Smaller Downpayment or Lower Interest Rate

5 Replies

Hey All, I'm trying to get some feedback on a financing question.  I will be seeking financing for a $150k loan as an investor with a standard lending institution.  I can either do a 20% down payment and obtain a 4.625% interest rate or a 25% down payment and get a 4.125% rate.  On the 25% deal, my cash on cash return will be 21.24% ..... on the 20% deal my cash on cash return will be 23.62%. 

My thinking is that the lower down payment would leave me  $7600 cash to invest, while returning my cash on cash faster.  Yes I get a slightly higher cash flow with the lower interest rate and a cheaper overall deal but ....

What would be your deciding factors when making this choice. 

Personally, I would go with the lower down-payment because it allows you to use that $7,600 to get into subsequent properties faster.  

However, the $7,600 extra would eventually be overcome by the extra cash flow from the 25% down.

I am a little confused.  The difference between 25% down and 20% down is $7,600.  If the sell price remains the same under both deals that means the overall price is $7,600/.05 or $152,000.  Why do you need to borrow $150,000?

Without out more information I don't know what would be my answer.

Good Luck.

Bill

Hey Kyle, Thx for your answer. Hey Bill, thx for taking the time to answer. To clear up your confusion: The purchase price (not loan) is indeed 152K, I just said 150K to round it out.  The loan would be the 152K minus either 20% or 25% downpayment.  The real core of my question was whether there is some common train of thought when it comes to a downpayment.  My thinking is the least you could put down would be best, the deal is leveraged and you get a faster return the cash that you put in.  On the flip side the loan as a whole would have a higher interest rate with the lower downpayment. 4.62% as opposed to 4.12. 

I am a big believer in the tenant paying the mortgage. So I would put as little down as possible (20%) and use that extra income to buy the next house sooner. Yes you get a "little" less in the beginning, but you are able to leverage you money faster. So what it really comes down too is your goal!

If you put 20%  down  you will have a loan of $121,600 with a payment of $625.19.  If you put 25% down you will have a loan of $114,000 with a payment of $552.50 or $72.69 less.  If we assume that this goes on for 5 years your balance on the first loan will be $111,056.69 and the second one will be $103,316.94. or $7,739.75 less.  If we assume that you can earn 10% per year on your money your $7,600 will have grown to $12,236.  Your $72.69 per month will have grown to $5,629.90.

You will be ahead by over $1,000 by putting 25% down.

If you go for 30 years you will be about $32,000 with the 25% down.

Good Luck.

Bill 

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