance: 169,095.85 VS Balance: 172,244.47

...and the big one,...

4 - What happens after the first five years in each of the two options?
Not clear on what you mean by this? 

Originally posted by @Joe Villeneuve :

The what happens after the first five years question is pretty straight forward.

"What are your plans after the first 5 years", when the balloon is due.

 Renegotiate a deal with the same bank or bring it elsewhere. The answer seems pretty common to me, I'm not sure I'm understanding it exactly. 

Depending on what your plans are after the 5 years fixed are up, this is a simple numbers (math) problem...as it always is.

1 - Since you are getting $9400 back at closing, that means you are out of pocket 9400 less with the higher interest than the lower...which puts you 9400 ahead at the start.

2 - Over the next 5 years, your cash flow will be about 130 less with the higher interest rate, however...

3 - That only totals up to about 7800, which means over that 5 year period the higher interest rate waves you about 1700, but...

4 - Since it will take you 5 years to reduce your cash position from a +9400 to a +1700, and if you invest the 9400 ASAP, the compounding effect on that immediate 9400 extra cash will make the minimal look of "only a 1700 savings" immaterial. 

This of course completely depends on what your plans are AFTER the 5 year fixed is up.

Originally posted by @Tyler Sellars :
Originally posted by @Joe Villeneuve:

The what happens after the first five years question is pretty straight forward.

"What are your plans after the first 5 years", when the balloon is due.

 Renegotiate a deal with the same bank or bring it elsewhere. The answer seems pretty common to me, I'm not sure I'm understanding it exactly. 

 OK...and there is the problem.  Can you guarantee what the interest rates are in 5 years?  You don't.  That means this would not be an investment...it would be speculating.  Your ultimate success depends on what happens 5 years from now...in other words, future events you have no control over.

This is what I meant when I said mentioned you might be looking only at this shortsighted.

Originally posted by @Joe Villeneuve :
Originally posted by @Tyler Sellars:
Originally posted by @Joe Villeneuve:

The what happens after the first five years question is pretty straight forward.

"What are your plans after the first 5 years", when the balloon is due.

 Renegotiate a deal with the same bank or bring it elsewhere. The answer seems pretty common to me, I'm not sure I'm understanding it exactly. 

 OK...and there is the problem.  Can you guarantee what the interest rates are in 5 years?  You don't.  That means this would not be an investment...it would be speculating.  Your ultimate success depends on what happens 5 years from now...in other words, future events you have no control over.

This is what I meant when I said mentioned you might be looking only at this shortsighted.

 Okay I see, so if mortgage rates did end up going to similar rate as it was in the 70's per se, the larger amount owed would be much more than the $9,400 gain I received today for example. 

So in your mind, you'd rather play it safe for the long term, than to gain 9,400 for another investment property in 6 months or so. 

Originally posted by @Tyler Sellars :
Originally posted by @Joe Villeneuve:
Originally posted by @Tyler Sellars:
Originally posted by @Joe Villeneuve:

The what happens after the first five years question is pretty straight forward.

"What are your plans after the first 5 years", when the balloon is due.

 Renegotiate a deal with the same bank or bring it elsewhere. The answer seems pretty common to me, I'm not sure I'm understanding it exactly. 

 OK...and there is the problem.  Can you guarantee what the interest rates are in 5 years?  You don't.  That means this would not be an investment...it would be speculating.  Your ultimate success depends on what happens 5 years from now...in other words, future events you have no control over.

This is what I meant when I said mentioned you might be looking only at this shortsighted.

 Okay I see, so if mortgage rates did end up going to similar rate as it was in the 70's per se, the larger amount owed would be much more than the $9,400 gain I received today for example. 

So in your mind, you'd rather play it safe for the long term, than to gain 9,400 for another investment property in 6 months or so. 

What if the market drops, and the property is less than the balance on the loan?  I would rather control what I can.  This is why I never, and would never recommend to my students, using any short term balloon notes.  You can't predict the future...as the past plainly shows us.

For that reason, I wouldn't do either of your options.  However, that wasn't your question.  If I had to choose between the two, I would go with the higher interest rate because it costs me less of my cash upfront, allowing me to invest that savings now, which should (here's hoping) offset any negative impact of future events.

Originally posted by @Joe Villeneuve :
Originally posted by @Tyler Sellars:
Originally posted by @Joe Villeneuve:
Originally posted by @Tyler Sellars:
Originally posted by @Joe Villeneuve:

The what happens after the first five years question is pretty straight forward.

