15% or 20% down? I can't decide

[Jeff Langley]

Hi all, 

I'm in the process of acquiring my first rental property and I'm struggling to determine which route to go. Do I put 15% down or 20% down? The biggest difference is the interest rate, 5.35% vs 4.25%. Neither will have mortgage insurance, although it's probably tied into the higher rate. Do I tie up more capital for the lower rate since these will be long-term plays, or do I put less money down to free up more transactions? I'd love to hear your insight. Thanks!

[Matt Devincenzo]

In retrospect I've always ended up benefiting by having less invested in a property...but that comes at the higher rate generally. But I have also realized that with better planning on my part there is a way to 'maximize' the benefit. I've found that I'm usually pursuing a rate and term refi at about year two after I've made improvements etc. and between appreciation and mortgage paydown I'm at the better LTV anyway. So adding the cost of the higher rate payment and the refi over say 30 months, and comparing it to my anticipated savings I can decide if it was worth it or not.

For example our primary residence was purchased at $520,000 with 10% down, 4.75% and $75 PMI. Had I done 5% down, 4.9% and $125 PMI it would have cost an extra $231/mo +/-. I refi'd in Jul 2020 which was 22 months after our purchase...(worst case scenario) had the interest rate at the time been exactly the same 4.75 as we originally got, and had the fees been 2.5% of the loan which I paid in cash, the refi would have saved me ~$8,500 of my downpayment ($26,000 additional 5% DP - $5,100 PMI and interest - $13,650 refi costs). That was worst case...reality is I timed the refi for a low rate, which happened to be historically low and appreciation historically high which combined made the actual result much better...but it would have been even better had I put the absolute minimum down when we purchased. 

I've always had a more 'old school' perspective on borrowing and not getting over-leveraged...so shifting my perspective to how the economics of today function takes work on my part...and I insure against this newer economic risk by holding that extra cash so it is available. But doing that I'm finding my investment profile improves much more easily and faster.