Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
I'm finalizing the loan for a 4plex. The loan is 30 years for $240K and the quoted rate is 5.125%. I can buy it down to 5% for $1013, or 4.875% for $1644.
If I buy it down to 5% I save $25 in interest per month. It would take 41-42 payments to recover the $1013 and save $6600 over a 30 year loan without additional payments on the note.
If I buy it down to 4.875% I save $50 in interest per month, and would take 33 payments to recover the $1644, and save $13200 over the course of a 30 year loan.
We all like to save money and the answer in my mind seems clear - spend $1644 and buy it down for the $50 a month interest saving, and lowering the payment from $1320 to $1270. But what am I missing? Is there a better use I can make of that $1644? I plan on keeping it for no less than 10 years when my kids hit college.
Or is this just a really dumb question / first world problem?
I've gone through this before, and my final thought is usually the house always wins. So if the bank is offering it to you, it's probably because it's better for them.
But what would you do with the extra $50? Do you need that to cashflow? Can you invest that to keep your compounding machine running?
Or maybe more importantly, what would you do with the $1013 or $1644? Can you invest that to make the break even point even later? And then it becomes a matter of, how likely are you going to really keep this for 10 years, and even if you do, perhaps you'll refi at some point and lose out on the benefit of having that extra $50/month anyways.
I've gone through this before, and my final thought is usually the house always wins. So if the bank is offering it to you, it's probably because it's better for them.
But what would you do with the extra $50? Do you need that to cashflow? Can you invest that to keep your compounding machine running?
Or maybe more importantly, what would you do with the $1013 or $1644? Can you invest that to make the break even point even later? And then it becomes a matter of, how likely are you going to really keep this for 10 years, and even if you do, perhaps you'll refi at some point and lose out on the benefit of having that extra $50/month anyways.
Rental Property Investor · boston, MA · Member since 2017 · 202 posts · 222 votes
6y
@Michael King definitely not a dumb question. Another question you should ask yourself is are you going to refinance? If so when?
I look at points as prepaying your monthly interest payments. It's a tiny hedge against you defaulting too early. Using your numbers it looks like you'll break even in less than 3 years. After that you're saving $50 in interest a month. Can you do something with the point money that will give a bigger yield in the long run?
Don't get me wrong the bank wins for as long as you hold the property and before you go refinance with someone else. They make most of their money in the beginning and points will add to that.
However for the long time buy and hold strategy I see reasonably priced points as a win for the owner. Remember that refinancing also cost money. What are the chances of finding such lower rate to make it worth it? You will also need to wait a long time to pull out real equity from that. You already know how much you can save at different points of ownership. Even 7 years of $50 a month of savings is like getting your closing costs back. So unless you can do something better with that amount I would not hesitate.
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
6y
Not knowing how long I'd keep a property I always took the lowest price/month then at year end dumped any excess cash onto the balance owed. It takes some discipline but pays off quickly & I'd often refi for another property later anyway.
Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
6y
If you are going to keep this loan for at least the 3-4 years it will take to pay off then it is probably worth it.
If you are tight on cash to close and/or tight on cash for renovations or reserves, then it probably makes sense to not buy the rate down.
I have done it both ways over the years and it is pretty much a wash... So if you need the cash now don't do it. If you don't need the cash and you're going to keep it for a while, go for it.
Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
6y
Guys some excellent points to keep it in perspective for me, thank you. I'm pretty sure I'll pay for the points; if I don't, I know I'll be kicking myself every month when I see that mortgage payment come out. The ROI percentage is not going to change by much - only 0.41%. Sounds better as a dollar amount of $50.
I also know that while that $1644 would come in handy being redirected to other investments, such as toward the next downpayment, it would also easily get absorbed into bills and lost in the system. If I don't spend it on say bills, and I pump it into this investment, I have to get it from elsewhere so additional motivation (and pressure) for me.
I can't see myself doing a refi on this property. At under 5% for an investment loan, it would take a long time for the rates to get to a point that would make it viable considering additional closing costs. I tend to take a mortgage amortization spreadsheet and calculate what it would take to pay my mortgages down in 15 years.
Thank you guys for helping clarify the muddy midnight thoughts!