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

[Account Closed]

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.

[Mike B.]

@Steve Johnson yes I would. If you wanted to you could calculate your cost to recoup that extra amount. Rates are rising though so getting lowest rate possible is key especially if this is a long term buy and hold

[Joel Owens]

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.

[Hai Loc]

I would to save the 5/8%. Your cash on cash would change a bit but this decision would rely heavily on how large the transaction is? If it’s a 2M property than an extra $100k might kill the deal?

[Account Closed]

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.

[Eric Veronica]

@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.  

[Ryan Beasley]

@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.

[Tim Johnson]

what type of deal is this?  Investment or private residence?  I agree that seems high like a high interest rate?  I'm a loan officer and I cant do a loan in NC but in Michigan we could get you a much lower rate with that much skin in the game on any investment deal

[David Roberts]

@Tim Johnson You can do 5% on a 75% LTV on investment SFR in michigan right now? Does this also work for a 75% cash out refi with the rental property owned in all cash for 6 months? Loan amount about 100k...

[Kath Marie]

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. 

[Javier D.]

@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.

[Account Closed]

@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.

[Sam Shueh]

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.

[Mary K.]

@eric veronica

where did you get your funding from?