How to approach mortgage rates...

[Musa K.]

Hypothetically speaking, lets say I want to get a SFH out of state, which a property management company will manage. The selling price is 190k. I get these mortgage rates:

20% Down No points- 4.75%--> Monthly principal and interest $792

20% Down with 2 points- 4.125%--> Monthly principal and interest $736 + $2933 for buydown

25% Down No points- 4.25%--> Monthly principal and interest $701

25% Down with 2 points- 3.75%--> $659 with $2713 buydown


How should I be approaching these rates and mortgages in general? 

My goal is to ideally get another property so having some extra cash for a future down payment is somewhat important. Obviously I want the lowest interest rate possible...but at the end of the day, if all things go accordingly, this will be paid by my tenant (not sure if this is the right way to think). Cash flow is important but I do not actually need that extra cash right now as these are for long term investments. 

So when I look at these rates, 3.75 is obviously the best interest rate, but would require the highest down payment (25% with 2 points). 20% down with 2 points gives me a better interest rate than 25% with no points, and saves me about $6500 cash which I can then use for future purchase. So from my perspective, 20% down with 2 points serves me best. 

Is this how I should be approaching mortgages? What should I ideally be looking at or calculating when determining what is the best option. 

As always, thanks for the help/guidance!

[Mark DePaul]

The answer to this question is really dependent on whether you want the extra cash flow or have the cash on hand now for other deals/repairs/upgrades and what your risk tolerance is. 

You should also consider how long you plan to hold the investment as that's when you really begin to reap the rewards of paying for points. For example you would break even on the loan paydown during year 3 for the 20% down scenario and during year 4 of the 25% down scenario. 

Even if these are 5-10 year holds it may not make sense to pay for points even though you will break even in year 3 or 4 as you have opportunity cost with the cash that you're putting into the deal up front. What could you do with the 3k (or ~12k in the 20% down scenario) in the mean time? Just looking at it from a pure investment standpoint and you put the cost of points into the S&P500 letting it grow for 30 years (Assuming a 7% ROI) would makeup for the extra interest if you were to not pay for points.

I personally don't pay for points on my own deals because of the opportunity cost and liquidity issues.