Should I put down an extra 5% in order to get a lower rate?

Question

My lender provided me a rate of 6.375%. This is for a 20% downpayment. If I put down 25%, I can get the rate lowered to 5.75% (a decrease of 0.625%.

This does raise my cash on cash return. Should I do the 20% or 25% down?

Appreciate any advice.

Ryan Beasley · Answer

@Steve Johnson

This truly depends on your own personal financial situation and the purchase price of the deal. With all other variables held constant it seems like a good risk/return but what if you truly need that money for other deals, personal expenses, property reserves, etc.?

I’ve researched and practiced the technical side of real estate a lot but the non-technical side is what has damn near killed 87% of agents and all the investors that get out of the business. Whatever decision makes your head rest easiest on the pillow and still provides your hurdle rate is what’s best.

Eric Veronica · Answer

Account Closed   Those rates seem very high.  I just financed a 30 year fixed investment property in NC  at 5.05% with 25% down payment.

Account Closed · Answer

Calculate the present value of the two alternatives and pick the better deal.  Use a financial calculator or create an Excel spreadsheet using the built-in financial functions.

Qualitatively, if you're willing and able to put more money down now, your future monthly payments will be lower (which make them easier on your future budget).  But that also means you have to part with more cash now to make the higher down payment and this money will not be available to cover future contingencies.  The present value number provides the geeky context to help you decide between the two.

Joel Owens · Answer

Hard to say. So  many factors to analyze. If a 1 million property that can be a difference of 50,000 in down payment. If a 100k property then talking about 5,000 difference.

How many lenders have you talked to ?  Those rates seem pretty high. You didn't mention the amortization schedule being offered 15,25,30, how long the rate is fixed, recourse or non-recourse loan, any pre-payment penalty, loan costs to close with lender and legal fees, etc.

There are lot's of other metrics besides just the interest rate that place a role in a decision.

Account Closed · Answer

@Joel Owens  This will a conventional 30-year fixed mortgage on an SFR. The purchase price is just under $60,000.

My mistake was not talking to more lenders. I did call up another lender and was able to secure a much better interest rate.

@Tim Johnson this is an investment property in Indiana.

@Kath Marie Account Closed Thank you all for your valuable insight.

Mary K. · Answer

@eric veronica

where did you get your funding from?

Sam Shueh · Answer

I expect a 30 year mortgage to be around 4.5-6% owner occupied to 5% non-owner occupied home with 20% down. I will shop around. Something is not quite right under credit score is below avg.

Javier D. · Answer

@Steve Johnson

https://www.vertex42.com/ExcelTemplates/rental-cash-flow-analysis.html

Compare the two. See how long to recoup difference over the fixed term of your loan.

Kath Marie · Answer

100% with @Ryan Beasley

Depends.

Not one shoe fits all.

If you have current CC debt at 20% a year then use the extra money to pay off CC debt vs lowering home loan interest.

Other scenario if you can make 7%+  annualized on other investments then technically use the extra $$ to invest elsewhere vs lowering your interest rate.

I know many people that stress about monthly payments so they buy everything cash. That keeps them sane. Other people stress about not having money in the bank so they finance everything. That keeps them sane.

Multiple factors can exist.

Should I put down an extra 5% in order to get a lower rate?

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