"What are your plans after the first 5 years", when the balloon is due.

 Renegotiate a deal with the same bank or bring it elsewhere. The answer seems pretty common to me, I'm not sure I'm understanding it exactly. 

 OK...and there is the problem.  Can you guarantee what the interest rates are in 5 years?  You don't.  That means this would not be an investment...it would be speculating.  Your ultimate success depends on what happens 5 years from now...in other words, future events you have no control over.

This is what I meant when I said mentioned you might be looking only at this shortsighted.

 Okay I see, so if mortgage rates did end up going to similar rate as it was in the 70's per se, the larger amount owed would be much more than the $9,400 gain I received today for example. 

So in your mind, you'd rather play it safe for the long term, than to gain 9,400 for another investment property in 6 months or so. 

What if the market drops, and the property is less than the balance on the loan?  I would rather control what I can.  This is why I never, and would never recommend to my students, using any short term balloon notes.  You can't predict the future...as the past plainly shows us.

For that reason, I wouldn't do either of your options.  However, that wasn't your question.  If I had to choose between the two, I would go with the higher interest rate because it costs me less of my cash upfront, allowing me to invest that savings now, which should (here's hoping) offset any negative impact of future events.

 You say you wouldn't do either of my options. Mind explaining that viewpoint a little more? 

Originally posted by @Tyler Sellars :
Originally posted by @Joe Villeneuve:
Originally posted by @Tyler Sellars:
Originally posted by @Joe Villeneuve:
Originally posted by @Tyler Sellars:
Originally posted by @Joe Villeneuve:

The what happens after the first five years question is pretty straight forward.

"What are your plans after the first 5 years", when the balloon is due.

 Renegotiate a deal with the same bank or bring it elsewhere. The answer seems pretty common to me, I'm not sure I'm understanding it exactly. 

 OK...and there is the problem.  Can you guarantee what the interest rates are in 5 years?  You don't.  That means this would not be an investment...it would be speculating.  Your ultimate success depends on what happens 5 years from now...in other words, future events you have no control over.

This is what I meant when I said mentioned you might be looking only at this shortsighted.

 Okay I see, so if mortgage rates did end up going to similar rate as it was in the 70's per se, the larger amount owed would be much more than the $9,400 gain I received today for example. 

So in your mind, you'd rather play it safe for the long term, than to gain 9,400 for another investment property in 6 months or so. 

What if the market drops, and the property is less than the balance on the loan?  I would rather control what I can.  This is why I never, and would never recommend to my students, using any short term balloon notes.  You can't predict the future...as the past plainly shows us.

For that reason, I wouldn't do either of your options.  However, that wasn't your question.  If I had to choose between the two, I would go with the higher interest rate because it costs me less of my cash upfront, allowing me to invest that savings now, which should (here's hoping) offset any negative impact of future events.

 You say you wouldn't do either of my options. Mind explaining that viewpoint a little more? 

 Exactly what I said above.  You have no idea what terms you will get, if you can even get a loan, in 5 years.

Joe, I've really appreciated your insight, would love to hear what you are thinking here. Don't invest in a rental property at all?

I see you're an investor yourself, so clearly you know the space. Not sure what angle you're trying to go at here saying that we shouldn't invest in any of the deals due to the risk of not having a mortgage by the end of the 5 years. 

@Tyler Sellars  

@Joe Villeneuve answered your question.. No short term debt. Not to not buy RE. Just not use short term debt. I agree with this 100% if your a savvy investor with deep pockets I'd say play the interest only loan / short term debt game all day long (better cash flow). But given history, ARM and balloon payments at the top end of a market... that's a no for me.

Originally posted by @Tyler Sellars :

Joe, I've really appreciated your insight, would love to hear what you are thinking here. Don't invest in a rental property at all?

I see you're an investor yourself, so clearly you know the space. Not sure what angle you're trying to go at here saying that we shouldn't invest in any of the deals due to the risk of not having a mortgage by the end of the 5 years. 

 Not sure how to answer this in a way I already haven't answered.

No, I didn't say don't get a mortgage.  I said, don't get a 5 year fix with a balloon at the end.  That Balloon means you have to get a mortgage that starts at that point, that you have no control over, or any idea of what the terms might be...or even if you can get one then.

Get a 30 year mortgage now.

This is Canadian. Our banking system on mortgages all have fixed term 1, 5, 10 year term mortgage with 10, 20, 30 year amortisation. They renew at the prevailing rates at end of term. There is no balloon. We do not have 30 year terms as in the US.