Loan interest rate question

[John Malcom]

Ok this one might be hard to explain...

I want to either refinance my paid off SFR or get a HELOC so I can buy a rental property. So far I have determined that my rate at least for a refinance will be about 5.25 for loan. Lets say my house is worth 100k and the LTV on the refinance is 70 so I can get 70k out of it to put towards a rental property.

Now lets say I find a rental property worth 200k and put down my 70k on it and finance the rest (130k loan). Also lets say the rate on the 130k 30-year fixed loan is 4.25. Finally here comes my question:

When using the BP rental calculator, I am unsure which loan rate to put into the 'interest rate' field on the calculator. In this scenario, the rental property's loan (130k) rate is only 4.25 but the SFR that I get the equity out of is 5.25. So which interest rate do I use to figure out if it's a good deal to buy a property or not? It's either 4.25, 5.25, or do I add them together since I am essentially paying two loans. I can't imagine being able to find a good deal that allows to me to make good cash flow and pay off 9.5% in interest. Help!

[Chris Mason]

Originally posted by @John Malcom:

Ok this one might be hard to explain...

I want to either refinance my paid off SFR or get a HELOC so I can buy a rental property. So far I have determined that my rate at least for a refinance will be about 5.25 for loan. Lets say my house is worth 100k and the LTV on the refinance is 70 so I can get 70k out of it to put towards a rental property.

Now lets say I find a rental property worth 200k and put down my 70k on it and finance the rest (130k loan). Also lets say the rate on the 130k 30-year fixed loan is 4.25. Finally here comes my question:

When using the BP rental calculator, I am unsure which loan rate to put into the 'interest rate' field on the calculator. In this scenario, the rental property's loan (130k) rate is only 4.25 but the SFR that I get the equity out of is 5.25. So which interest rate do I use to figure out if it's a good deal to buy a property or not? It's either 4.25, 5.25, or do I add them together since I am essentially paying two loans. I can't imagine being able to find a good deal that allows to me to make good cash flow and pay off 9.5% in interest. Help!

 Hi John,

FYI 4.25% is quite optimistic for an investment property purchase, assuming you're talking about 30 year fixed. But, in any case...

Average the two to find the 'average' cost of each dollar financed. Loan amounts multiplied by interest rate added together, divided by total amount financed. And remember this next time a middle school aged child asks "why do we have to learn this, we will never use it in the real world." :)

[$70k*5.25% + $130k*4.25%] / $200k = 4.6%.

This is also how one can answer the HELOC v cash out question... find out which has the lower average cost per dollar financed.